Crypto Insider Trading Generated $1.7M+ in Profits Since February 2021, Data Reveals
Image courtesy of 123rf.

Crypto Insider Trading Generated $1.7M+ in Profits Since February 2021, Data Reveals

New data sheds light on insider trading in crypto.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Near the end of Apirl, a Twitter user reported some shifty on-chain data regarding Coinbase. It pointed out the so-called front-running of tokens which translates to the crypto version of insider trading, a process by which insiders could make millions in guaranteed profits. Last Friday, the Wall Street Journal elevated this coverage and ignited the debate of insider trading in crypto again.

Public Transactions Suggest Insider Trading in Crypto

The article covered the case of Gnosis (GNO) coins, the native currency for the Gnosis market prediction platform. Outside of its Dutch Exchange, this is one of the cornerstones of the Gnosis ecosystem. A prediction market allows users to stake their tokens based on the bets they make for future events.

For instance, one could register an event question about Tesla’s next gigafactory location. Then, tokens staked in the accurate answer appreciate the most. Belonging to this niche market, last August, a single wallet accrued $360k worth of GNO coins.

A week after that accumulation of GNO coins, the token was listed on the world’s largest crypto exchange, Binance. Such token front-running has been a common occurrence, forcing even Coinbase to rethink its policy after the allegations.

Why Getting Listed Leads to Price Pumps for Tokens

While any token holds value based on its utility, when it is listed on a mainstream exchange, its price tends to skyrocket. That’s because it opens the door for traders, which increases the coin’s liquidity and places buying pressure. Simultaneously, the token listing also legitimizes the blockchain project.

For this reason, knowing which token is getting on an exchange is like knowing which company is to benefit from a government deal before the public is even aware. Predictably, as soon as the GNO token was listed, the wallet holder started selling it, getting a $140,000 profit in the end for their insider trading foreknowledge.

After the listing, Gnosis (GNO) coins received a 7x price spike. Image credit: The Wall Street Journal

Blockchain analytics firm, Argus Inc., found additional 45 wallets that altogether held $17.3 million worth of GNO coins. Alongside Binance, the wallet holders also knew that Coinbase and FTX were going to list it. Overall, GNO sales resulted in at least $1.7 million in profits. The actual profits are unknown because of wallet transfers to other exchanges instead of outright selling them.

Join our Telegram group and never miss a breaking digital asset story.

Dealing With Moral Hazards in Crypto

How would a wallet holder know when a token is to be listed unless they are tightly involved with the exchange’s day-to-day operations? This even applies to NFT marketplaces. Case in point, a month after OpenSea exceeded $3 billion in August’s trading volume, the Head of Product Nate Chastain had to quit after being exposed to front-run NFTs.

“Yesterday we learned that one of our employees purchased items that they knew were set to display on our front page before they appeared there publicly.

This is incredibly disappointing.”

OpenSea CEO Devin Finzer

While Coinbase is imposing its own rules on token front-running, Binance CEO, Changpeng Zhao, called for the public to report any suspicious activity.

Likewise, FTX exchange partnered with Eventus Systems Inc. last month to prevent anti-market manipulation. Jeff Bell, the Eventus COO, made an interesting point. If the massive advantage provided by insider trading is not stamped out, this has a negative effect on the whole market.

“Smart traders don’t want to play in a market where there is market manipulation going on.”

Jeff Bell, Eventus’ chief operating officer (COO).

On the regulatory side of things, the Securities and Exchange Commission (SEC) and the Commodities Futures Trade Commission (CFTC) are in charge of fraud prevention. CFTC had already launched an insider trading probe into Binance last September, but with no forthcoming results since.

The SEC’s Chair Gary Gensler told Bloomberg this month that cryptocurrency exchanges are often “market-making against their customers”. Last May, Gensler warned that to avoid front-running, exchanges should be as regulated as Nasdaq stock listings.

“Without a cop on the beat and some rules of the road, then market participants can front-run your orders,”

Gary Gensler on May 26, 2021, during the Financial Services and General Government subcommittee hearing.

It appears this is the case regardless of exchanges’ purported zero-tolerance policies. Although the blockchain sector was created with a decentralizing spirit in mind, exchanges represent the opposite. Likewise, they inherit the same moral hazards as the traditional markets. 

In the meantime, decentralized exchanges (DEXs) will likely take advantage of insider trading risk on CEXs. Although CEXs will always be more convenient to use and with greater liquidity, anyone can list a token on a DEX as long as it is compatible with its mainchain.

While this creates unvetted tokens, it doesn’t take much to figure out which ones are legitimate. In the end, as Terra’s collapse showed, even vetted and mainstream-listed tokens can go bust.

Finance is changing.
Learn how, with Five Minute Finance.
A weekly newsletter that covers the big trends in FinTech and Decentralized Finance.

Have you ever witnessed a pump-and-dump scheme, as a fakeout insider trading? Let us know in the comments below.