Chainalysis report shows fake trading volumes continue

A new study by Chainalysis suggests that while reported fake volume numbers have reduced, crypto’s fake volume problem persists despite being first confirmed almost a year ago.

Fake volume still an issue

The New York-based analytics company compared the value of crypto assets entering exchanges via on-chain transactions with the exchanges’ self-reported off-chain trading volumes to gauge whether a platform is suspected of inflating its trading activity.

Chainalysis researchers used the “Bitwise 10” exchanges, which include Binance, Bitfinex, bitFlyer, Bitstamp, Bittrex, Coinbase, Gemini, itBit, Kraken, and Poloniex, as a benchmark for exchanges that are reporting their actual trading volumes. Then, they calculated the ratio of bitcoin traded versus bitcoin received on-chain.

The analysis showed that the ratio averages 6:1, which means for every BTC deposited on an exchange, around six are trading on the platform.

Next, Chainalysis researchers looked at the top five exchanges by reported trading volume on CoinMarketCap. They found that one exchange stood out as having a much higher trading volume to on-chain coins received ratio: Bitforex.

According to the study, Bitforex has a trading volume to on-chain bitcoin received ratio of 40,000:1. That is over 6,000 times the industry average of 6:1 (consistent with the most reputable bitcoin trading platforms). Therefore, Chainalysis researchers believe “with a high degree of certainty” that the Hong Kong-based exchange is misreporting its trading volumes.

Next, the researchers looked at the top 25 exchanges outside of the Bitwise 10, with the highest on-chain bitcoin volumes. Out of this sample set, twelve exchanges had higher ratios than the Bitwise 10 in 2018, but have since fallen roughly in line.

According to Chainalysis, Bit2c, Bitbank, Bithumb, Bitso, CoinCheck, Coinfloor, CoinOne, Huobi, Korbit, OKCoin, UPbit, and Zaif have had higher ratios in 2018 but have moved towards the “Bitwise 10” ratio in the first half of 2019.

The data analytics firm suggests that these exchanges likely faked exchange volumes in 2018 but ceased with the practice after it made waves in the media in late 2018.

Why exchanges fake volume

Higher trading volumes mean more exposure for exchanges on market data platforms such as CoinMarketCap. The higher an exchange ranks for bitcoin trading volume, the more likely it is to attract traders (because traders look for liquidity) and the more likely it is to generate revenue from altcoin listing fees. Trading volumes (real or perceived), therefore, play an important role in the success or failure of an exchange.

Acquiring new users has become increasingly difficult since public interest in crypto assets has waned since the 2017 bubble. Altcoins have become less appealing to investors as many have struggled to recover from recent lows and the market for bitcoin is more competitive than ever. Moreover, with the death of the ICO market, fewer new coins and tokens are looking for exchange listings, which means that this revenue stream has declined.

As a result, exchanges are looking towards new monetization avenues such as crypto lending or staking-as-a-service.

Without a growing, active user base, however, it remains difficult for small and medium-sized exchanges – the likes of Binance and other top tier exchanges are able to attract the bulk of crypto traders with their superior product offerings and good reputations. In a desperate and unscrupulous attempt to compete, many exchanges have resorted to faking trading volumes.

At the same time, the industry is implementing measures to filter out overreported trading volumes to make the asset class more transparent. A number of crypto asset data analytics platforms have taken measures that aim to distill trading volumes to only show actual trading activities across exchanges. Moreover, regulators have been taking a much closer look at crypto exchanges in many jurisdictions, with South Korea and Japan leading as examples.

For the crypto asset markets to mature into a widely accepted asset class, the exchange ecosystem has some way to go. But as bad actors continue to be called out and the industry adjusts to new security and transparency standards, the markets are slowly but surely heading in that direction.

Chainalysis concluded its report stating that “while we did find examples of exchanges likely faking substantial trade volumes, most large exchanges appear to have ceased these deceptive practices in the last year.”

That is good news for the industry and brings it one step closer to being perceived as a mature asset class with a trustworthy trading ecosystem. Only then will a Bitcoin ETF have a chance at approval.