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Fake volumes & wash trading needs to end

The fake volume problem is getting worse. In the period from November 2018 to January 2019 BNC analysis identified 68% of reported market volume on the 240 exchanges it tracks as being suspect - up from 54% in the previous period. For the cryptocurrency ecosystem to achieve its full potential this flagrant misrepresentation must end.

When it comes to price discovery and benchmarking, the positive evolution of the digital asset ecosystem depends in no small part on market participants being able to trust the market data they are being presented with. But with so many exchanges reporting erroneous volumes, that scenario is far from a reality.

BNC has been tracking the cryptocurrency market since early 2014 (with data for bitcoin going back to 2010). Since that time, our policy has been to focus on the accuracy and integrity of the data to establish a robust platform against which the market can not only conduct price discovery but also optimize value and manage risk.

Recently, a report which included trading analysis of cryptocurrency exchanges was presented to the SEC by Bitwise Asset Management in support of a Bitcoin ETF application. The report highlighted the issue of exchanges reporting fake trading volumes, with only 10 exchanges out of the 81 surveyed reporting ‘qualified’ trading volumes.

BNC supports the Bitwise findings. In fact, our own analysis shows that the percentage of reported trading volume that is erroneous is actually increasing. Whereas the Bitwise report surveyed 81 exchanges, BNC tracks over 240 global exchanges and in the period from November 2018 to January 2019 found 68 percent of reported market volume was unqualified. This was a significant increase from the August – October 2018 period when 54 percent was unqualified.

The percentage of unqualified volume

Trade Volume Charts

Source: Brave New Coin

This isn’t a ‘victimless crime’ – particularly for those institutional investors operating at the larger end of the trading spectrum where 10 percent price slippage could equate to hundreds of thousands in losses.

The opportunity exists now for crypto exchanges to develop Minimum Operating Standards and to self regulate. If not, they will likely have regulations imposed on them. And for those that don’t comply market isolation is a likely outcome.

Addressing the issue

Fake volume data is nothing new, but with such a large percentage of market data being essentially unusable, the responsibility for bringing integrity to the numbers has fallen to the ‘reputable’ exchanges that provide accurate data and service providers like Brave New Coin and others that vet and filter hundreds of gigabytes of data daily, in order to provide credible price discovery tools like BNC’s Liquid Indices program.

Core to the methodology that underwrites the BLX (Bitcoin), ELX (Ethereum) and XRPLX (Ripple) Liquid Indices is the ongoing evaluation of the select group of constituent exchanges whose data is included in each index. In selecting these exchanges BNC evaluates a range of variables including an exchange’s business model, trade history and order books.

BNC’s Liquid Indices series

BLX ELX XRPLX

Also considered are minimum trading volumes of $USD, $EURO and $BTC, and any formal Anti Money Laundering and Know Your Customer processes (AML-KYC) deployed. Traditional benchmarking processes also have a role to play, and through an internal governance program and an independent compliance officer, BNC’s indices are in alignment with recognized standards for securities tracking – such as those promoted by the International Organization of Securities Commissions (IOSCO). The result is an indices series with built in redundancy to react to constituent anomalies, outlier effects and breaches in data integrity.

Although the marketplace can and does rely on products like these to deliver accurate market data, the wider issue of fake volumes remains a growing concern for the crypto sector.

The challenge is multi-faceted. To simply disqualify exchanges outright is to say that all of their data is faked, while at the same time to include them no-questions-asked would see fake volumes perpetually distorting the assessment of real trades and common assumptions about the total value of the market.

Further to this, the much anticipated entry of ‘institutional investors’ that the market is relying on will require evidence that the same standards of behaviour that these mega-investors see in the traditional financial markets today are being applied in crypto.

To that end, BNC recommends the following as important components exchanges could include in any Minimum Operating Standards

  • Detail country of operation and banking partners
  • Be transparent about company structure, shareholders, directors and officers
  • Charge fees and display a clear fee schedule
  • Adhere to global AML and KYC standards
  • Have mechanisms in place to prevent manipulation of trading volumes and price
  • Have clear Business Continuity and Disaster Recovery (BCDR) policies
  • Provide clarity on token listing rules, processes and costs
  • Commit to timely disclosure of hacks and notification of associated remediation plans

It’s not a journey these exchanges have to take alone either. We appreciate the exchange ecosystem as a critical component of the wider crypto market and BNC is currently working with a number of exchanges to create bespoke reports and recommendations around operations, portfolios and market insights. With the breadth and depth of our data we have been able to derive some compelling exchange strategies – and we welcome the opportunity to work with exchanges to help them create value out of the incredible opportunity that the digitization of value presents to the global economy.


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