Legal Definitions - daisy chain

Daisy Chain

A "daisy chain" refers to an illegal scheme in financial markets where a small, coordinated group of individuals or entities repeatedly buys and sells the same asset among themselves. The primary goal of this rapid, internal trading is to create a false impression of high demand and increasing value for the asset, thereby artificially driving up its price.

Once the price has been sufficiently inflated and unsuspecting external buyers are attracted by the apparent market activity and rising value, the original group sells off their holdings for a quick and substantial profit. This leaves the new, external investors with an asset that is significantly overpriced and likely to lose value once the artificial demand disappears.

Here are some examples:

• Cryptocurrency Manipulation: Imagine a newly launched, obscure cryptocurrency. A small group of its early developers and initial investors begins to repeatedly trade large quantities of this coin back and forth among themselves on a lesser-known exchange. Each transaction is recorded, creating the illusion of significant trading volume and a rapidly appreciating asset. This activity catches the attention of individual retail investors who, seeing the coin's apparent growth, decide to invest heavily. Once a substantial number of these external investors have bought in, the original group sells off their entire stake, making a large profit and causing the coin's price to plummet, leaving the new investors with substantial losses.

  This illustrates a daisy chain because the small group artificially inflated the cryptocurrency's perceived value and demand through coordinated, internal transactions, attracting unsuspecting buyers before cashing out.

• Non-Fungible Token (NFT) Scheme: Consider a limited series of digital art NFTs created by a small collective of artists. To boost their perceived value, members of the collective use multiple digital wallets to repeatedly buy and sell these NFTs to each other on a secondary marketplace, consistently at incrementally higher prices. This creates a public record of escalating sales and rising floor prices, making the NFTs appear highly desirable and a good investment. Influenced by this fabricated market activity, external art collectors purchase the NFTs at these inflated prices. The collective then sells their remaining NFTs, realizing significant profits, while the new buyers are left with assets whose true market value is much lower than what they paid.

  This demonstrates a daisy chain as the small collective artificially inflated the NFTs' market value through repeated, internal transactions to lure in external buyers, ultimately profiting at their expense.