Nearly half of all non-fungible token (NFT) trades on the Ethereum blockchain are fraudulent, according to a recent report by NFT analytics provider bitsCrunch and Cointelegraph Research.
The report suggests that the lack of regulation and transparency in the market has made it easier for scammers to create and sell fake NFTs, contributing to this issue. Despite the year-long crypto winter, the NFT market saw a record number of new collections introduced in 2022.
In their most recent study titled “BitsCrunch NFT Wash Trade Report for 2022″, bitsCrunch and Cointelegraph Research found that in 2022, there was an 860 percent increase in the number of new NFT contracts created. The surge in NFT gaming and sports-related collectibles led to the creation of over 85 million new NFTs.
This indicates that NFT creators and collectors were undeterred by the unpredictable state of the crypto market. The total NFT sales volume for 2022 was $54 billion, with Bored Ape Yacht Club being one of the most popular collections, generating over $4.4 billion in trade volume.
The report also revealed a concerning increase in NFT wash trading as it rose by 25 times, reaching almost $33 billion in 2022, potentially damaging the credibility of the NFT market.
NFT main issue in wash trading
NFT wash trading refers to a fraudulent activity that inflates the value of NFTs. Fraudsters conduct fake trades to create a false impression of demand and liquidity.
The term “wash trading” itself is not unique to the NFT market and has been a problem in traditional financial markets, including stocks, bonds, and commodities. It has become the NFT market’s main setback, creating an unrealistic market valuation and decreasing trust in the market.
The bitsCrunch report states that 59 percent of the aforementioned $54 billion volume traded on Ethereum in 2022 is suspected of being wash traded. Even the top 10 NFT collection lists were manipulated by wash traders.
After removing wash trade volumes, the top collections by volume in 2022 were BAYC, Mutant Ape Yacht Club, Otherdeed, and Azuki. The overall NFT market activity was worth $21.7 billion, according to bitsCrunch.
Wash traders are suspected of using LooksRare, the most popular of the top-five NFT marketplaces, for their fraudulent activities. The report attributes this to LooksRare’s loyalty token, which is based on NFT trade volume.
As a result, LooksRare’s monthly volume is almost $10 billion more than OpenSea’s, with wash trade accounting for about $1 billion of OpenSea’s $18.7 billion total sales volume, according to the report.
NFT marketplace sees two “sharks” wash over $5 billion
The report also reveals that two “sharks” were responsible for over $5 billion in wash trading volume, accounting for 18 percent of the total activity on the LooksRare NFT marketplace.
“Sharks” refer to traders who engage in large-scale wash trading, with transactions valued at over $1 million. These traders artificially inflate the prices of NFTs, often coordinating their activities to manipulate the market and generate profits for themselves.
The marketplace, which saw $27.3 billion in total NFT sales, had 96 percent of that suspected to be wash traded. In 2022, over 613,000 new NFT collections were launched, but only 1.6 percent (10,000) of them made $10,000 or more in sales, making research and analysis vital before investing.
While annual reports provide insight into the NFT market, reliable tools are still necessary to detect and flag fraudulent activities. BitsCrunch collaborates with industry stakeholders to build a sustainable ecosystem and restore trust in the NFT market.