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Over 33% of NFT Volume is Wash Trading: bitsCrunch CEO Interview

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NFTs were undoubtedly the hottest topic in late 2021 and early 2022. Pushed into mainstream adoption by projects like the Bored Ape Yacht Club, Azuki, Okay Bears, and others, NFTs have boomed.

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As the overall market was in a significant drawdown and the price of Bitcoin lost nearly 70% of its value in a matter of months, non-fungible tokens also felt the pressure. Valuations have collapsed and floor prices for big projects like BAYC have fallen.

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In addition to all this, the emerging industry is plagued by other problems: fictitious trade is clearly flourishing, and copycat projects are multiplying like mushrooms. In this podcast, we’ll discuss some of the industry’s growth challenges, as well as possible future solutions. Vijay Praveen is the CEO and founder of NFT analytics provider bitsCrunch.

Over a third of NFT trading volume is fraudulent trading

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One of the main problems of the NFT industry has been fictitious trading for quite some time now. For those who don’t know, shell trading is the process of artificially inflating the price of an asset by simulating trading activity. Let’s see an example.

Imagine that John buys NFT for 1 ETH. However, he wants it to look like it’s an expensive collectible that he managed to acquire at a bargain price. To do this, he creates another MetaMask wallet and “buys” it from himself for 10 ETH. Now you have to remember that NFT sales take place online and the data is recorded and subject to public verification. This is why the trading history for each individual NFT on OpenSea (which also applies to most marketplaces) is fully visible. That being said, anyone who checks this NFT will now see that it was bought for 1 ETH and then sold for 10 ETH, giving the illusion that it is an expensive item. Then someone might decide to spend more than 10 ETH on it, thinking they are buying something expensive, when in fact John artificially inflated its price by selling it to himself.

This task can be extended for various purposes. For example, founders can artificially inflate the sales of their collections to keep them trending across platforms.

Speaking about this, Praveen said that his company has calculated the numbers and shared with us that more than a third of the total NFT trading volume in all markets is subject to fictitious trading.

The example above was especially simple. Pravin said that they have identified more than 12 patterns that scammers use to achieve their malicious goals.

Are NFTs connected to the wider crypto market?

The cryptocurrency market has been fluctuating in recent months, and the fall has intensified this week as the price of bitcoin nearly reached $20k, the previous all-time high of 2017 and a critical level.

At the same time, NFT prices also fell. Now, there are a few important things to consider here. Non-fungible tokens are usually denominated in the native cryptocurrency of the network they operate on. Most often it is either ETH or SOL.

It is logical to assume that when the price of ETH or SOL goes down, so does the value of NFTs in USD, but it is important to keep an eye on whether their ETH or SOL denomination also goes down. So far, it looks like it is.

For example, at the time of this writing, the minimum price of NFT Bored Ape was around 86 ETH, and just a couple of months ago it was above 130 ETH. According to Pravin, there is a correlation between NFT prices and the wider crypto market, especially with some collections.

As a provider of NFT analytics and forensics, we looked at some correlations. We see some of them, especially with collections like MAYC (Mutant Ape Yacht Club) – we see them correlate with ETH and other cryptos.

On the other hand, there are collections like ArtBlocks where anyone can mint coins and they have over 200,000 owners. They do not correlate with Ethereum and other regular coins.

The NFT space is like a child

As mentioned above, there are a huge number of projects in the NFT space that simply replicate successful collections with minor changes or updated narratives. There are also many projects with dubious visuals.

One example of recent weeks is Goblintown, a collection of downright ugly goblins (as if there are cute goblins) in explicit bear market references, as in “we’re going to goblin town.” The collection was free to mint, and at one point its floor price reached a whopping 9 ETH. And this is not the first such collection that has released a mass series.

Pravin believes that this is due to the fact that the NFT market is still very young, and over time the industry will be cleared of “junk projects”.

I would liken the NFT space to a baby who is still crawling and trying to climb up. I expect some junk projects to get lost due to this market situation.

This is both good and bad in some ways – bad for those who put their heart and soul into the project, but at the same time cleans up collections that are not ready to stay for a long time.

On the other hand, he believes that projects like BAYC and CryptoPunks are most likely not going anywhere and that they have brought great value to this space.

Pravin also shared his thoughts on Web3, the involvement of venture capitalists and how he thinks the market will evolve in the future. Feel free to watch our video podcast to find out what he thinks NFTs will look like in the next couple of years.

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