Mark Cuban says this could cause the next crypto implosion

High angle view of two business workers collaborating while working on bitcoin development chart in office.

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The owner of the Dallas Mavericks has doubts about the trading volume of some cryptocurrencies.

Key points

  • Mark Cuban believes money laundering could cause the next crypto implosion.
  • Wash trading is when one person buys and sells assets to manipulate the market using artificial trading volume.
  • One analysis found that more than half of crypto trading volume is likely fake or uneconomic.

Cryptocurrencies have been hit by some high-profile collapses in 2022. One of the biggest cryptocurrencies, Terra (LUNA) experienced a crash in May. And one of the largest crypto exchanges, FTX, filed for bankruptcy in November. Founder Sam Bankman-Fried was charged with fraud and money laundering.

The hope for crypto investors is that there will be no such incidents in 2023. But billionaire Mark Cuban, a longtime crypto investor himself, thinks another could be on the horizon. He believes the next possible crypto implosion is “detection and removal of washed trades on central exchanges,” he said in an interview with TheStreet.

Cuban clarified that there is no concrete data to support his assumption. However, there is evidence that this is a serious problem. If you’re investing in cryptocurrencies, it’s important to be aware of what’s going on and what to watch out for.

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What is wash trading?

Wash trading is an illegal activity that involves buying and selling the same asset by one person to manipulate the market. By doing so, the owner of the asset can increase its trading volume and mislead potential investors. It was originally used with the stock market, but it can also be used to manipulate other markets, such as cryptocurrencies.

For an example of how this works, let’s say you own a million dollar crypto token. You sell it to another crypto wallet under your control. You still have the same amount of cryptocurrency, minus transaction fees. And your transaction added $1 million in artificial trading volume.

Fraudsters often use shoplifting as part of cryptocurrency pump-and-dump scams. They will buy and sell their own tokens to give the impression that the cryptocurrency is heavily traded. They will then promote the cryptocurrency on social media. Once they convince people to invest and raise the price, they sell their tokens at a profit. The price then plummets, and all those new investors end up losing money.

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Crypto probably has issues with trading laundering

Because of the way cryptocurrency works, the market is particularly vulnerable to laundering. Crypto wallets are not tied to the identity of the owner. Some crypto exchanges allow you to trade by connecting your wallet, without the need for identity verification. This makes it very easy for a fraudster to set up multiple wallets and move their own cryptocurrency back and forth.

Non-fungible tokens (NFTs) have the same problem. If you own an NFT and want to make it more valuable, you can buy it yourself at a high price.

Recent data supports Mark Cuban’s crypto-laundering trading theory. In August 2022, Forbes published an analysis of trading activity on 157 crypto exchanges. It found that “more than half of the total reported trading volume is likely to be fraudulent or uneconomic.” Global Bitcoin (BTC) trading volume was estimated to be less than half of what was reported.

How to protect yourself while investing in cryptocurrencies

Investing in cryptocurrencies is inherently risky business, so there is no way to be completely safe. And if there is a discovery of widespread trading on major exchanges, Cuban is right that it could lead to another crypto implosion.

Take all crypto trading volume with a grain of salt and don’t use it as a reason to invest. This is especially true if you are considering investing in smaller cryptocurrencies, but it can also be the case with larger coins. Base your investment decisions on the quality of the cryptocurrency, not how much it is allegedly traded for.

Also, be conservative about how much money you have in cryptocurrency. There is nothing wrong with cryptocurrency becoming a small part of your investment portfolio. If you want to put 5% of your money into crypto, that’s fine. Just don’t invest money you can’t afford to lose, and keep most of your portfolio in less volatile investments, like stocks.

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