WSJ: Crypto has an insider trading problem

WSJ: Crypto has an insider trading problem

Cryptocurrency traders know that insider trading is a serious problem. Is anything going to be done about it?

We’ve been reporting on the collapse of UST and LUNA. And while algorithmic stablecoins are looking a lot like a ‘pyramid’ scheme, there’s another scheme that cryptocurrency traders need to be wary of that’s typically associated with stocks: insider trading.

5 Cryptocurrency Scams You Should A...
5 Cryptocurrency Scams You Should Avoid

As Matt Levine writes for Bloomberg:

Here is the crypto insider trading scandal that I actually see, repeatedly:

1. There is some crypto project. Maybe it does something, but this is irrelevant to the discussion.

2. What is relevant is market depth: If you can sell the project’s token to more people, then it will be more valuable. In particular, if it is listed on one of the big cryptocurrency exchanges, the price will go up, because more people will buy it, independent of any considerations about what the token actually does or whether the project will ultimately succeed.

3. The project’s token gets listed on a big exchange.

4. While the listing is being considered, but before it is publicly announced, somebody — presumably an insider of the project or of the exchange — buys a bunch of tokens.

5. The token lists on the exchange, the price goes up, and the insider gets rich from her well-timed token purchases.

Meanwhile, the Wall Street Journal reports on a specific case:

Over six days last August, one crypto wallet amassed a stake of $360,000 worth of Gnosis coins, a token tied to an effort to build blockchain-based prediction markets. On the seventh day, Binance—the world’s largest cryptocurrency exchange by volume—said in a blog post that it would list Gnosis, allowing it to be traded among its users.

Token listings add both liquidity and a stamp of legitimacy to the token, and often provide a boost to a token’s trading price. The price of Gnosis rose sharply, from around $300 to $410 within an hour. The value of Gnosis traded that day surged to more than seven times its seven-day average.

Four minutes after Binance’s announcement, the wallet began selling down its stake, liquidating it entirely in just over four hours for slightly more than $500,000—netting a profit of about $140,000 and a return of roughly 40%, according to an analysis performed by Argus Inc., a firm that offers companies software to manage employee trading. The same wallet demonstrated similar patterns of buying tokens before their listings and selling quickly after with at least three other tokens.

The question average cryptocurrency traders want to know is “when is the SEC going to step up and do something about this?”