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What An Insider Trading Study Can Teach Us About Crypto Investing

It’s not the first time crypto has been accused of being a hotbed of insider trading, and it almost certainly won’t be the last. Still, there was something novel about accusations emerging last week, if only because they came from a study published by researchers at the University of Technology Sydney in Australia. Not only that, but said study presented clear evidence of “systematic” insider trading in the cryptocurrency market, meaning it happens on a regular basis.

There are likely two main reactions to such conclusions. The first is to label the study as another example of FUD (fear, uncertainty and doubt) and dismiss its warnings, even though the evidence it presents is pretty compelling. The second is to be scared off cryptocurrency trading, unnerved by what the paper reveals about the frequency of insider trading and — by extension — dumping onto non-insiders.

However, while the existence of insider trading in crypto is troubling, there are things investors and traders can do in order to adapt to it. One is simply to follow the tried-and-tested advice of investing only in fundamentally strong and well-established coins for the long-term. The other is to try to ride the wave of insider trading, by identifying altcoins on DEXes (decentralized exchanges) likely to receive a listing in the near future.

Crypto trading

Insider Trading is a Big Problem in Crypto

Published in early August in SSRN, the straightforwardly titled “Insider Trading in Cryptocurrency Markets” found that such trading occurred in anything between 10% and 25% of new listings on Coinbase between September 2018 until May 2022.

This is a striking figure, particularly when the study was focused only on Coinbase, which has a reputation within the industry of being more reputable, largely because it’s publicly listed and has to undergo more scrutiny as a result. Yet it resonates with fairly recent Coinbase-related news, particularly the news from July that the SEC and US Department of Justice filed criminal charges against a former manager at the American crypto-exchange. In particular, US authorities accused this manager of passing on confidential info related to new listings to his brother and another associate, who then traded with this info on at least 14 occasions between June 2021 and April 2022, making a profit of at least $1.5 million.

This figure is interesting, since it’s the same figure that the Australia-based researchers give as the lower, minimum estimate for the profits their inside traders made. Here’s what they had to say about four wallets that exhibited abnormal trading behavior prior to certain Coinbase listings:

“Overall, between November 24, 2020 and January 22, 2022, these four linked wallets profited an estimated 1003 ETH ($1.5 million) from trading prior to Coinbase listing announcements.”

Of course, this is likely to be an underestimate, given that the four wallets they monitored operated only between November 2020 and January 2022. Because they also have evidence of “abnormal return run-ups” between Sept 2018 and May 2022, meaning trading activity that’s “statistically significant and abnormal relative to listings in which insider trading is unlikely to occur.”

As such, it’s likely that insider traders made more than $1.5 million in profit from Coinbase listings over the past four years or so. Then you have to add the fact that the study covered only Coinbase, with it being arguable that many other big exchanges are more likely to suffer from insider trading.

Indeed, the SEC began an insider trading probe in relation to Binance in September 2021, not that it has proven or concluded anything yet. Meanwhile, a May 2022 study published by analysis firm Argus identified 46 wallets that conveniently purchased $17.3 million in tokens right before coins were listed on Coinbase, FTX and Binance, making a profit of at least $1.7 million.

Then there was the OpenSea case from early June, when the Southern District of New York charged an ex-employee of the NFT marketplace with insider trading. There have also been earlier allegations made against such exchanges as BitMex and Bitfinex.

Tweet about insider trading

Source: Twitter

This all adds to a picture of an industry rife with insider trading. In fact, the authors of the SSRN study conclude that it is more common than in more traditional markets, although they shy away from any dramatic statement that things are much worse

“Our findings suggest that insider trading in cryptocurrency markets is somewhat more prevalent than in stock markets. In stock markets, insider trading is estimated to occur between one in 20 earnings announcements or one in five merger and acquisition events.”

How to Adapt to Insider Trading

Assuming that insider trading is a regularly occurring phenomenon within cryptocurrency markets, the practical question emerges as to how the average investor should adapt to it.

Well, for most investors, recent findings and cases provide yet more confirmation of the old adage ‘HODL’ (hold on for dear life). That is, if you want to reduce your exposure to being dumped on by insider traders (and whales or market manipulators in general), it remains highly advisable to focus on a few well-established and fundamentally sound coins and hold them for the long-term.

For instance, investing only in bitcoin (or ethereum, etc.) is probably the best way of remaining in the cryptocurrency market without risking losing money by buying coins from insider traders. Because BTC now has such a large, highly liquid market (witness Tesla’s sale of its bitcoin stocks), it’s more insulated against insiders buying it up in advance of positive news being released. Moreover, because of its strong fundamentals, it remains a good long-term investment prospect, so any pump and dump affect BTC will be ironed out in the long-term.

Having said that, more adventurous/reckless traders may want to try to take advantage of insider trading, by keeping their ears to the ground and sniffing out any potential listings before they happen.

This will be a very difficult task if you’re not an insider at an exchange, but there are a few things people with nerves of steel can do to improve their chances.

Firstly, they will obviously need to have accounts on a variety of decentralized (and centralized) exchanges, so that they can buy up newer coins before they’re listed on bigger trading platforms.

Secondly, and perhaps most importantly, they will need to use a variety of social media (and news websites) to keep an eye out for speculation surrounding new listings. This includes not only Twitter, but also networks such as Discord and Telegram.

Needless to say, there’s no guarantee that a plucky trader will pick up reliable rumors before a listing, but it will at the very least keep them apprised of new, promising coins. Which is already a win in itself.

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CryptoVantage Author Simon Chandler

About the Author

Simon Chandler

Simon Chandler is a journalist based in London. He writes about technology, markets and politics, and has bylines for Forbes, Digital Trends, CCN, Wired, TechCrunch, the Verge, the Sun, the New Internationalist, and TruthOut, among many others. His Twitter handle is @_simonchandler_

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