The deeper you dig into the underground economy of crypto exchanges, the shadier it looks. It’s no secret that centralized exchanges have never been popular among crypto fans, but the reality is that we still need them at this point and they remain the main platforms for buying, selling, and exchanging BTC and other tokens and coins. They also give a smooth start for beginners by simplifying the process of trading and avoiding cryptocurrency scams. And like many other comforts, they come at a certain price.
The Bitwise Report and the Imaginary Market
In practice, exchanges often exaggerate numbers and recently we received more proof of that. On May 24th, Bitwise, an established cryptocurrency index fund, published a white paper that was based on the March research they presented to SEC. This white paper explores the depths of economic and non-economic trading in Bitcoin and states that nearly 95% of the Bitcoin trading volume that has been declared is fake. Although scams in cryptocurrency are no surprise, this percentage of fake data is unexpectedly overwhelming.
“In sum, our data-driven screens suggest that $10.5 billion out of the $11 billion in reported average daily spot bitcoin volume, or roughly 95% of all reported volume, is either fake volume or wash-trading.”
For those of you who wonder, what is bitcoin trading volume, it’s simply the amount of BTC that has been traded within a certain period of time.
The research was based on data from 83 exchanges and only 10 of them actually passed all of Bitwise’s tests and proved to have a real volume. The glorious ten includes Binance, Bitfinex, bitFlyer, Bitstamp, Bittrex, Coinbase Pro, Gemini, itBit, Kraken and Poloniex. HitBTC, Huobi, and OKEx made the list of the ‘storytellers’. HitBTC countered the accusations by writing a blog post specifying the fact that their client profile is different and basically cannot be used as an example as they tend to practice algo trading.
Additionally, the report aims to show that the real market is ‘significantly smaller, more regulated, and more efficient than commonly understood.’ And finally, the reporters explore the positive influence of various factors that led to the emergence of the modern Bitcoin market, such as the launching of regulated bitcoin futures, the development of an institutional short lending market, and large algorithmic market makers, as well as the arrival of market surveillance, and advances in the market for bitcoin custody and custodial insurance.
The white paper then makes another point: thanks to the arbitrage systems that control prices on the real global bitcoin spot exchanges, all these fake Bitcoin volumes have no effect on its price in the real BTC spot market. In all fairness, we’re not sure if that’s consistent with reality.
So what’s the purpose of this fake news data and how do crypto exchanges actually pull it off?
To begin with, every exchange needs liquidity. A fair amount of clients and transactions contribute to real liquidity. Ideally, it should work like this: one user places an order looking to sell 1 BTC, and at the same time there is another user who wants to buy 1 BTC, so they seal the deal and everyone, including the exchange, is happy. The key word in this cheerful scheme is ‘ideally’, but in practice, nothing works perfectly.
When trading on exchanges, it often happens that there are way too many people who want to, let’s say, buy Bitcoin at the same time, and only a few sellers are placing the orders. Or there are those who want to buy a different amount of BTC or a different coin. So what happens in this case? These orders simply hang in the system for hours, days, or even weeks waiting for the right buyer or seller, creating illiquidity. And that’s why cryptocurrency trading bots have been put to use and fake ratings have appeared.
This practice was adopted from traditional stock trading and serves to solve the problem of low liquidity. These bots help with closing orders that cannot be closed by real users immediately, so nobody has to wait for ages for their transactions to be finalized.
But that’s not the entire picture. The crypto industry is far from being strictly regulated and exchanges take advantage of this situation and use trading bots to not only close pending orders, but to also execute entire transactions from placing to completing the deal. Firstly, why would anyone use an exchange with nonexisting liquidity? Secondly, once Bitcoin skyrockets, no one wants to wait for hours to complete the deal as the rate might not be that attractive in a matter of minutes. Actually, nobody likes to wait at all. So these exchange manipulations come in handy.
The Bottom Line
On the bright side, Bitwise’s whitepaper says that ‘ […] after you remove the fake volume and fake data from the equation, you are left with an extremely efficient and orderly market […]’.
Besides, we choose to have high hopes for those ten exchanges that proved they’re willing to play by the rules. After all, these exchanges are the major players on the Bitcoin trade market and they are responsible for being a sort of role model and setting standards for better quality, a decent audience, and advanced technology.
Moreover, we believe that karma (or, in this instance, national regulators) will eventually affect everyone, and with time the number of dishonest platforms will be reduced or they will have to clean up their act if they don’t want to lose followers.
As for Lumi Wallet, we prefer to think of ourselves as crypto hippies: we believe in universal peace, honest ways of doing business, and that evil never wins.