Crypto Might Have an Insider Trading Problem

Public data suggests that several anonymous crypto investors profited from inside knowledge of when tokens would be listed on exchanges.

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.

The crypto ecosystem is increasingly grappling with headaches that the world of traditional finance tackled decades ago. The collapse of a so-called stablecoin from its dollar peg earlier this month stemmed from crypto’s version of a bank run. How cryptocurrency exchanges prevent market-sensitive information from leaking has also become a growing topic of concern. The focus comes as regulators are raising questions about the market’s fairness for retail users, many of whom just booked major losses on steep declines in crypto assets.

The wallet buying Gnosis was among 46 that Argus found that purchased a combined $17.3 million worth of tokens that were listed shortly after on CoinbaseCOIN -1.88% Binance and FTX. The wallets’ owners can’t be determined through the public blockchain.

Profits from sales of the tokens that were visible on the blockchain totaled more than $1.7 million. The true profits from the trades is likely significantly higher, however, as several chunks of the stakes were moved from the wallets into exchanges rather than traded directly for stablecoins or other currencies, Argus said.

Argus focused only on wallets that exhibited repeated patterns of buying tokens in the run-up to a listing announcement and selling soon after. The analysis flagged trading activity from February 2021 through April of this year. The data was reviewed by The Wall Street Journal.