New Capital’s Journey Report #2: Crypto exchanges and data aggregators— the good (rare), the bad and the ugly
In the relatively short period of time since we became involved in two projects that include cryptocurrency components, we have expended significant energy and resources wading through the complex and sometimes murky world of crypto exchanges, trying to attain listings, optimize liquidity and gain visibility for the TWINS and FIX coins.
Our first journey report dealt with the general lack of transparency in the burgeoning crypto industry, and our impression that many of the participants are not operating in good faith. In this second report, we focus on crypto exchanges and data aggregators, describe commonplace fraudulent activities such as fake trading volumes, and expand on some of the main challenges confronting crypto startups when dealing with these service providers.
In addition, we chronicle how, almost in self-defense, we launched our own cryptocurrency exchange to service our community and also to provide a safe and transparent trading platform for other crypto projects.
Crypto exchanges and market data aggregators — the face of the cryptocurrency industry
The launch of the TWINS and FIX blockchains and our interactions with the crypto exchanges has lead us to a deeper understanding and appreciation of the pressures and challenges experienced by the various participants in this industry. Our journey must be very similar to that of many other fledgling projects, with the desire to list the cryptocurrencies on exchanges, ensure liquidity and then graduate to market data aggregators in order to accelerate visibility and gain credibility.
Cryptocurrency exchanges play a critical role in the rapidly growing crypto industry, being platforms for buying and selling digital assets, and for providing liquidity. Importantly, these exchanges may be considered to be a lens through which the cryptocurrency industry as a whole is viewed, and their behavior is an indication of the trustworthiness of the participants, their projects and the underlying technologies.
Market data providers, or aggregators, track a selected list of cryptocurrencies by using inputs from multiple exchanges to present metrics such as current and historical pricing, trading volumes, market capitalization and supply data. In general, these data providers offer not only web interfaces, but include APIs for the distribution of data to third parties and traditional business media outlets that are trusted to publish dependable information, such as Bloomberg, Reuters and CNBC.
The various market data providers differ greatly as to the methodologies that they use to aggregate and process raw information, and the completeness and accuracy of their data coverage is highly variable. More importantly, the quality of the information harvested is dependant on the underlying exchanges and the authenticity of the raw data that they make available.
Clearly, the data published and disseminated by crypto exchanges and market data providers must be widely accepted as credible, dependable and ethical to be accepted by financial institutions and regulators, who currently view the use of cryptocurrencies with skepticism and caution.
Fake volume, and the reasons why this practice is so prevalent
One of our biggest surprises when dealing with crypto exchanges has been the pervasiveness of fake trade volumes. In general, fake volume refers to trades that actually occur, but the transactions take place for the sole purpose of manipulating the market. Very often, this practice takes the form of simply moving funds from the right pocket to the left, with matching buy and sell “wash trades” essentially cancelling each other out.
The incentives to fake are clear. For the management of the crypto project, exchange trading volume serves as an indicator to investors as to the health and success of the project. Furthermore, many exchanges require a minimum trading volume and will delist thinly traded projects, thus adding pressure for the project managers to fake volumes and secure their listings.
From the point of view of the crypto exchanges, higher trading volumes indicate greater market activity and hence a large number of users on the platform. This activity indicator is very effective in attracting new users and is important for enticing crypto-projects to list their coins. Clearly, exchanges demonstrating superior trading volumes are able to charge companies higher rates for coin listings on their portals. In addition, the vast majority of crypto exchanges aim to be listed on industry data aggregators such as CoinMarketCap or CoinCodex, providing them with greater visibility and access to larger investors. Trade volume is an important factor for securing these listings, and for increasing their rankings on the aggregator websites.
Fake volume — how big is this problem?
It is difficult to state categorically how much of the listed trading volumes on crypto-exchanges are fake. However, it is clear that this practice is prevalent, presenting a huge problem for anyone trying to determine the value and popularity of cryptocurrencies, and implement strategies based on market data. In addition, fake volume generation brings the entire industry into disrepute, and may have a significantly negative impact on the growth and acceptance of crypto-based projects and cryptocurrencies.
Recent studies have highlighted the severity of this problem. For example, Bitwise Asset Management, one of several U.S. firms seeking regulatory approval to launch a Bitcoin exchange-traded fund (ETF), has estimated that 95 percent of all Bitcoin trading volumes are faked, and according to Alameda Research, nearly 70% of all the cryptocurrency volume displayed on CoinMarketCap is fake. In a study released in March 2019 by the trading analytics platform The Tie where they analyzed 97 exchanges, the organization estimated that 87% of the reported trading volume was potentially suspicious, and 75% of exchanges had some form of questionable activity occurring.
