This article takes a look at a major epidemic in the industry, where 88% of crypto exchanges are manipulating trading volume to ‘boost’ their rankings.
A recent report by BlockchainTransparency indicates that 88% of the Top 25 cryptocurrency exchanges are manipulating their trading volume to boost their rankings in CoinMarketCap. These breaking statistics opens the door to the shady practices employed by cryptocurrency exchanges on a bid to inflate their trading data. The scale of manipulation by these cryptocurrency exchanges suggest a unanimous effort to ‘win at all cost’, even if it means deceiving the public.
Inconsistency of Reported Data vs Actual Data
The report looked at the top 25 Bitcoin (BTC) trading pairs, calculating their true volumes and comparing it to their reported volume on CoinMarketCap. Horrifyingly, the majority of the trading pair’s actual volume is under 1% of their reported volume, with only 3 exchanges –Binance, Bitfinex, and Liquid – that were found to truthfully report their trading numbers.
Based on the data above, 88% of the Top 25 exchanges based on BTC pairs volume is manipulated and severely exaggerated. The most notable culprit highlighted in the report is OKEx, which is found to manipulate the trading volume of all of their Top 30 traded token pairs. The next in line is Huobi, which was found to have manipulated their Top 25 token pairs. These results are indicative of severe data manipulation by these cryptocurrency exchanges.
(Read more: Guide on Identifying Scam Coins)
Why Do Cryptocurrency Exchanges Manipulate Their Trading Volume?
There are several reasons as to why exchanges manipulate their trading volume:
1) Referral Traffic from CoinMarketCap
CoinMarketCap (CMC) is the most popular cryptocurrency website that displays key financial metrics and graphs for all coins and tokens in the cryptocurrency world, as well as related data on the trading volume of all cryptocurrency exchange. With an Alexa rank of 438, CMC receives an average of 2.7 million views on a daily basis, which is equivalent to over 8 million views monthly!
With that level of exposure and reach, it becomes imperative for cryptocurrency exchanges to compete against one another for the spot of being ranked highly on CMC. Referral traffic from CMC would be a huge boost to the exchange and its business. Since the main factor that most cryptocurrency investor and trader look for when trading on an exchange is liquidity, cryptocurrency exchanges would have an incentive to artificially inflate their numbers to attract users to their exchange.
Liquidity refers to the ability of a coin to be converted into cash or other coins easily. A higher degree of liquidity is always preferred since users can execute their orders quickly and effectively.
(See also: Guide to Decentralized Exchanges: Comparison of Popular DEXs)
2) Listing Fees
Running a cryptocurrency exchange is a highly lucrative business, with listing fees being a huge driver to the business model of exchanges. Reports have suggested that projects that want to get their tokens listed on a cryptocurrency exchange have been asked to pay a staggering amount of money, ranging from USD $50,000 to $1 million. Given the sheer amount of coins and tokens being created by projects in the cryptocurrency market, it is no wonder that exchanges are at the top of the food chain. Here’s a look at the estimated daily revenue of cryptocurrency exchanges back in March 2018:
These explosive numbers are indicative of the growing cryptocurrency market, but most importantly, it shines the light towards the crazy listing fees charged by exchanges. Exchanges with greater liquidity would possess a higher listing fee since token liquidity is the main factor that traders look for. It provides the perfect incentive for cryptocurrency exchanges to inflate their volumes by a long shot to increase their rankings and charge a sizeable fee for the rights to be listed on the exchange.
(See more: Will A Crash in Bitcoin’s Price Lead to Its Demise?)
How Do Cryptocurrency Exchanges Manipulate Their Volume?
In order to manipulate their trading data, cryptocurrency exchanges use a technique called wash trading.
Wash Trading is a process of market manipulation where an entity simultaneously buys and sells securities with the sole purpose of creating misleading and artificial activity in the marketplace.
The general idea of wash trading is to create a false impression that there is a good level of trading activity actually going on. This is achieved by an entity – in this case, a cryptocurrency exchange – placing orders in the exchange and executing these orders themselves, with no actual value exchanged with real users. This means that the value of these bogus orders stays in the same hand (or account). The main objective of doing this is to inflate the actual trading data, thereby giving the impression that the instrument is more in demand than it really is.
