You’ve heard about non-fungible tokens, but you may still have some questions. Let’s go over what they are and how they work.
It can be hard to understand digital ownership, and the market for digital assets can be confusing. It’s tough to know who to trust when a lot of people are saying different things about digital assets. Some people are making a lot of money from these assets, so it’s hard to know what is really going on.
People have been buying the things they made, which has made some people question the industry. Our article will explain what is happening and what it means for the future.
Why would you purchase your own NFT?
It’s not surprising that creators buy their NFTs. This is because it is like an auction where artists can create a fake demand to attract more investors.
People used to think that the mysterious buyers of artworks were non-digital artists. For example, people thought that Banksy bought his famous painting “Girl with a Balloon” and then proceeded to shredded it.
However, Banksy’s story does not really apply to what is happening in the NFT world. For starters, a famous artist probably does not need to increase his artworks’ price artificially. For the record, the shredded painting went through a new action, with a higher final price.
People often wonder if it is legal to own-buy. After all, it seems like someone purposely raises the prices to send a message. But science has shown that high prices can attract customers in many different areas.
From a more down-to-earth standpoint, the technique may be considered “wash trading.” In the specific section on wash trading, we’ll spend more time on the subject.
Famous market stories
The transparent nature of the blockchain makes it easy for people to find the buyer of digital assets. The following are two recent cases where creators bought their digital assets:
Last November, CryptoPunk 9998 was sold for an amount of ETH that was worth $532 million. This would have been a record-breaking deal, as it would have been more than the $69 million that was paid for Beeple’s NFT in March.
However, the market believes that the artist paid for his work using crypto derivatives. This is done by taking out a “flash loan,” which is when you borrow money from three different cryptocurrency sources.
Eventually, he returned the money to the buyer. This was done in order to repay the debts that were owed. However, this scheme caused some people to doubt the record sale.
This method of buying art is a way to control the market. As we mentioned before, this can make the price of art go up (and make it more popular).
Apparently, Melania Trump’s first NFT was very successful during its auction. There are rumors that the former first lady may have purchased it herself, but this has not been confirmed.
Bloomberg reports that the Solana blockchain transaction of 1,800 SOL involving Trump’s “Head of State Collection, 2022” audition is suspicious.
What happened? On Jan. 23, somebody transferred 372,657 USDC to a second wallet. Then, 1,800 SOL was transferred from that wallet to a third address.
The last step is the process of the auction winner being chosen on Solana’s blockchain.
Trump’s office reminded everyone that blockchain technology is all about transparency. They hinted at how they will set up the transaction for a third-party buyer.
What is wash trading?
Wash trading is a type of illegal trading where people trade with each other to make it look like there is more activity in the market than there really is.
In general, we encountered two examples of wash trading.:
- When a group of traders work together to buy or sell stocks in a company, this is called conspiring. This can be done to achieve a goal, like making money.
- No difference between buyers and sellers: sometimes, a trader may act as both the buyer and seller of the security.
In the United States, wash trading is illegal. Wash trade losses are not allowed as deductions on taxable income by the IRS.
Before the 1930s, wash trading was a popular method for stock fraudsters to indicate their fake interest in a firm.
Under CFTC laws, brokers cannot benefit from wash transactions. The rule applies even if they claim they were unaware of the traders’ objectives. As a result, brokers must conduct due diligence on their clients in order to exclude fraudulent operations such as wash trading.
The existing NFT regulation
Chainanalysis’ recent findings suggest that the NFT wash trading problem exists. The researchers also reminded the market of the lengthy wait for rules on the issue.
NFT wash trading is a type of trading that exists in a legal gray area. We mentioned that traditional wash trading involving securities and futures is an illegal system, but no action has been taken against NFT wash trading yet.
If people trade NFTs in a way that makes the prices go up, it might not be fair for the people who bought the tokens at lower prices. This could mean that they don’t trust the NFT ecosystem anymore and won’t want to use it in the future.
People who sell NFTs to a wallet they’ve financed themselves can be easily found using data from the blockchain. This means that markets may choose to ban or sanction the biggest offenders.
What can we learn from this story?
Unfortunately, as with any new technology, NFTs can be used for illicit purposes. The financial sector is still figuring out how this novel asset class might alter our concept of property rights.