Our experience — navigating the minefield of crypto exchanges and aggregators
Looking specifically at the problem of fake trade volumes, it is easy from our first-hand experience to understand why this practice is so common. A crypto startup may typically face the classic chicken and egg scenario, where being listed on recognized exchanges is not possible until there is sufficient trading volumes in their coin, but they cannot generate those volumes unless they are listed on exchanges and attract a sizeable user base. Moreover, once a coin has been listed on an exchange, that project may face delisting if sufficient trade volumes are not recorded. In order to satisfy these conditions and to advance liquidity, fake trade volumes are generated.
Unfortunately, the exchanges have little incentive to remedy this situation. Inflated volumes are to the exchange’s advantage, as trading statistics are a very important indicator of the popularity and success of the trading platform. Therefore, too often, the crypto exchanges turn a blind eye to this unethical practice, even if they are aware of this deception.
During our relatively short involvement with the crypto industry, we have spent significant time trying to ensure the availability of trading and liquidity platforms for our projects, while maintaining our stated ethical commitments. This has not been an easy task. As a direct result of our refusal to be listed on questionable exchanges and therefore increase our visibility, it has been challenging for us to qualify for listings on the larger exchanges and aggregators.
On a personal note regarding our journey, we are very fortunate to be part of a dedicated community who not only believe in their projects, but share a commitment to transparency, integrity and honesty. This community has been united in their refusal to list TWINS and FIX coins on exchanges that are deemed to be incompatible with our principles, even when those decisions were detrimental of our liquidity and visibility.
A crypto exchange is simply a trading platform, and any expectations that such listings alone will attract investors, traders or liquidity are unrealistic
We have learned some valuable lessons regarding the attainment and effectiveness of listings on crypto exchanges as far as young projects are concerned. Firstly, a crypto exchange is simply a trading platform, and any expectations that such listings alone will attract investors, traders or liquidity are unrealistic. In reality, trading volumes are totally dependent on the project’s own community that have been brought to the exchange to support that specific project.
Secondly, listing a coin on multiple exchanges where one or more of those exchanges has low trading volumes or limited liquidity is counterproductive, and only increases the volatility of the cryptocurrency. It is much more advantageous to participate in fewer exchanges, and ensure adequate activity on each exchange.
We expended significant resources to find supportive, friendly, reliable and safe crypto exchanges for our community. Even with our best due-diligence efforts, we were unable to guarantee trading platforms that met our expectations. For example, one of our selected exchanges unexpectedly ceased operations and some of our community funds were lost. Another exchange has proven to be unreliable in providing timely wallet updates, causing user assets to be locked, sometimes for months. In addition, this exchange unilaterally modified their fees, making the use of their service economically unviable.
Taking these factors into account, and also to satisfy the continual concerns voiced by our community regarding the safety, security and reliability of their cryptocurrency assets when using exchanges, we introduced our own service, the New Capital Community Exchange. Incidentally, the provision of this service was not foreign to New Capital’s medium-term goals, as one our supported projects, win.win, aims to provide a decentralized exchange platform for the direct transacting of value between network users. The New Capital Community Exchange is a significant step in this direction, supporting our own community and also attracting the interest of a range of crypto projects. This trading platform has proven to be a great success, servicing a growing list of cypto assets and offering free-of-charge transactions between New Capital-supported cryptocurrencies. The ethical operation of the Community Exchange has already been recognized by the industry, and has been awarded an “A+” transparency rating by a leading market aggregator, Nomics.
Interestingly enough, overseeing the Community Exchange has provided us with additional first-hand experience of the pressures that other exchanges may feel with regards to condoning and supporting unethical practices. As an exchange, it is in our interest to attract a variety of projects to this service, and list their cryptocurrencies. However, during our discussions with a number of potential participants, the management of those projects have blatantly refused to join the Community Exchange as we would not employ the use of bots to generate fake trading volumes on their behalf.
Our interaction with market data aggregators has also been somewhat frustrating, with CoinMarketCap requiring that an asset be listed on multiple exchanges as a qualifying condition. As stated previously, attempting to fulfill this precondition may have very negative consequences for a young crypto project with already low volumes, as listing on multiple exchanges only dilutes the per-exchange trading volume of the cryptocurrency. Once again, fake trading is a strategy often used to overcome these barriers. Other popular listing services, such as masternodes.online, rank cryptocurrencies by trading volume. Clearly, both of these positions encourage fake trading and limits access by immature or smaller projects.
