Mark Cuban Says This Could Cause the Next Crypto Implosion

The Dallas Mavericks owner is suspicious about some cryptocurrencies' trading volumes.

Cryptocurrency was plagued by some high-profile collapses in 2022. One of the largest cryptocurrencies, Terra (LUNA) crashed in May. And one of the largest crypto exchanges, FTX, filed for bankruptcy in November. Founder Sam Bankman-Fried has been charged with fraud and money laundering.

The hope for crypto investors is that there aren't any incidents like these in 2023. But billionaire Mark Cuban, a longtime crypto investor himself, thinks another could be on the horizon. He believes the next possible crypto implosion "is the discovery and removal of wash trades on central exchanges," he said in an interview with TheStreet.

Cuban clarified that he doesn't have specifics to support his guess. However, there's evidence this is a serious issue. If you invest in cryptocurrency, it's important to be aware of what's going on and what to look out for.

What is wash trading?

Wash trading is an illegal activity that involves a single person buying and selling the same asset to manipulate the market. In doing so, the owner of an asset can pump up its trading volume and mislead potential investors. It was originally used with the stock market, but it can also be used to manipulate other markets, like cryptocurrency.

For an example of how this works, let's say you own $1 million worth of a crypto token. You sell it to another crypto wallet in your control. You still have the same amount of cryptocurrency, minus transaction fees. And your transaction added $1 million in artificial trading volume.

Fraudsters often use wash trades as part of pump-and-dump cryptocurrency scams. They'll buy and sell their own tokens to give the appearance that a cryptocurrency is heavily traded. Then, they'll promote the cryptocurrency on social media. Once they've convinced people to invest and driven up the price, they sell their tokens at a profit. The price then plummets, and all those new investors end up losing money.

Crypto likely has a wash trading problem

Because of how cryptocurrency works, the market is especially vulnerable to wash trading. Crypto wallets aren't tied to the owner's identity. Some crypto exchanges let you trade by connecting a wallet, with no identity verification required. That makes it very easy for a scammer to set up multiple wallets and move their own cryptocurrency back and forth.

Non-fungible tokens (NFTs) have this same problem. If you own an NFT, and you want to make it seem more valuable, you can just buy it yourself for a hefty price.

Recent data supports Mark Cuban's theory about crypto wash trading. In August 2022, Forbes released an analysis of trading activity at 157 crypto exchanges. It found that "more than half of all reported trading volume is likely to be fake or non-economic." It estimated that global Bitcoin (BTC) trading volume was less than half of what was being reported.

How to protect yourself while investing in cryptocurrency

Cryptocurrency investing is inherently risky business, so there's no way to be completely safe. And if there's a discovery of widespread wash trading on major exchanges, Cuban is right that it could lead to another crypto implosion.

Take all crypto trading volume with a grain of salt, and don't use it as a reason to invest. This is especially true if you're thinking of investing in smaller cryptocurrencies, but it can be the case with larger coins as well. Base your investing decisions on the quality of the cryptocurrency, not how much of it is supposedly being traded.

Also, be conservative about how much money you have in crypto. There's nothing wrong with making cryptocurrency a small part of your investment portfolio. If you want to put 5% of your money in crypto, that's fine. Just don't invest money you can't afford to lose, and keep the bulk of your portfolio in less volatile investments, such as stocks.