The periodic 'wash trading' in the crypto market is a recurring phenomenon; it is essentially a process of market self-regulation and emotional release. Next, I will discuss how this mechanism operates, its causes, and its significance.
1. What is periodic 'wash trading'?
In the crypto market, 'wash trading' typically refers to the process of liquidating high-leverage positions through significant price fluctuations, eliminating weak players, and resetting market sentiment. This phenomenon often occurs in the following scenarios:
Excessive leverage: Traders use high leverage (such as 10x, 50x, or even 100x) to chase short-term gains; once the price fluctuates in the opposite direction, positions with insufficient margin will be forcibly liquidated.
Extreme emotions: The market has accumulated a large number of irrational positions during phases of greed (FOMO) or fear (FUD), such as longs overleveraging at high prices or shorts being overly bearish at low prices.
Liquidity squeeze: Large holders or 'whales' manipulate the order book to trigger waterfall declines (or rises), triggering a chain reaction of liquidations.
This liquidation of $262 million, while not the largest in history (for example, single-day liquidations of over $4 billion occurred in May 2021), still exemplifies the typical characteristics of 'wash trading': fast, intense, and widespread.
2. The cyclical nature of 'wash trading'
Wash trading in the crypto market is not random but closely related to several cyclical factors:
Bitcoin halving cycle: The halving event, which occurs once every four years (such as in April 2024), is usually accompanied by bullish expectations, followed by overheating and corrections. March 2025 will be one year after the halving, and the market may enter a period of consolidation as it digests previous gains.
Funding rate fluctuations: In the perpetual contract market, the funding rate reflects the balance of long and short forces. If the rate is too high (for instance, if longs are paying high fees), it often signals that wash trading is imminent as the market needs to balance positions.
Macroeconomic linkage: The crypto market is increasingly influenced by global finance; for instance, expectations of Federal Reserve interest rate hikes, a strong US dollar index (DXY), or stock market fluctuations may trigger fund withdrawals and wash trading.
Accumulation of technical indicators: Signals such as RSI overbought/oversold, a decline in active on-chain addresses, or an increase in net inflows to exchanges often correlate with wash trading.
Taking this event as an example, the $60.01 million Bitcoin liquidation may be related to the price breaking below a key support level (such as $65,000) in the short term, triggering a chain reaction of long liquidations and short squeezes.
3. The role and significance of 'wash trading'
Although 'wash trading' brings panic and losses, it plays an important role in the crypto ecosystem:
Excessive liquidation: After high-leverage positions are eliminated, the market leverage ratio decreases, reducing systemic risk. For example, after a liquidation event, the open interest (OI) in the derivatives market often declines significantly.
Emotional reset: Wash trading breaks the extreme emotions of greed or fear, allowing the market to return to rationality and creating conditions for the next round of upward movement or bottom formation.
Wealth redistribution: The funds from liquidated positions usually flow to more patient or financially stronger players (such as long-term holders or whales), reflecting the survival of the fittest in the market.
Healthy adjustment: Just as forest fires clear dead branches and leaves, wash trading frees up space in the market, preventing bubbles from expanding excessively.
After this liquidation, if on-chain data shows that long-term holders (HODLers) continue to accumulate (such as an increase in Glassnode's 'holding wave' indicator), it indicates that the wash trading may lay the groundwork for the next round of upward movement.
4. Historical comparisons and patterns
Looking back, the scale and frequency of wash trading are highly correlated with market cycles:
End of 2017 to early 2018: Bitcoin crashed from its peak of $20,000, and the bear market wash trading lasted for several months, eliminating a large number of retail investors.
May 2021: China's mining ban and Elon Musk's tweets triggered a $4 billion liquidation in a single day, marking a correction in the middle of the bull market.
November 2022: The collapse of FTX led to over $1 billion in liquidations, accelerating the formation of the bear market bottom.
The scale of this wash trading in March 2025 is relatively small and may just be a 'micro-adjustment' within the cycle, rather than a major turning point. However, if subsequent liquidations continue to expand or are accompanied by significant negative news (such as tighter regulations), it could evolve into a deeper correction.
5. My views
From my perspective, periodic wash trading is an inevitable 'growing pain' of the crypto market. It reflects the youth and immaturity of this market — high volatility, speculation-driven behavior, and lack of deep liquidity remain the norm. Compared to traditional finance, wash trading in the crypto market is more frequent, more intense, but also more vibrant. It is like a natural selection, eliminating the weak and rewarding patience and strategy.
The author's attitude towards wash trading is neutral: it is both a risk and an opportunity. For traders, learning to identify wash signals (such as abnormal funding rates or on-chain data) and controlling leverage is crucial; for long-term investors, wash trading is just noise, and the real value lies in technological progress and increased adoption rates. In the context of the $Ghibli craze, wash trading forms an interesting contrast with meme coin speculation — the former is the market's calm 'street sweeper', while the latter is the fervent 'dream maker', together creating the bizarre world of crypto.
How do you think this wash trading will affect the subsequent market trends? Or do you want to discuss a specific mechanism within wash trading? Please leave a message to let me know.