crypto strategy

While hackers and thieves get away with billions, there is another type of fraud lurking in the industry.

Happy Tuesday, readers. I am Phil Rosen. By the end of the month, I’ll be back in winter Manhattan, but for now I’m writing from Los Angeles.

Like a limp handshake, FTX’s downfall served as a sad introduction to readers who had never been exposed to the budding crypto industry. A once-niche segment of finance has been thrust into the mainstream, and now everyone and their mothers know the name. Sam Bankman Fried.

Since the chaos began in November, countless people have told me that their outlook on crypto has deteriorated. The downtrend is building – and much of this can be attributed to a broad loss of confidence.

I’m sorry to say that when you dig deeper into the practices of opaque crypto exchanges, there’s not much to restore that faith.

But before we jump in, Matt Turner, business editor at Insider, is at the World Economic Forum in Davos. He will be posting notes and videos on his LinkedIn all week. You can follow here – and read his last post here.

Now shall we?

In case you missed it: On Friday, I spent an hour answering questions about FTX on Reddit. You can see the Q&A here.

If this was forwarded to you, register here. Download the Insider app here.

Sam Bankman Fried

Sam Bankman-Fried in Manhattan federal court on Thursday.

Jeenah Moon/Reuters

1. Yes, FTX showed us why gambling with client funds is bad, but evidence of a lesser-known fraudulent practice called wash the trade has also made its rounds in the crypto sector, according to the National Bureau of Economic Research.

In a working paper released last month, the group concluded that washing transactions accounted for up to 70% of all transactions on unregulated crypto exchanges.

It suggests pervasive fraud and deception, as my colleague Jennifer Sor writes.

Imagine I’m starting a lemonade stand. I want people to believe that my lemonade is the best in town. My partners in the business (in this case neighborhood kids) come by to buy lemonade and proclaim its superior refreshing qualities. Maybe they’re stating loud and clear that they’d gladly pay way more than I’m asking for a drink of this stuff.

Soon everyone wants what I’m selling.

It may be a patchy metaphor, but you get the idea. People want what interests others. In fictitious trading, a party trades with itself to give the illusion of deeper liquidity than exists and to artificially pump the price of an asset which may attract inexperienced investors.

Admittedly, the schemes are usually more elaborate than pretending to buy your own lemonade. Timothy Cradle, director of regulatory affairs at Blockchain Intelligence, told Insider that wash trading is market manipulation.

“There is competition in all sectors” Cradle said. “That’s no excuse to go out and wash trade and try to make your exchange more liquid than it really is, especially when you’re dealing with cryptocurrency.”

And it’s not just a few little-known family shops. NBER researchers have estimated that wash trading accounts for nearly half of all trades on Binance, the world’s largest crypto exchange by volume. (A Binance spokesperson told Insider that it does not engage in this practice.)

Similarly, KuCoin, another top-five cryptocurrency exchange, is said to have 52.9% of its transactions made up of washout transactions (which the company denied).

Get all the details here, from Insider’s Jennifer Sor.

Are you surprised that researchers found wash trading to be such a widespread practice? Tweet me (@philrosenn) or write to me ([email protected]) let me know.

In other news:

nyse trader


2. Global stocks and US futures are down early Tuesday, Weak economic data in China reignited fears of a slowdown. Investors will also be closely watching the latest round of corporate financial data as the earnings season kicks off. Here are the latest market movements.

3. On the role: Morgan Stanley, Goldman Sachs and Citizens Financial Group Inc, all reports.

4. This fund manager has beaten 99% of its competitors over the past five years. He shared the investment strategy that led to his huge success – then broke down seven of his favorite value stocks.

5. JPMorgan Asset Management’s chief investment officer says the Fed has already won its war on inflation. The firm’s David Kelly believes it’s time for policymakers to stop rate hikes: “They risk tipping the economy into a recession.”

6. Economist “Dr. Doom” Nouriel Roubini said the Fed will run out of steam in its fight against inflation. In his view, policymakers need to raise rates above 6% to achieve their inflation target. In both cases, he thinks a severe recession at this point has become inevitable.

7. A recession will drag stocks down this year, according to PIMCO. But that means it could be the perfect time to stock up on bonds – which have lower but safer returns and are an attractive investment in a downturn.

8. A senior portfolio manager and strategist at UBS Asset Management has analyzed the opportunities he is most bullish on for 2023. US economy will hang on longer than expected, says Evan Brown – but that doesn’t mean stocks as a whole will outperform.

9. The head of $19.5 billion ETF strategy Allianz explained why the Fed is on track to shock the markets. Once central bankers raise rates higher and longer than expected, inventors will end up regretting ignoring what the Fed was signaling. In his words, a “wet blanket for stocks.”

VIX index of January 17, 2023

Markets Insider

10. Tom Lee of Fundstrat pointed out that more than half of the components of the CPI are in deflation mode. This is good news for the stock market, as lower inflation will help ease financial conditions. Here’s what he said specifically about the Wall Street Fear Gauge.

Organized by Phil Rosen in Los Angeles. Feedback or tips? Tweeter @philrosenn or email [email protected]

Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.

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