How Do ‘Wash Trades’ Distort the True Liquidity Picture in Level 2 Crypto Data?

Wash trading is a manipulative practice where a trader simultaneously buys and sells the same asset, creating the illusion of genuine trading activity and volume. In Level 2 data, this can artificially inflate the visible volume and depth of the order book, making the asset appear more liquid than it truly is.

A trader relying on this false liquidity may execute a large market order, only to find the true depth is shallow, resulting in massive, unexpected slippage.