Wash trading and illiquidity inflate crypto valuations | Opinion

As politicians, traditional financial institutions, and Wall Street investors increasingly warm to crypto, the industry’s market dynamics require greater scrutiny after operating in their own murky niche for years.

Crypto token prices are dramatically impacted by momentum, and crypto traders obsess over price charts, relying on them heavily to make trading decisions. A sudden price spike is usually perceived as a key market signal: the protocol must be gaining traction, the network must be growing, and the token must have utility and intrinsic value.

But that mental shortcut has dangerous consequences. In reality, operators know how to game the system to make their price chart look attractive. Most crypto tokens are thinly traded, and their prices can be easily influenced by small pockets of demand. Market manipulation is widespread, misleading market-making practices are common, and coordinated wash trading runs rampant.

As crypto drifts further mainstream, it’s important to recognize that token price is not a proxy for value. In an illiquid and speculative market, short-term price action can create the illusion of growing utility, triggering feedback loops that distort valuations, mislead investors, and destabilize networks.

If digital assets are to mature into investable, productive infrastructure, we need to confront how liquidity gaps fuel these distortions and stop confusing volatility with value.

Valuing digital assets is inherently difficult

Unlike equities, most tokens lack valuation anchors like earnings, cash flow, or dividend yields. There is no price-to-earnings ratio to reference. No discounted cash flow model to triangulate against. As a result, price becomes the default signal, regardless of whether it’s grounded in reality. This creates a structural vulnerability in how digital assets are perceived and priced.

Even in traditional markets, asset prices can deviate from fundamentals. But in crypto, the disconnect is exacerbated by a lack of stabilizing market forces, poor transparency, minimal regulation, and low liquidity.

Consider the case of Mantra and its OM token, which in March 2025 appeared to have strong fundamentals and widespread trading activity. To most traders, the token seemed like an attractive investment. But behind the scenes, Mantra team members allegedly coordinated with market makers and community insiders to simulate fake trading activity using a technique known as “wash trading.” OM tokens were passed back and forth between insiders, creating the illusion of robust demand and deep liquidity. This practice deliberately engineered the metrics that analysts and investors rely on: on paper, the token appeared to be among the top 25 by market cap, yet in reality, less than 1% of the token supply was being genuinely traded.

Once this artificial trading volume had inflated the price and lured in outside investors, insiders began offloading their holdings. Within 90 minutes, the token crashed 90% in value. Those behind the scheme walked away with profits, while retail investors were left holding near-worthless tokens.

These types of events are widespread across crypto and hold the industry back from reaching a wider pool of investors. Who wants to enter such deceptive waters?

How illiquidity and a lack of stabilizing market forces derail price perception

In traditional markets, market caps are enormous, and only the largest firms, such as Citadel, can meaningfully move markets, making them de facto gatekeepers for how assets are priced. These players set valuation norms using fundamentals like price-to-earnings ratios, free cash flow, and revenue growth.

Their presence adds stability and keeps markets rooted in reality. If a stock’s P/E ratio drifts too high, investors expect that major funds will start trimming positions, and thus trim their own. Valuations converge toward the benchmarks set by those with the most market-moving power. And whether by self-fulfilling prophecy or informed analysis, these institutions have historically kept valuations in check and steered retail sentiment in a rational direction.

Crypto markets, by contrast, lack this stabilizing force. Instead, retail traders dominate the space, often chasing momentum without any grounding in reality. They aren’t arbitraging toward fair value, they’re purely speculating on what comes next. That absence of institutional discipline creates a playground for manipulation. With no shared valuation framework and thin liquidity, it’s easy to manufacture misleading price signals and fool investors who’ve been trained to read charts as a true reflection of a company’s performance.

Crypto markets are often extremely illiquid, further fueling dysfunction. Outside the top-tier tokens — Bitcoin (BTC), Ethereum (ETH), Solana (SOL), etc — most token markets are extremely illiquid, and even modest buying (or selling) activity can move prices dramatically.

In a market where price is the sole proxy for value, investors commonly misread manipulative buys as genuine signs that a project holds promise (“why else would its value shoot up?”). A token appreciates; traders interpret the move as a sign of growing utility; and new investors pile in, reinforcing the trend. The buying itself drives more price appreciation, which then justifies more bullishness, creating a manic flywheel and driving valuations to absurd levels.

In a market detached from reality, everyone loses

As crypto teeters on the precipice of mainstream adoption, it’s still unclear if the investing public will be stepping into a stable, pragmatic market or hype-driven pandemonium driven by insider trading. The industry badly needs stabilizing forces, whether they be deep-pocketed players that stick to a predictable investment thesis, regulatory safeguards, or a new, crypto-native solution.

The industry’s current stance: actively courting outside investment, while aggressively punishing outside investors, seems ridiculously untenable.

New entrants to crypto end up making bets based on misunderstood signals. Crypto developers misinterpret token price spikes as evidence of product-market fit (“investors must be responding to our latest feature!”), derailing development. And utilitarian users are forced to navigate volatile token prices, which can undermine the asset’s real-world usability for payments.

After a stellar year of regulatory wins, skyrocketing valuations, and surging capital inflows, the crypto industry is flying high… but before it can reach its full potential, it will need to crash back down to reality.