A handful of NFT users are making big money off of a stealth scam. Here’s how ‘wash trading’ works

February 4, 2022, 7:53 PM UTC

NFTs had a breakout year in 2021, but apparently so did NFT scammers.

By artificially inflating the prices of their NFTs, or non-fungible tokens, through a process called “wash trading,” 110 NFT traders netted a combined $8.9 million in profits from unsuspecting buyers in 2021, according to a report by blockchain data platform Chainalysis. 

Wash trading is the process of raising the price of an NFT when one person is selling it between two of his or her own digital wallets—they essentially “sell” to themselves at a higher price than the NFT would fetch in the regular marketplace. They are then able to sell to someone else at a falsely higher price. And although this scam is now happening with NFTs, it’s nothing new to finance in general—the first U.S. law barring the practice was passed in 1936.

So why is it happening with NFTs?

Because there is a lack of regulation in the NFT industry, and because many NFT exchanges only require buyers and sellers to connect their crypto wallets (and not identify themselves), according to the report.

But not all wash traders are profiting. Apart from the 110 users that cumulatively earned millions from the practice, the report also identified 152 users whose profits from the scam weren’t even enough to cover the “gas” fees charged by NFT trading platforms. Gas fees come from transferring an NFT from one wallet to another. In fact, those 152 accounts lost about $416,000 combined. In short, only a few big players are bringing in substantial profits from the practice. 

But the sheer number of these wash trades, which Chainalysis said is likely an undercount, shows the vulnerability the NFT market has at the moment to illicit actors. One user alone executed 830 wash trades, according to the report.

In the absence of a crackdown by either regulators or NFT trading platforms, the number of wash trades continues to be an “area of concern” for the NFT market, according to the report, which has undergone significant growth in the past year: It surpassed $44 billion in transactions in 2021.

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