Are Crypto’s High Trading Volumes A Scam?

Not surprisingly, the volume of trading in cryptocurrencies tends to soar as their prices rise, with new investors pile in, creating a feeding frenzy. But given their relatively short existence, cryptocurrencies manage to rack up trading volumes that would be the envy of a multinational corporation.

In late July 2021, as the price of a bitcoin (BTC) reached $40,000, trading volume hit $9.2 billion. That marked a rebound in both price and volume. Daily average volume had been trending below $2 billion for months, starting to climb only in late November 2020.

By way of contrast, the trading volume for General Electric Company (GE), which became a listed company in 1962, averages about 5.6 million shares a day, adding up to about $560 million.

The main beneficiaries of high trading volumes are the cryptocurrency exchanges, which rake in trading fees on transactions.

But there’s a problem here: Some cryptocurrency exchanges have been faking their volume numbers in order to raise the visibility of their businesses and bring in more customers. That’s easy to do in the less-than-transparent world of global crypto trading.

Now, an effort is underway to force the exchanges to report real numbers. That campaign is being led by the financial media and websites that cover cryptocurrencies, at least some of whom have been duped by false volume numbers reported by crypto exchanges.

How Crypto Sites Can Fake Volume

Coindesk reports that a Moscow State College sophomore set up a business helping obscure crypto exchanges fake big trading volume. He achieved this by setting up multiple accounts on an exchange and using bots to trade constantly between the accounts.

The goal is to fake enough trading volume to get the exchanges on the lists tracked by the widely followed CoinMarketCap website, thus gaining the attention of real crypto investors.

Coindesk’s report, in July 2019, indicated that this Russian kid’s business was only one of a number around the world that help fledgling exchanges “fake it until you make it.”

Trading Incentives

A Bloomberg report pointed out anomalies in Singapore-based cryptocurrency exchange Bitforex’s trading volume. The exchange has an incentive program linked to the transaction fees charged by the exchange for users.

The Transaction mining program offers users $1.20 in digital tokens for each $1 they spend in transaction fees. Several users had multiple accounts on the platform and used bots to increase trading volume between their accounts and earn lots of tokens.

The transaction is a profitable one if the distributed tokens increase in value.

Such trades are known as wash trades and the U.S. Justice Department has already opened an investigation into cryptocurrency exchanges involved in the practice.

The other red flag for Bloomberg is the absence of a correlation between the number of website visits and trading volumes.

Cryptocurrency exchanges with few website visits are reporting trading volumes that run into billions of dollars. According to Bloomberg, 40% of trades at the top 30 exchanges ranked by Coin Market Cap come from eight venues with the highest volume to visits ratio.

Why Trading Volumes Matter

Large trading volumes at crypto exchanges serve two purposes.

First, they help avoid drastic price movement in a cryptocurrency’s price after a significant sale. This is the benefit of liquidity, a factor valued by most investors.

Second, they are testaments to the trustworthiness of a cryptocurrency platform and indicators of user trust in an incipient industry that has zoomed into mainstream focus on the back of scandals and scams.

Trading volumes are also important indicators of price movement: an increase in trading volume is generally considered a precursor to a big price move. 

An Ongoing Problem

This is not the first time that cryptocurrency exchanges have been accused of fabricating trading volume figures. In a post in 2018, trader and investor Sylvain Ribes found that OKEx, a China-based exchange that had among the highest trading volumes, had enormous slippage when a sale of cryptos worth $50,000 was made. The results were similar when he revised the trading amount to $20,000. Ribes concluded that approximately 93% of OKEx’s volume was fabricated.

Experiments at other cryptocurrency exchanges revealed similar data points. At Huobi, another big China-based exchange, he estimated that 81.2% of trading volume was fake. HitBTC and Binance, which is arguably the biggest crypto trading platform, showed a similarly large slippage amount. 

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