Out of 83 cryptocurrency exchanges, analyzed by crypto investment company Bitwise Asset Management, only 10 passed a test aimed to show if they were reporting systematically inflated bitcoin trading volumes.
From the highest to the lowest, in order of their average daily traded volume during April 2019 are as follows:
Exchange (Daily volume in million USD):
Coinbase Pro (73)
Total trading volume: USD 554 million
South Korean exchanges were once again excluded from the analysis, due to their volumes being isolated from the globally connected bitcoin market because of the capital controls as Bitwise explains.
“Any reported trading volume that does not reflect legitimate price found in the market will not be accepted, therefore the authors of the analysis main purpose was to work on identifying those exchanges who systematically increase volumes traded”.
They have put the exchanges through these three tests:
• time period of visualized data. To detect anomalous or artificial patterns, one week was good enough for this case as was found to be the most suitable for visualizing data.
• trade size histograms is a data visualization technique that allows people to see the percentage of trading volume on an exchange that occurs at particular trade sizes over a specified period, as defined by the paper.
• Then the volume spike alignment , considering the global nature of bitcoin, charts should show similar patterns and all exchanges should respond to the same developments too.
About 95% of all reported volume, or more precisely, USD 10.5 billion out of the USD 11 billion in reported average daily spot bitcoin volume, is either fake volume or wash-trading, from the additional paper presented to U.S Securities and Exchange Commission in march 2019 by Bitwise.
According to these findings in the paper presented which was published on May 24th 2019, titled “Economic and Non-Economic Trading In Bitcoin: Exploring the Real Spot Market For The World’s First Digital Commodity”, authors claim that “public perception of bitcoin’s spot trading market as being disorderly, inefficient, and widely believe that its volumes and prices are inflated is very wrong.”
They find that “the modern bitcoin spot market is both significantly smaller and significantly more efficient than commonly understood”, and especially the outcome of the massive changes after December 2017.
Methods and motivations for exaggerating volume
Lets look at quite a few ways in which exchanges can inflate volume, though with little to no consequences along the line, including but not limited to practices such as:
• fraudulent printing which involves printing more volume to their tape using algorithms that post trades that never happened, false volume.
• Exchange doing level wash trading by placing orders and doing wash trading on their own platforms, at same time, buying and selling a single asset with an affiliated party or itself.
• Aside itself, Exchanges can do paid third-party wash trading by paying market makers to engage in wash trading.
• They also engage in trade mining. This happens when exchange pays traders to trade, mainly in an exchange-specific coin, in that way economically incentive trading activity and fee-tier wash trading offering benefits such as preferential trading or lower fee tiers are given to traders that attain high volumes of trades.
Reasons to inflate volume
According to the paper’s authors, they are usually twofold, the first one is the trader lead generation through league table dominance and the major data aggregators, like CoinMarketCap, its an important source of lead-generation for new exchanges that want to build volume since they are more likely to attract attention if they are at the top of popular lists. Listing fees from ICOs in other to attract listing fees from initial coin offerings is another motivator to exaggerate volume.
There is likely to be a gray area between exchanges with 100% real volume and those with 100% fake volume, this is citing a comment from their previous study which showed a gray area.
The authors cited Gate.io as an example, stating: “ Reasonably we could argue with anyone about Gate.io having a fake volume exchange or not, or whether some percentage estimate of its volume should be applied to our total volume statistics.”
They add that : “The reality however, is the fact that Gate.io does not have enough volume for this question to meaningfully alter our conclusions”. In the month of April, Gate.io reported USD12 million in average daily volume where by the total daily volume of the 10 real volume exchanges was USD 554 million. Even though we counted all of Gate.io’s volume as real, it still will not affect none of our analysis .”
Gate.io claimed that their “volume are all real, and presently we’re on average of about USD 50 million per day.” In an interview with cryptonews .com in April.
The company also said that they’re certified by a group of blockchain data researchers and enthusiasts, called Blockchain Transparency Institute, who are known for their reports on wash trading. Looking at the website information, the project did not disclose who are the members of this profit group anyway.
Credit: Sead FadilpašićJOIN OUR COMMUNITY