Following the burst of the bitcoin bubble in early 2018, finding reasons to leave the crypto speculation game has been much easier. Aside from the steep price decline of Bitcoin from its 2017 high, there’s a gap in the oversight of cryptocurrency exchange platforms, which could potentially expose investors to platforms with poor risk controls or out-and-out scams.
One scam that the industry could be running involves inflating their trading volume data. Citing a new report by Bitwise Asset Management, an article on Forbes said that roughly 95% of bitcoin trading volume reported by a widely used resource for cryptocurrency market data is fake.
“CoinMarketCap reports approximately US$6 billion per day in bitcoin trading volume, but the actual figure is US$273 million, or roughly 4.5% of the reported amount, according to Bitwise,” the Forbes article said.
The report was created in relation to an application for a bitcoin ETF that Bitwise submitted to the US Securities and Exchange Commission (SEC). Bitwise’s analysis included data from 81 exchanges, which were selected based on reported bitcoin trading volume; those reporting less than US$1 million worth of volume per day were excluded.
In its examination of CoinBene, reported to be the world’s largest bitcoin exchange with US$480 million in daily volume, Bitwise found several red flags. A screenshot of the trading interface showed a perfect, evenly alternating pattern of buy and sell trades, which is unlikely to arise in real-world circumstances. Other suspicious signs included:
- The occurrence of paired buy and sell trades that practically offset each other over time;
- An absence of very small trades;
- A lack of “round number” trades; and
- Wider-than-expected bid-ask spreads based on the reported trading volume
Why would bitcoin exchanges exaggerate the amount of trading that occurs on their platforms? Aside from the obvious — attracting new traders is easier when there’s an impression of high trade volumes — there are several other contributing factors motivating that trend. According to Tim Enneking, managing director of Digital Capital Management, those include:
- The generalized decline in volume over the last 12 months or so, which makes appearing to be larger more important and more difficult;
- The growing volume on OTC platforms, which both worsens and accelerates the first problem; and
- The seemingly endless proliferation of new exchanges, which creates fiercer competition for large pieces of a shrinking pie
To be fair, the 95% is an aggregate, across-the-industry number; Enneking noted that most of the largest exchanges appear to have a much lower level of “fake” volume. John Hargrave, publisher of Bitcoin Market Journal, also stressed that there’s a short list of exchanges with a good reputation.
Of the 81 exchanges Bitwise evaluated in its report, only 10 provide legitimate trading volumes. That includes industry heavyweight Coinbase, which faced its own share of criticisms when Bitcoin prices fell steeply in early 2018.
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