Up to 1/4th of Crypto Listings Profit Insiders: Study

Up to 1/4th of Crypto Listings Profit Insiders: Study

Researchers estimate that insider trading occurs in 10%-25% of cryptocurrency listings as sampled tokens show abnormal returns before listing announcements.
Neither the author, Kingsley Alo, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

A recent study by the University of Sydney has found evidence of systematic insider trading within the cryptocurrency market. The research estimates that insider trading occurs in 10%-25% of cryptocurrency listings, with insiders accumulating over $1.5 million in trading profits. By leveraging blockchain data, the analysis showed significant price surges before listing announcements, similar to prosecuted cases within the stock market.

$1.7M in Crypto Insider Trading Profits Since February 2021

Insider trading refers to the illegal use of private information to buy coins or stocks before official exchange listing announcements. Recently, the spotlight has focused on this fraudulent activity within the digital asset market. Another study revealed that it generated over $1.7 million in profits since February 2021. 

Furthermore, insider trading has attracted concerns within the crypto sphere. Behemoth crypto exchange, Coinbase, has come under investigation from the US Securities and Exchange Commission (SEC) over this widespread illicit activity on the platform. This occurred after a former employee and his accomplices were arrested and charged with insider trading.

Research Samples 146 Coinbase Listing Announcements

The research provides empirical evidence regarding the prevalence of insider trading in cryptocurrency markets, some of which are not being investigated by authorities. To arrive at its results, researchers manually collected Coinbase listing announcements between September 25, 2018, and May 1, 2022. In total, 146 token listings were sampled within that time frame and formed the basis of the study.

Also, by using blocking data, researchers looked at the price changes of the sampled tokens on different exchanges. The time frame studied ranged between 300 hours before Coinbase listing announcements and 100 hours after the exchange released the information.

Consequently, the idea was that tokens traded on decentralized exchanges (DEXs) before the listing would have abnormal returns if insider trading occurred.  However, those not listed on DEXs would not post such returns. Accordingly, the statistics showed that 10% to 25% of the tokens studied recorded significant levels of irregular returns. And the price patterns on DEXs just before Coinbase listings mimicked the “run-ups” seen in well-known instances of stock insider trading.

Additionally, the transparent nature of the blockchain allowed for direct analysis of trades before the listing announcements. By leveraging this, the researchers sought patterns of particular traders that routinely traded before the announcements to rule out other causes. Consequently, a tiny subset of wallet addresses on the DEXs was found to accumulate substantially and then dispose of tokens after the announcement.

Trading activities of wallets involved in potential insider trading. Source: Insider Trading Study

The chart above shows four connected wallets were found to continuously and systematically trade soon-to-be-listed tokens before their announcements. These wallets were estimated to have earned 1003ETH ($1.5 million) through the sale of the tokens after the listing announcements. Furthermore, each wallet transferred money to the following wallet to carry on with the same trading strategy.

Consequently, the wallet-level evidence, including patterns of specific trades, helped eliminate alternative explanations for the surges seen in tokens before their listing. However, it should be noted that the study is still in its draft status and is yet to be peer-reviewed.

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

Insider Trading More Common in Crypto Than in Stocks

According to the research, cryptocurrency markets were discovered to have a little higher prevalence of insider trading than stock markets. Insider trading is thought to occur in the stock market. About one in twenty earnings announcements and one in five merger and acquisition transactions. This suggests that the crypto markets are more vulnerable to the same misconduct traditional financial market regulators have long struggled with.

The prevalence of insider trading harms the integrity of the relatively nascent crypto industry and would reduce investor confidence. These traders may decide not to participate in the markets if they think insider trading is rife, thus preventing investors from realizing trade profits. 

However, the SEC and the Department of Justice (DOJ) have recently stepped up efforts to combat the issue. While that is commendable, lawmakers may need to develop regulations that proffer clear guidelines to prevent these fraudulent activities. Furthermore, the risk of losing customers or facing a probe should motivate exchanges to tackle the issue proactively.

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

Do you think the rampant insider trading in the crypto markets can be curtailed given the decentralized nature of the industry? Let us know your thoughts in the comments below.

Article Sources

1. a:0:{}

2. a:0:{}