Are high levels of fraud in Crypto exchanges actually a good sign for the future?

In a recent interview for “The Street”, Mark Cuban argued that wash trades on crypto exchanges could cause the next crypto implosion and drive Bitcoin price even lower (Mark Cuban Warns of Potential New Crypto Scandal and Fraud – TheStreet). Wash trading usually involves a trader buying and selling a security for the purpose of artificially inflating its price while creating an illusion of liquidity.

This practice is illegal in most jurisdictions, including in the US, but only when it comes to the stock markets – not for crypto. The rather flexible and sometimes complete lack of regulation in various territories provides a golden opportunity for traders who want to manipulate the crypto markets for a quick gain. Unfortunately, these traders are responsible for most of the trading.

Studies suggest that the levels of wash trading in unregulated Crypto exchanges are incredibly high and consist of more than 50% of the trade in 1st tier unregulated exchanges while 2sn tier exchanges present much higher numbers. The situation in the NFT marketplace is not different, with many people buying their own NFTs to pump the price up.

There is no doubt that wash trading is hurting the reputation of the crypto industry and should be eliminated if people’s trust in crypto exchanges and in the industry as a whole is to be restored. It is also clear that the only way to fight wash trading is through stricter regulation (or new regulation in territories that have not adopted any yet).

Apparently for Mr. Cuban, as well as for many other analysts, “exposing” wash trading and effectively prohibiting it might cause an extremely bearish event, which will cause the price of cryptocurrency coins, including Bitcoin, to drop. The concern is that people will realize that the exchanges do not provide the liquidity they represent to provide.

But what if wash trading in crypto exchanges has already been priced in (at least partially)? It is my opinion and belief that this is exactly the case, since reports about wash trading in crypto have been published since at least 2017 (see for example Wash Trading Bitcoin: How Bitfinex benefits from fraudulent trading | by Bitfinex’ed | Medium).

Therefore, it is logical to assume that as more and more territories will adopt a stricter regulatory regime for crypto exchanges, we will witness less wash trading and a decrease in total trading volume, but also an increase of legitimate volume and in trust levels, which in turn will cause the price of Bitcoin to surge higher.

If we adopt this view, it can really be said that the presence of so much manipulation in the market in the form of wash trading is actually a good thing for Bitcoin price going forward, since the solution is already known, and the required actions are already being taken by the various regulators worldwide.