Earlier this month, a trio of Australian researchers released a new study titled Insider Trading in Cryptocurrency Markets that sought evidence of “individuals using private information to buy coins prior to their listing announcement and profiting from the typical price surge that follows the announcement.”
The paper examined 146 token listing announcements on Coinbase from September 2018 until May 2022. The 2018 date is when Coinbase invited users to submit applications for token listings, a process that the company said would likely result in the exchange listing “most assets over time.” At the time, Coinbase stressed that “all employees will continue to be subject to trading restrictions and confidentiality obligations to ensure the integrity of our platform.”
The study examined price movements in the 300 hours prior to each Coinbase token listing announcement and extending 100 hours after each announcement. Hourly price and volume data was collected from both centralized and decentralized (DEX) exchanges, with Uniswap chosen as the primary DEX due to its trading volume and its having listed 98 of the 146 tokens under the microscope. The study bundles these 98 tokens into a ‘Likely Insider Trading Group’ (LITG).
Even after controlling for factors that “could cause a general tendency for run-ups ahead of listings,” the paper found that the LITG tokens “have cumulative abnormal returns 15% higher” in the three-day period prior to the listing announcement compared to the baseline group. The abnormal return rate was 19% higher in the seven-day period prior to the announcement. For the overall 300-hour period, coins traded on the DEX rose 40% compared to the market benchmark.
Turning to the behavior of individual digital asset wallets during these pre-listing hours, the study identified four “connected” wallets that took positions in 15 tokens that were listed between November 2020 and January 2021. Combined, the four wallets “profited an estimated 1003 ETH” worth around US$1.5 million during the period in question.
The paper claims the four wallets’ trading activity was “so consistent and systematically precedes the listing announcements” that it virtually rules out any other factor than “possessing inside information about the upcoming listing announcements.”
The study authors conclude that insider trading of this sort occurs in 10-25% of the listings in their sample (the lower figure representing listings for which the study has “wallet-level evidence”). The authors say this rate suggests that “insider trading in cryptocurrency markets is somewhat more prevalent than in stock markets.”
Points if you saw this coming, but of the four wallets cited in the paper, three of them sent their allegedly ill-gotten profits to Binance, presumably because of that exchange’s legendary aversion to performing adequate know your customer (KYC) and anti-money laundering (AML) procedures.
The paper has yet to be peer reviewed—it occasionally misstates LITG as ‘LTIG’—so perhaps there’s some academic rigor yet to come that might blunt some of its findings. But it’s not like we don’t already know that insider trading is going on.
Last month, former Coinbase product manager Ishan Wahi and two other individuals were hit with both civil and criminal charges for using advance knowledge of 25 different digital assets chosen to be listed on Coinbase. The trio allegedly made between $1.1 million and $1.5 million in illegal profits between June 2021 and April 2022. Wahi pleaded not guilty to his criminal charges earlier this month.
Naturally, Coinbase continues to insist that it takes all allegations of front-running “incredibly seriously” and has lots of tools in place to guard against insider trading. But the exchange apparently had no idea what its product manager was up to until online sleuths traced “hundreds of thousands of dollars of tokens” purchased by a single Ethereum wallet prior to Coinbase’s April 2022 announcement of the token listings.
Worse, the U.S. Securities and Exchange Commission (SEC) maintains that that nine of the tokens involved in the insider trading scandal are unregistered securities. True to its 2018 pledge to list nearly all the tokens that users suggest, Coinbase announced this April that it needed to “accelerate the process” of reviewing tokens for potential listing. But said review process appears to involve little more debate than ‘will we earn more commissions’ from listing any particular token.
And speaking of Coinbase insiders, a pair of execs have demonstrated a rare show of support for their flagging platform by buying—not selling!—shares in the company. Chief Accounting Officer Jennifer Jones, who dumped $50 million of her holdings following last year’s direct listing on the Nasdaq, splashed out a modest $438,747 for 4,512 shares on August 15. That same day saw director (and Shopify CEO) Lütke Tobias spend $382,153 expanding his Coinbase stock.
While you have to admire their courage, both these sales were conducted while Coinbase stock was worth $97.24, about $15 higher than the stock was trading just three days after their purchases. But hope dies eternal, and if Coinbase could just go one week without some disastrous report on their business practices, it’s Coinbase to the moon, baby!
And just like that, another class action suit is filed regarding Coinbase’s failure to protect customer accounts from security breaches. Oh, well… Thanks for playing and better luck next time!
Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
New to blockchain? Check out CoinGeek’s Blockchain for Beginners section, the ultimate resource guide to learn more about blockchain technology.