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Overview of the topics

• Crypto Highlights: In October, roughly 48% of Ethereum NFTs traded were affected by the phenomenon of wash trading.
• Financial Data: The wash trading quota on X2Y2 has reached 85% of all transactions, still lower than Looksrare.
• Onchain Data: At the end of the most famous wash trade ever, Cryptopunk 9998 was listed back on the market for $1 billion.
• Social Data: In the 4th quarter, the value created by illicit addresses continued to increase, reaching $1,4 million.
• Deep Dive: Ether’s drop indicates that the crypto is not ready to go above its 50-day moving average.

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Crypto Highlights

48% of NFTs traded in October were fake

In October, global NFT sales reached more than $850 million over 3 million transactions. However, roughly 48% of Ethereum NFTs traded were affected by wash trading. As a result, the investors that tried to artificially inflate the price of the collections earned $389 million.

Among the NFT buyers and sellers, the number of “wash trading users” accounted for 46% of the total number. According to the most important centralized exchanges, the number of buyers and sellers continues to increase despite unfavorable market conditions. However, 80% of new buyers are keeping digital tokens in their wallets to inflate market prices.

Moreover, this number is inconsistent with the growth of sales value and transactions, because 1 million users contributed to 4 million sales value in May versus 250,000 in October. Since a growing market demand generally corresponds to a higher sales value traded, this could be a sign that the Ethereum network is highly affected by wash trading.

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Financial Data

Wash trading holds 85% of X2Y2 volume

What is wash trading? It’s a form of market manipulation, where investors simultaneously sell and buy the same financial asset to create a sort of artificial activity in the market. It leads to a situation in which hundreds of insiders transfer NFTs between their own wallets.

Nevertheless, there are some signals that are able to indicate the presence of wash trading. These include overpriced NFT trades with roughly 0% fees, NFTs addresses that buy more than a normal amount of times per day, and NFTs acquired by the same buyer in a very short period of time. But why do they do that? To earn platform rewards and create liquidity for assets.

Wash trading is extremely popular on X2Y2, one of the most famous NFT marketplaces; the reason has to be searched in its volume-based trading rewards. In fact, the more the user contributes to X2Y2 volume, the higher the reward that he will receive. As a consequence, the wash trading quota on the platform has reached 85%, but it’s still lower with respect to another important marketplace, Looksrare.

A similar result can be found when looking at collections. “Terraforms”, a non-fungible token collection (NFT) from Mathcastles, has reached a wash trading volume of $12.19 billion, nearly equal to the total volume. However, the most important ones, BAYC and CryptoPunks, are no more affected by the phenomenon.

How can it happen? Even if NFT wash trading is illegal because it represents a form of NFT scam, these digital assets have not been clearly defined by jurisdictions, which makes the phenomenon extremely difficult to regulate.

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Onchain Data

CryptoPunk 9998 as a case study

Even if Cryptopunks are no more affected by wash trading, the most famous example of the phenomenon comes from a digital token of the collection. On October 28, 2021, CryptoPunk 9998 was traded between two wallets for 124,457 ether, worth $532 million at that time.

The sale was picked up by CryptoPunks Bot, which announces CryptoPunks transactions on Twitter. They noticed that the buyer used a flash loan from multiple sources to pay 124,457 ETH to the CryptoPunk’s smart contract, but that the seller sent the 124,457 ETH back to the buyer, repaying his loans.

At the end of the wash trading, the NFT was listed back on the market for 250,000 ETH, about $1 billion. However, before the transaction, Cryptopunk 9998 was selling for between $300,000 and $400,000. Even if the company announced that “This transaction and others are not a bug, they are being done with flash loans” other large bids have been made like this.

The phenomenon, however, has spread throughout the whole NFT market. Researchers have identified nearly 262 users that have sold NFTs to a self-financed wallet more than 25 times. In 2021, 110 of these wallets generated $8.9 million in profit as a whole. “The $8.9 million is most likely derived from sales to unsuspecting buyers who believe the NFT they are purchasing has been growing in value, sold from one collector to another” Chainalysis said.

However, not all NFT wash traders are profitable, because 152 out of 262 have lost $416,984 due to the gas fees they have spent on each Ethereum blockchain transaction. Indeed, only 110 have been considered profitable, with an average earning of $8,458.

Profits apart, wash trading in NFTs is creating an unfair marketplace for the investors that purchase digital tokens, since assets are artificially inflated. The major consequence is that the phenomenon undermines the trust in the ecosystem, inhibiting possible growth.

Social Data

Wash trades cause $8.6 billion in losses

On the social side, wash trading hides a more “worrying” problem: money laundering. The phenomenon has always represented a real issue in the fine art market because art pieces are easy to move, have subjective prices, and might offer tax advantages. For this reason, criminals often purchase art with illegally gained funds and sell them.

However, while in the case of physical art it is difficult to quantify the amount of money laundered, the transparency of the blockchain permits estimating the presence of money laundering in the case of NFTs. The value created by illicit addresses increased in the 3rd quarter of 2021, exceeding the value of $1 million. The trend continued in the 4th quarter, reaching $1,4 million.

In both cases, the main source of laundering activity was scam-associated addresses sending funds to marketplaces to make purchases, as well as stolen funds. In particular, in the 4th quarter, $284,000 worth of cryptos were sent to marketplaces from addresses with sanctions risk. This was probably due to transfers from the peer-to-peer exchange Chatex, added in 2021 to the OFAC’s Specially Designated Nationals And Blocked Person List (SDN).

Even if NFT cybercrimes cause bigger losses to marketplaces with respect to money laundering, the latter made marketplaces lose $8.6 billion only in 2021, together with discouraging the trust in the relative sector. In fact, when the last information on the number of wash trades was released, Twitter investors typed 167 times per day “Ethereum” and “Fake”.

Nevertheless, ETH, whose current price is $1,251, rallied 6.3% to $1,350 on December 13. But despite reaching the highest level in 33 days, the gains didn’t install enough confidence in traders.

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Community

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Deep Dive

Will the ETH uptrend be interrupted?

Ether’s drop indicates that the crypto is not ready to hold above its 50-day moving average and the 38.2% Fibonacci retracement level can be seen as a bad sign for short-term traders.

Even if Ethereum’s medium-term uptrend is still holding, a breakdown under $1,250s could interrupt the positive trend of November and could trigger a reduction of ETH sentiment, together with a drop toward $1,200.

However, because of the downtrend that cryptos could show, some traders started searching for alternatives with more potential in the short term. Invite 3 friends and gain access to the full deep dive!

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News of the week

• Binance: CryptoQuant verifies Binance's reserves, and reports no ‘FTX-like’ behavior. [Read more]
• FTX: Embattled crypto firm FTX wants to sell Its functioning units, including LedgerX. [Read more]
• Crypto: Bitcoin and Ether raise $79 million in the shadow of the FTX crisis. [Read more]
• Law: France under pressure to tighten crypto-friendly regulations.[Read more]

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