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The cryptocurrency market experienced a significant increase at the start of the year, with Bitcoin ($BTC) achieving unprecedented highs and the overall altcoin market exceeding $1.5 trillion for the first time.
The introduction of spot Bitcoin exchange-traded funds (ETFs) in the United States further integrated the asset into traditional finance.
Additionally, conversations surrounding a potential U.S. strategic Bitcoin reserve have contributed to the asset class’s legitimacy.
Increase in Wash Trades
Despite these market achievements, a recent Chainalysis report points to a troubling rise in market manipulation across certain blockchain networks.
The results raise significant concerns regarding the extent of market manipulation within the cryptocurrency sector.
Diane Seo, a data scientist at Chainalysis, informed Cryptonews that the firm estimates wash trades involving ERC20 and BEP20 tokens represent up to $2.57 billion in trading volume on decentralized exchanges (DEXs).
In our latest preview chapter for the 2025 Crypto Crime Report, we examine our methodologies for uncovering suspected wash trading and pump-and-dump schemes, providing a clearer view of how market manipulation manifests within the crypto space: https://t.co/dg7RZZBpsz
— Chainalysis (@chainalysis) January 29, 2025
“We estimate that ERC20 and BEP20 wash trades on select blockchains account for as much as $2.57 billion in trading volume,” Seo stated.
Seo explained that Chainalysis developed two distinct heuristics to identify this illicit behavior.
Interestingly, both methods revealed a long-tail distribution, suggesting that a small number of participants are responsible for the majority of these trades.
Source: Chainalysis
“For instance, the first heuristic indicates that 10% of the addresses accounted for 43% of the total wash trades, with one single address executing over 54,000 buy-and-sell transactions of nearly identical amounts,” Seo stated.
Source: Chainalysis
“The second wash trading heuristic shows that one malicious actor was responsible for 16.7% of the total wash trades,” she added.
Pump-And-Dump Schemes Increase
Market manipulators utilize wash trading for various purposes, including artificially boosting token activity in pump-and-dump schemes.
“This involves individuals inflating the activity of a token they have launched to attract investors, and then selling off the token to realize a profit,” Seo explained. “Another variation includes malicious actors offering wash trades as a service to token creators, assisting them in inflating the token’s activity and receiving payment for their services.”
A recent case involved social media influencer Hailey Welch, known as “Hawk Tuah,” whose meme coin, $HAWK, raised concerns regarding a pump-and-dump scheme.
The Hawk Tuah controversy deepens! @HalieyWelchX, the “Hawk Tuah Lady,” pledges to cooperate amid the $HAWK lawsuit following a shocking 90% crash and $151K in losses.#HawkTuah #Lawsuithttps://t.co/YXXv9DSLtB
— Cryptonews.com (@cryptonews) December 20, 2024
Welch faced legal scrutiny after $HAWK dropped 90%, wiping out over $151,000 in investor funds.
Chainalysis found that pump-and-dump schemes constituted 4.52% of market activity in 2024, an increase from 3.59% in 2023. This rise is partly attributed to lower transaction fees, driven by the emergence of new Layer 2 solutions and growing interest in more affordable Layer 1 chains.
Impact of Market Manipulation on the Crypto Sector
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The Chainalysis findings raise serious concerns about the integrity of cryptocurrency market activity.
Blake Benthall, Founder and CEO of blockchain analytics firm Fathom(x), informed Cryptonews that wash trading is becoming increasingly prevalent across exchanges and decentralized finance (DeFi).
“This is inflating volumes and complicating the assessment of genuine market activity,” Benthall stated.
The Chainalysis report contextualizes this issue, revealing that over 3 million tokens were launched in the blockchain ecosystem last year. Approximately 1.29 million of these (42.54%) were listed on a DEX.
Source: Chainalysis
However, despite the large number of new tokens, only 1.7% remained actively traded in the past 30 days, primarily due to market manipulation tactics such as wash trades, pump-and-dump schemes, and rug pulls.
Source: Chainalysis
Benthall noted that industry insiders often utilize undisclosed software, advanced market-making tools, and prebuilt mining capabilities to gain an advantage, even in open-source projects.
He also pointed out that personality-driven hype can lead to significant volatility.
“Meanwhile, personality cults drive volatility – a single tweet from a prominent figure can cause a token to crash, highlighting just how centralized these markets truly are,” he added.
Combating Market Manipulation
Unfortunately, market manipulation is expected to continue within the cryptocurrency sector.
“As the industry matures, it inherits bad actors from traditional finance, just as the internet inherited scammers and fraudsters from the real world,” Benthall remarked. “Crypto has also entered the political mainstream, and manipulation is evolving.”
While this issue persists, certain measures can be implemented to help combat market manipulation.
Seo explained that Chainalysis has found that most market manipulation is concentrated in the actions of a few sophisticated bad actors who repeatedly engage in the same patterns over time.
“This suggests that if the bad actor had been identified early and proactively banned from trading, it could have prevented subsequent wash trades,” she stated.
Given this, Seo believes that transparent regulations and market surveillance are increasingly necessary for the cryptocurrency industry.
“This could help to quickly identify patterns, take action, and prevent larger-scale misconduct,” she stated.
Benthall added that the transparency of public blockchains means insider trading and dubious dealings can often be uncovered.
“While crypto can be used to circumvent traditional oversight, every transaction remains on-chain, creating a digital breadcrumb trail that could be scrutinized for years to come,” he said.
Several initiatives are already underway to combat illicit activity in the cryptocurrency sector. The T3 Financial Crime Unit (FCU), for example, was established in September last year to monitor illegal USDT transactions on the TRON blockchain.
Ari Redbord, Vice President and Global Head of Policy and Government Affairs at TRM Labs, informed Cryptonews that blockchain technology inherently provides transparency, but when combined with analytics, it enables real-time detection of market manipulation.
“Collaboration between the private sector, regulators, and law enforcement will be crucial in addressing these challenges and creating a safer environment for investors,” Redbord stated.
The post Chainalysis Report: Market Manipulation Impacts Billions in Crypto Trading Volume appeared first on Cryptonews.
