Researchers Reviews and Exposes Crypto Exchanges With Artificially Inflated Volume

• Up to 98% of Ethereum (ETH) trade volume on large crypto exchanges is inflated
• Researchers at Blockchain Research Lab used wallet balances and site views to estimate true volume
•  FCoin, Huboi and OKEx appear to misrepresent volume

 

According to the report, up to 98% of Ethereum (ETH) trade volume on large crypto exchanges is artificially inflated. The results were published in a paper by Blockchain Research Lab. If this is true,  which exchanges are trustworthy? Which exchange should you put your money on?

 

Analysis of trades turned up surprising amounts of so-called “wash trading.” According to Investopedia: Wash trading is a process whereby a trader buys and sells a security for the express purpose of feeding misleading information to the market. ... Wash trading is illegal under U.S. law, and the IRS bars taxpayers from deducting losses that result from wash trades from their taxable income.

 

The paper places exchanges into three groups: ones with honest volume, ones with possibly inflated volume, and ones with clear evidence of inflated volume.

 

Larger trade volumes rank exchanges higher on the list for sites like CoinGecko and CoinMarketCap. The higher rank brings in more traffic. CoinMarketCap uses its own algorithm to address the validity and reliability of posted trade volumes and liquidity.

 

Some exchanges could have bad actors posting fake orders on their books. If these accounts are indeed owned by the exchange, they increase liquidity and depth artificially.

Our new working paper „Wash Trading at Cryptocurrency Exchanges“ is out! https://t.co/lv4LTQzw1u

We analyze potential wash trading based on web traffic and wallet data. Suspicious volume of >90% is detected for most investigated exchanges. pic.twitter.com/u9wG6LMZFK

— Blockchain Research Lab (@lab_blockchain) August 20, 2020

 

Below are the exchanges and how they are being categorized.

The first category researchers determined were the honest exchanges. These included Bitfinex, Bistamp, Bittrex, Kraken, and Poloniex.

The second category, the ones with inconclusive evidence, were the giants Binance and HitBC, as well as the smaller, less-established exchanges like KuCoin and YoBit.

The third category, the ones with obviously inflated trade volume, included FCoin, Huobi, and OKEx. The researchers used data from the honest group to scrutinize the exchanges with fraudulent volumes.

Blockchain Research Lab relied on indicators, such as posted trade volume, balances on the exchanges, the number of wallets, and web-traffic to determine how much volume originated from wash trading. They used trade volumes for BTC, ETH, XRP, USDT, and USD to make their determinations.

 

The average daily volume for BTC/USD for exchanges from the first “honest” group was about $42 million. The second group accounted for a much larger $170 million, and the manipulated exchanges claimed a volume of almost $490 million.

 The ratio of trade volume to actual page views in the third group was 138 times that of the first. Likewise, the ratio of ETH trade volume to the balances on the exchanges was much higher in the latter two groups than the first.

 Based on this data, analysts proposed a theoretical trade volume for the second two groups. This theoretical trading volume was 50% lower than the “official” trading volume claimed by the exchanges.

 The researches also inferred that 96-98% of ETH trade volume on exchanges accused of falsifying results was suspect. Analysis of token balances compared to trade volume also suggested that 72-97% of the volume could have been falsified.

 

Another Game in Town

These analysts are not the first to reach such conclusions. In July, CoinMetrics posted its own research, rating the likely validity of official trade volumes. In this document, the firm determined only about a dozen exchanges published reliable volumes.

 Last year, Forbes magazine wrote that up to 95% of Bitcoin trading was wash trading. Gavin Brown, a Senior Lecturer in Financial Economics at Manchester Metropolitan University, told Forbes:

 Most exchanges are unregulated. So they are incentivized to fake trading volumes without any legal repercussions.

 In addition to these metrics, stable coins make up at least $11 billion of the total crypto market. Accounts can easily rotate stablecoins back and forth to produce higher volumes. Some exchanges hold trading competitions in which users are rewarded for higher trade volumes, regardless of prices.

 The same freedoms that allow crypto traders to avoid regulators also come with their own risks. The specter of fake trading volume requires users to do their due diligence.