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TIE report names and shames fake volume exchanges

New report reveals worst offenders for wash trading and transaction mining – and shows 59 percent of exchanges are reporting suspicious trading volume.

Back in the days before stock markets were regulated, unscrupulous exchanges would swap assets among themselves, hoping to lure in buyers by creating a false bullish picture — and then short selling the assets at the top.

In the crypto markets, wash trading is also a serious issue, and a report from trading analytics platform TIE casts new light on this shadowy corner of the ecosystem.

Using data from reputable exchanges like Coinbase and Kraken as a baseline, the study sets reported traded volume against the number of exchange visitors, revealing that 59 percent of reported volumes were more than 10 times higher than would be expected: "If each exchange averaged the volume per visit of CoinbasePro, Gemini, Poloniex, Binance, and Kraken" tweeted TIE, "we would expect the real trading volume among the largest 100 exchanges to equal $2.1B per day. Currently that number is being reported as $15.9B."

The main offenders

As the chart shows, there are many exchanges which, with 50 percent more trading volume than would be expected based on the number of visitors, are considered to be showing "potentially suspicious trading activity".

Wash chartone

Many of the worst offenders are based in the Far East, like Hong Kong-based CHAOEX, and Shenzhen-based iQuant. But equally, there are several in the West, like Edinburgh’s Coinex and Vancouver’s BCEX.

Though they might not share a location, the most fraudulent exchanges do share similar characteristics. Trader Sylvain Ribes, who conducted his own study into fake volume, suggests that the majority of the perpetrators are small new exchanges manufacturing volume as a way of enticing new traders.

CoinMarketCap, which ranks exchanges according to reported trading volume, provides a common entry point for traders searching for the best place to buy altcoins. Thus a high ranking there, Sylvain suggests, can be both cheaper and more effective than a new exchange putting in the hard work of "creating and implementing marketing and communication strategies".

OKEx, which according to a study from Crypto Exchange Ranks is one of the biggest beneficiaries of referral traffic from CoinMarketCap, is also notorious for fake volume — having been identified by both TIE and The Blockchain Transparency Institute, which has placed the exchange at the top of its Exchange Advisory List.

Wash charttwo

To pump up the volume levels, crypto exchanges often use automated trading programs — also known as bots — to rapidly swap cryptocurrencies back and forth between accounts.

These have become so popular among some exchanges that they are even promoting them to potential new listings to help "enable mass volume production" and ensure that your token’s candlestick chart will be very attractive!’

But not all of the fake volume can be put down to bots, and some exchanges are using different methods to create volume through more organic means. Singapore’s BitForex, for instance, admits to using a practice called transaction mining to make profit, and in the process inadvertently pumping up volume levels.

Transaction mining generates profit by rewarding those who place trades (whether using a bot or manually), with exchange tokens that are worth more than the trading fees incurred. On BitForex, traders earn the equivalent of $1.20 in exchange tokens for every $1 paid in transaction fees — a policy that, according to Crypto Exchange Ranks, caused bitcoin/tether volume on the exchange to jump +2900 percent, from 35K BTC to over 1 million BTC.

Who does it hurt?

Regardless of how it’s achieved, the artificial inflation of volume has significant consequences for traders, and those trading with large accounts who take the figures at face value are particularly at risk. In his study, Ribes measured against the order book the potential effect of selling 50k worth of crypto on various pairs on OKEx. This revealed that, even in pairs which apparently had volumes of up to $5 million, the potential slippage ( the difference between the expected price of a trade and the price the trade is actually executed at) would be 10 percent — making it very difficult for large buyers to cash in and out efficiently.

For those amongst the chorus of voices calling for regulation, fake volumes are yet another example of the failure of the free crypto market to regulate itself, while for those who see centralized exchanges as the problem, the TIE report is more evidence that of crypto’s need for decentralized and transparent exchanges.


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