Insider tradings in stocks are common. But have you wondered why crypto insider trading is rare, at least for now?
Here is a cryptocurrency insider trading scandal that I would like to see:
- There is some crypto project that does something. People work together to build something that adds value to the world, and there are tokens that represent some form of economic interest in that project. If the project succeeds and the underlying product is widely used and beloved, the tokens will be valuable; if the project fails, the tokens will be worthless.
- Something good happens at the project. A trial version of the product works really well, some regulatory approval is received, some big business decides to use the project, whatever: Some event occurs that materially increases the probability that the project will succeed and, thus, that the token will be valuable.
- After the event happens, but before it is publicly announced, some insider of the project buys a bunch of tokens.
- Then the event is announced publicly, the tokens go up, and the insider gets rich from her well-timed token purchases.
There is nothing particularly novel or interesting about this; this is just insider trading. Just normal insider trading. Happens at companies all the time: A company has good quarterly earnings or a good drug trial or lands a big customer or whatever, an insider buys stock, the news comes out, the stock goes up, totally normal stuff. Illegal stuff! But normal.
Here is the crypto insider trading scandal that I actually see, repeatedly:
- There is some crypto project. Maybe it does something, but this is irrelevant to the discussion.
- What is relevant is market depth: If you can sell the project’s token to more people, then it will be more valuable. In particular, if it is listed on one of the big cryptocurrency exchanges, the price will go up, because more people will buy it, independent of any considerations about what the token actually does or whether the project will ultimately succeed.
- The project’s token gets listed on a big exchange.
- While the listing is being considered, but before it is publicly announced, somebody — presumably an insider of the project or of the exchange — buys a bunch of tokens.
- The token lists on the exchange, the price goes up, and the insider gets rich from her well-timed token purchases.
In a sense this is novel and interesting because crypto tokens are (at least sometimes) not securities, everything happens vaguely offshore, and the law of insider trading in this area is underdeveloped and arguably unclear. It is also interesting because the insider trading tends to occur on public blockchains, which means (1) everyone can see the concentrated well-timed trades right before the listing event but (2) you can’t necessarily tie the wallet doing those trades to the actual person involved (to see if it’s an insider, etc.). But the inside information is always fundamentally about the exchange, not about the project. The core inside information is never “the fundamental value of this token has increased,” always “we can sell this token to more people.” It is a dispiriting sort of insider trading.
Over six days last August, one crypto wallet amassed a stake of $360,000 worth of Gnosis coins, a token tied to an effort to build blockchain-based prediction markets. On the seventh day, Binance—the world’s largest cryptocurrency exchange by volume—said in a blog post that it would list Gnosis, allowing it to be traded among its users.
Token listings add both liquidity and a stamp of legitimacy to the token, and often provide a boost to a token’s trading price. The price of Gnosis rose sharply, from around $300 to $410 within an hour. The value of Gnosis traded that day surged to more than seven times its seven-day average.
Four minutes after Binance’s announcement, the wallet began selling down its stake, liquidating it entirely in just over four hours for slightly more than $500,000—netting a profit of about $140,000 and a return of roughly 40%, according to an analysis performed by Argus Inc., a firm that offers companies software to manage employee trading. The same wallet demonstrated similar patterns of buying tokens before their listings and selling quickly after with at least three other tokens.
Look, this exists in traditional finance. There was a fun 2020 case against an S&P Global Inc. manager who allegedly traded on inside information about what stocks would be added to indexes; information about liquidity and demand can be material, just like information about the actual business. But this is rare; most of the material information about stocks is information about the business. In crypto it is the reverse.