As a crypto exchange, it is in our interest to be integrated with aggregators in order to attract project listings. This process has also proven to be challenging and frustrating. For example, CoinMarketCap has refused to recognize our trading volumes, as there are no fees payable for transactions made on the New Capital Community Exchange. According to CoinMarketCap, the lack of fees incentivizes fake trade volumes, thereby disqualifying their recognition of the legitimate activity on our exchange. We feel that this policy has no merit, as it is been demonstrated that a significant percentage of the trade volumes presented on CoinMarketCap’s platform are fake, even though there are fees associated with those trades.
In our interactions with CoinGecko, not only was the listing process ambiguous and badly managed, but the demand for high (but unpublished) trading volumes once again promotes the generation of fake trades
We also had a difficult experience with the aggregator CoinGecko. In this case, we followed their published instructions for listing the New Capital exchange by developing a custom library, so that they could integrate all the data points from our exchange by simply merging this code module into their platform. Six months after we submitted the required code to their GitHub repository, and after numerous attempts to secure our listing status, we were eventually informed by the CoinGecko sales team that we had been approved for a listing. However, they stated that there was a waiting list of 500 exchanges pending, and we were offered a special deal of paying USD 6000 to expedite this listing. We agreed to the payment, but we were subsequently informed by CoinGecko that our trading volumes were insufficient to achieve a listing. In our interactions with CoinGecko, not only was the listing process ambiguous and badly managed, but the demand for high (but unpublished) trading volumes once again promotes the generation of fake trades, in this case, by the exchanges. We perceive this CoinGecko policy as being contradictory to their stated position of being a leader in transparency, and their desire to be a “trust score” provider for the crypto industry.
Due to our experiences, we have subsequently sought listings on aggregators that do not stipulate a minimum trading volume as a precondition, and also do not consider trade volumes as the most important parameter for acquiring high rankings on their platform. Additionally, we actively seek visibility on aggregators who demonstrate their commitment to transparency and openness, and who scrutinize the exchanges from which they receive their raw data. An example of such a platform is Nomics, where they have introduced their Verified Exchange Program that serves to validate and rank the source exchanges in order to produce professional-grade market data. In addition, as opposed to CoinGecko, the listing and integration process for Nomics was clear, well documented and seamless, further enhancing their reputation as a leading and high quality data provider.
Where to from here?
Navigating the world of crypto exchanges has been a difficult, frustrating and sometimes depressing experience. Over and above the basic challenges of a young project having to list a coin on exchanges and ensure liquidity, it is extremely difficult to operate in good faith within an environment where dishonest and unethical behavior is not only prevalent, but is often encouraged.
However, all is not bleak, and we are aware of a number of initiatives and improvements that will promote and even enforce transparency and accountability. Already, market data aggregators are encouraging crypto exchanges to meet increased standards of operation, particularly with regards to providing detailed trading data as opposed to a total daily volume summary. In addition, some data aggregators are instituting programs to ensure that they only cooperate with crypto exchanges that adhere to higher standards of accountability and disclosure. A typical example of such as initiative is the Data Accountability & Transparency Alliance from CoinMarketCap, which seeks to form group of global participants who share the common goal of promoting transparency, accountability and disclosure from projects in the crypto space.
More importantly, in the near future, we expect that the cryptocurrency industry will be subject to stringent regulations, and unethical practices will be considered to be akin to committing financial crimes or fraud. Clearly, once fraudulent activity on exchanges has been minimized or eliminated, then this advancement will have a direct and positive effect on crypto projects that will be forced to adhere to much higher standards of integrity and responsibility.
In the meantime, those looking for reliable crypto pricing and volume data may have to depend on the market data aggregators to be the policemen of the industry. Hopefully, these service providers will increasingly use data only from the crypto exchanges that they deem to be trustworthy, and provide transparency rankings that should help in marginalizing unethical participants.
Our journey through the world of crypto exchanges and data aggregators has been challenging, but we see these issues as short term teething problems typical of an immature industry. In practice, the listing for a young crypto-based project should be as simple as the procedures implemented for domain name registration, and the trading data should be automatically and seamlessly aggregated, with no limitations placed on minimum volumes or the number of exchange listings required.
There is however a silver lining to our trials and tribulations. Although our experiences with exchanges may have been mostly negative, some strong positives have emerged. Specifically, during this journey we have discovered a number of exciting opportunities, and these ideas will be promoted by New Capital as we continue to develop solutions that will assist in the advancement of the crypto industry as a whole.