The Fake Volume Problem At Crypto Exchanges

Fake volumes at exchanges has proved to be a persistent problem within the cryptocurrency ecosystem. Along with skyrocketing prices, fledgling crypto exchanges have routinely displayed trading volumes for assets that run into millions and billions of dollars. Despite the incessant crypto drumbeat of mainstream media, it is still difficult to believe that a nascent asset class has attracted investors willing to bet their life savings on it.   

The SEC referred to volumes as part of its letter detailing concerns about the crypto ecosystem at the beginning of last year. “Would (ETF) funds have the information necessary to adequately value cryptocurrencies or cryptocurrency-related products, given their volatility…and the nascent state and current trading volume in the cryptocurrency futures markets?” it wrote.

A Bitwise report this year confirmed the agency’s suspicions.  The report detailed gross misreporting of all actual bitcoin trading volumes at crypto exchanges and estimated that approximately 95% of all bitcoin trading volumes reported at exchanges is false. Wash trading, or the practice of using automated bots to make purchase and sell orders for an asset, is said to be a common practice at crypto exchanges.  

New Services to Tackle Fake News Problem

Several new services are attempting to clean up crypto’s act.  

Coinmarketcap.com, probably the world’s most popular site for cryptocurrency price data, is working on new metrics to address the issue of inflated volumes at exchanges that are used in its rankings methodology. In a blog post making the announcement, the site stated that the metrics would be based on liquidity at exchanges instead of volume, as is the practice currently. The new rankings methodology will launch in November and will regularly poll order book depth (i.e., the number of confirmed orders executed) at exchanges included in the site’s ranking.

A Midwest-based startup called Nomics is also tackling the same problem. The company recently announced its Transparent Volume service. The tool helps subscribers to its service calculate the percentage of real volume traded for individual cryptoassets. For example, the service calculates fake volumes across exchanges for a cryptoasset like Bitcoin. Nomics has cast wide net and determines the fake volume percentage gathered from 102 exchanges in the new initiative.

Why do Exchanges Fake Volumes?

High trading volumes impress and attract more customers and businesses interested in listing on these exchanges. But last year’s bear market resulted in a precipitous dip in trading activity for cryptocurrencies, making inflated volumes a necessity for exchanges to maintain their operating margins. Over-The-Counter (OTC) markets, where trading occurs between two parties through an OTC desk, are another threat to exchanges because they draw away customers and liquidity. Finally a profusion of cryptocurrency exchanges has dispersed trading activity across them, resulting in a fragment landscape and thin liquidity. More exchanges are competing for a dwindling number of traders and inflated volumes provide the exchanges with an edge.