Mark Cuban says this could cause the next crypto implosion

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The owner of the Dallas Mavericks is suspicious of the trading volumes of some cryptocurrencies.

The cryptocurrency has been plagued by some high-profile crashes in 2022. One of the biggest cryptocurrencies, Terra (LUNA) crashed in May. And one of the biggest cryptocurrency exchanges, FTX, filed for bankruptcy in November. Founder Sam Bankman-Fried has been accused of fraud and money laundering.

The hope for crypto investors is that there won’t be any incidents like these in 2023. But billionaire Mark Cuban, himself a longtime crypto investor, thinks another one might be on the horizon. He believes the next possible cryptocurrency implosion “is the discovery and removal of wash trades on central exchanges,” he said in an interview with TheStreet.

Cuban clarified that he has no details to support his hypothesis. However, there is evidence that this is a serious problem. If you invest in cryptocurrency, it’s important to be aware of what’s going on and what to look for.

What is wash trading?

Wash trading is an illegal activity that involves a single person buying and selling the same asset to manipulate the market. By doing so, the owner of an asset can increase 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 cryptocurrency.

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

Fraudsters often use scavenging operations as part of pump-and-dump cryptocurrency scams. They will buy and sell their own tokens to give the impression that a cryptocurrency is heavily traded. Then, they will promote the cryptocurrency on social media. Once they get 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.

Crypto probably has a wash trading problem

Because of how cryptocurrency works, the market is particularly vulnerable to wash trading. Crypto wallets are not tied to the identity of the owner. Some cryptocurrency exchanges allow you to trade by linking a wallet, with no identity verification required. This makes it very easy for a scammer to set up multiple wallets and move their cryptocurrency back and forth.

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

Recent data supports Mark Cuban’s theory on cryptocurrency trading. In August 2022, Forbes published an analysis of trading activity across 157 cryptocurrency exchanges. It found that “more than half of all reported trading volume is likely to be fake or uneconomical.” He estimated that global Bitcoin (BTC) trading volume was less than half of what was reported.

How to protect yourself when investing in cryptocurrencies

Cryptocurrency investing is an inherently risky business, so there is no way to be completely safe. And if there is a discovery of widespread wash trading on major exchanges, Cuban is right that it could lead to another cryptocurrency implosion.

Take all cryptocurrency 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 be the case for larger coins as well. Base your investment decisions on the quality of the cryptocurrency, not on how much it is supposed to trade.

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