- Billionaire Mark Cuban thinks the next crypto meltdown could stem from wash trades.
- “There are supposedly tens of millions of dollars in trades and liquidity for tokens that have very little utilization,” he told The Street.
- Wash trades are a form of pump-and-dump scheme to artificially generate interest around a crypto token.
After FTX’s collapse rocked the crypto sector, billionaire Mark Cuban thinks the next meltdown could stem from so-called wash trading schemes.
“I think the next possible implosion is the discovery and removal of wash trades on central exchanges,” he told The Street. “There are supposedly tens of millions of dollars in trades and liquidity for tokens that have very little utilization. I don’t see how they can be that liquid.”
Cuban added that he lacked “any specifics to offer to support my guess,” and didn’t elaborate further in email exchanges with The Street.
Wash trades are a type of pump-and-dump scheme that involve creating artificial interest in a financial asset, in this case a cryptocurrency.
A trader will buy mass volumes of a specific crypto and sell the same token to tout large trading volumes before turning to social media to create a misleading picture of demand.
The scheme essentially allows those behind the scheme to conduct transactions without taking on any risk or changing their market position, according to the Commodity Futures Trading Commission.
The Securities and Exchange Commission has said that FTX founder Sam Bankman-Fried ordered his crypto hedge fund Alameda Research to buy cryptos and artificially inflate the value of a token it was borrowing against.
Because so many cryptos exist, tokens are especially susceptible to wash trades. A December report on the practice from National Bureau of Economic Research said that of 29 unregulated cryptocurrency exchanges across the globe, a staggering 70% of the transactions were illicit wash trades.
The report also said that in 12 “tier-2 exchanges,” wash trades accounted for nearly 80% of the total trade volume.
“These estimates translate into wash trading of over %4.5 trillion in spot markets and over $1.5 trillion in derivatives markets in the first quarter of 2020 alone.”