Insider trading in crypto markets

New research shows evidence of systematic insider trading in cryptocurrency markets. It suggests traders are using private information to purchase crypto coins prior to exchange listing announcements, and profiting from the price surge that follows an announcement.

“There is a perception that cryptocurrencies are a lawless “wild west” where traders can do things that would be illegal in traditional financial markets,” said study co-author Professor Talis Putniņs from the University of Technology Sydney.

“However, the US Department of Justice recently charged a former Coinbase product manager and two close contacts with insider trading, setting a precedent to crack down on this type of financial misconduct. Our research suggests there is more work ahead for prosecutors.”

The study, recently published as a preprint by authors Ester Felez-Vinas, Luke Johnson and Professor Putniņs, shows insider trading may have occurred on 10% to 25% of new crypto listings at Coinbase, the largest cryptocurrency exchange in the US, between September 2018 and May 2022.

The public and highly transparent nature of blockchains allowed us to directly analyse trades ahead of listing announcements.

Professor Talis Putnins

When a coin is listed on Coinbase, this can cause the price to jump because it is available to more buyers. By using inside knowledge to purchase coins prior to listing the traders could have generated at least $1.5 million in illegal profits, according to the study.

To determine this figure, the researchers looked at how frequently a crypto coin had abnormal trading patterns indicative of insider trading in the days before Coinbase announced it was going to be added to the platform. They also used blockchain data to identify the specific wallets involved in such trading.

“The public and highly transparent nature of blockchains allowed us to directly analyse trades ahead of listing announcements, something that is not possible with public data from stock exchanges,” Professor Putnins said.

After analysing 170 listing announcements, they found at least four crypto wallets involved in suspicious trading. The wallets repeatedly bought coins in the days before Coinbase announced it was going to list them, and sold them after the announcement.

The study follows previous research by Professor Putnins and colleagues into the use of cryptocurrencies on the “dark web” to finance illegal activity, and on the use of “pump and dump” manipulation in cryptocurrency markets.