What Is The Reason Behind 95% Of Crypto Trading Volume Being Faked?

This weekend the cryptocurrency world was once again shaken by a new investigation. This time, the analysts decided to report on the most extensive study of cryptocurrency assets trading. Bitwise Asset Management, a crypto-fund from San Francisco, openly published the report and sent it to the US Securities and Exchange Commission (SEC). One important thought sounds clearly in this report: 95% of the volume of Bitcoin trade is fake or non-economic. First of all, it is a severe blow to the reputation of crypto exchanges. So, is this report a provocation, or have the analysts from San Francisco decided to tell the whole world that “the king is naked”?

1/ New Research from us @BitwiseInvest.

As part of 226 slides presented to the SEC on our ETF filing, we did a first-of-its-kind analysis of *order book data* from all 81 exchanges reporting >$1M in BTC volume on CMC.

TLDR: 95% of reported volume is fake but LOTS of good news! pic.twitter.com/TuXLlDCRyP

— Bitwise (@BitwiseInvest) 22 марта 2019 г.

Should we look at CoinMarketCap at all?

The report, consisting of 226 pages, was presented to the SEC for a reason: the launch of Bitcoin-ETF is on the horizon, and such a message should serve as a kind of catalyst. Meanwhile, the Bitwise report has not yet received any definite response from the Commission.

The biggest doubt about the results of the report are the numbers that CoinMarketCap broadcasts, and in particular those that eloquently tell about the volume of daily trading. Data for 81 exchanges recording a trading volume of more than $1 million per day were included in the study. Bitwise analysts examined the CoinMarketCap data and claim that they are incorrect and thus mislead users:

“Despite its widespread use, the CoinMarketCap.com data is wrong. It includes a large amount of fake and/or non-economic trading volume, thereby giving a fundamentally mistaken impression of the true size and nature of the bitcoin market.”

As the researchers say, the largest share of the entire notorious volume is “supplied” by unregulated or poorly regulated exchanges. As in has already been confirmed in the past year, these are the facts of overstated trading volumes, market manipulations, and money laundering.

CoinMarketCap reports a bitcoin trade volume of approximately $6 bln per day. Bitwise claims that the real volume of daily transactions does not exceed 270 mln. As a result, Bitcoin’s actual market, if the wash trading is not accounted for, is lot smaller, orderly and more regulated than is actually reported.

Vivid examples of "Bitcoin magic"

Bitwise compares the data about Coinbase Pro, which they consider to be a “real exchange”, and CoinBene, which has the largest volume of BTC trading, but is called “suspicious” in the report. The volume of BTC trading at the first level is $27 mln per day, while at the second, BTC trading volume is estimated at $480 mln per day. Analysts compared trade printing on their respective websites, web traffic and real-world footprints, trying to catch the “traces” of Bitcoin transactions. This way, quite amusing facts were revealed:

“It is surprising that an exchange claiming 18x more volume than Coinbase Pro would have a spread that is 3400x larger.”

While analyzing the "candles" of the hourly trade volumes, one can also stumble upon interesting data. For example, some exchanges present consistent and almost identical volumes throughout the day. The report shows an example of the CHAOEX exchange, where the average daily trading volume is $70 mln, but a monotonous graph is quite obvious — the same trading volumes hourly. Isn’t it strange that this exchange is insensitive to price changes, news, waking hours, weekends and other factors of this turbulent market?

Why do these bubbles occur?

“It's interesting that we conclude that the main motive behind those inflammatory volumes are the insane integration fees, cryptocurrency exchanges charging Initial Coin Offerings which vary in between $1-3 mln. Again, it is worth to be mentioned that most of the leading actors of the crypto ecosystem are regulated, and the industry is not a Far West as tends to be presented by mainstream media,”

— Nikolas KOSTOPOULOS, community development specialist at Quadrant, shares his thoughts.

Now, when the ICO market gradually turns to IEO, the exchanges start playing an even more significant role, and they will definitely take advantage of such a chance. According to another study, this time from The Tie, the real trading volume of some exchanges does not exceed 1% of the declared ones. Alas, but the swelled volumes and a beautifully drawn picture still can put down some vigilance. The publication of such reports opens the eyes of many gullible investors and startup founders.

There is a good sign in all of this

Despite the false volumes, the market “was uniquely resistant to market manipulation,” the report also says. Bitwise claims that bitcoin market is an extremely well-arbitraged market, with a proven ability to ignore outlier prices, and that both the fundamental market structure and the specific NAV calculation methodology provide unique protections against potential efforts to manipulate that market.

Also, analysts have compiled a list of the largest ten exchanges, whose volumes are not overstated, and which are safe and reliable.

Naked facts sometimes help to look at things soberly: unregulated ecosystem and manipulations have already disserviced the crypto industry. If unscrupulous exchanges continue to operate in the same mode, they will not end up good, for there is some big reason that this document is currently in the SEC.

Image courtesy of The Merkle