Wash trading is illegal for any financial markets in many countries – especially the United States of America (USA) – since it explicitly aims to falsify trading volume.
(Read also: Guide to Cryptocurrency Taxes: A Guide to Common Tax Situations)
Methods of Testing Exchange Manipulation
According to their report, BlockchainTransparency utilizes a number of methodologies to measure the extent of trading manipulation of these exchanges, which include:
- Assessing exchanges’ order books
- Analyzing trading volume data points
- Interacting with key stakeholders including market makers, high-frequency traders, and trade surveillance consultants
From the extensive data collected, they were also able to discover different trading bot strategies employed by exchanges to inflate their trading numbers. These bots have been programmed to trade on different trading pairs depending on the time of the day. It is interesting to note that the bot’s settings are subject to change depending on current volume trends or the current hype surrounding a particular coin or token during the time period.
Additionally, a common method to measure manipulation is called ‘Slippage’, which assesses the liquidity of digital assets by selling a certain value worth of each asset across a variety of different exchanges and measuring the rate of price decline of the coins. Exchanges that were manipulating their data had massive slippages, indicated by a greater degree of price decline and an unstable order book. This implies that their trading volume is fabricated and inflated since a small amount of sell orders is sufficient to destabilize the order book and ultimately the prices of the coins.
(See also: Guide to Market Capitalization: Everything You Need to Know About Market Cap)
Are Cryptocurrency Exchanges Regulated?
It must be mentioned that the majority of cryptocurrency exchanges isn’t regulated. In the cryptocurrency world, there are two types of exchanges; fiat-accepting cryptocurrency exchanges and pure cryptocurrency exchanges. All fiat-accepting exchanges require licenses since they are dealing with national paper money regulated by governments, while there are little to no laws governing pure cryptocurrency exchanges at the moment. Here’s a quick comparison between the two:
Only 10% of the Top 100 exchanges are fiat-accepting exchanges, while the rest of the 90% are pure cryptocurrency exchanges. This implies that only a small portion of cryptocurrency exchanges – in the form of fiat-accepting exchanges – are regulated and monitored by the relevant authorities. The bulk of the exchanges are not, and can, therefore, engage in unscrupulous behaviour since they are not supervised by any governing authorities. In simple terms, they can do whatever they want with no consequences.
Summing it All Up
Yet again, the severity of allegations that cryptocurrency exchanges are employing shady practices holds true. There have been numerous reports and substantiations prior to this that has unraveled the manipulative practices of unregulated cryptocurrency exchanges. Users are highly recommended to perform their due diligence in choosing the appropriate exchanges to trade in, and most importantly, possess adequate knowledge in storing their coins and tokens safely in digital wallets rather than storing them in cryptocurrency exchanges. For projects looking to get their tokens listed, please refer to the Advisory List from BlockchainTransparency that blacklists cryptocurrency exchanges with poor records.
(You might also be interested in: Crypto ICO vs. Stock IPO: What’s the Difference?)
Beneficial Resources To Get You Started
If you're starting your journey into the complex world of cryptocurrencies, here's a list of useful resources and guides that will get you on your way:
Trading & Exchange
- Crypto Guide 101: Choosing The Best Cryptocurrency Exchange
- Guide to Bittrex Exchange: How to Trade on Bittrex
- Guide to Binance Exchange: How to Open Binance Account and What You Should Know
- Guide to Etherdelta Exchange: How to Trade on Etherdelta
- Guide To Cryptocurrency Trading Basics: Introduction to Crypto Technical Analysis
- Cryptocurrency Trading: Understanding Cryptocurrency Trading Pairs & How it Works
- Crypto Trading Guide: 4 Common Pitfalls Every Crypto Trader Will Experience
- Guide to Cryptocurrency Wallets: Why Do You Need Wallets?
- Guide to Cryptocurrency Wallets: Opening a Bitcoin Wallet
- Guide to Cryptocurrency Wallets: Opening a MyEtherWallet (MEW)
Read also: Crypto Trading Guide: 4 Common Pitfalls Every Crypto Trader Will Experience and Guide To Cryptocurrency Trading Basics: Introduction to Crypto Technical Analysis.
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I'm Aziz, a seasoned cryptocurrency trader who's really passionate about 2 things; #1) the awesome-revolutionary blockchain technology underlying crypto and #2) helping make bitcoin great ‘again'!