Volume profile and fake volumes

A simple metric to detect suspicious trading activity in cryptomarkets

Crypto Integrity
Apr 8, 2019 · 5 min read

The spike in bitcoin price on the 2nd April 2019 has also led to the dramatic increase in trading volumes: from around $10 billion a day prior to the spike to over $20 billion during the next couple of days. Although the initial price movement allegedly started on a few exchanges, the arbitrageurs did their job well by pushing the price higher and trading with resting orders on other exchanges. In addition, the uncertainty about future BTC price has sparked the interest among investors and traders, which in turn has added to the increased trading volume.

The recent spike in bitcoin price has made it possible to create another metric to detect suspicious trading volume based on intraday profile and 24h volume change — Gemini, Bitbank, CEX.IO, Bitfinex, itBit, Coinbase Pro, Liquid, Kraken, and Bitstamp are among the most trustworthy crypto exchanges.

A bit of theory

However, the analysis of trading volume across crypto exchanges has revealed different intraday patterns. While some exchanges have experienced a dramatic increase in trading volume (e.g., Coinbase Pro, Kraken, Bitstamp etc.), other major exchanges have shown steady-to-no growth (e.g., Bibox, HitBTC). We have identified several central factors that explain the similarities in volume profiles:

  1. Arbitrageurs. A reliable exchange has little restrictions on free cash and asset movement, thus, making it easy for algorithmic traders to exploit arbitrage opportunities.
  2. Client base. A reliable exchange has diversified retail and/or institutional client base that react to the important news by increased interest and, consequently, trading activity.
  3. Resting orders. A reliable exchange has substantial retail and/or institutional client base that tend to leave limit orders without changes for a long time. In contrast, algorithmic traders, including rogue traders who are involved in wash trading, tend to place short-term orders. An extreme case of a fraudulent exchange is the one where 100% of the orders in order books are placed by the same wash sale algorithm — a spike (or a drop) in price does not affect the volume because (a) the wash trading bot goes on generating the same volume, (b) the limit orders synchronously moved up (or down) without interacting with the resting orders of other clients .

Results

CoinGecko publishes historical charts of the reported trading volume, which makes our comparison possible. The charts below show the trading volume profile over the last 2 weeks. The profiles of exchanges, which reported a huge increase in volumes, look pretty similar.

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Bitstamp (left) and Binance (right) — Reported USD trading volume. Source: CoinGecko

In contrast, the profiles of crypto exchanges, which reported low or no increase in volumes, differ from those of the first group of exchanges. As it is difficult to justify this difference, we find the reported trading volumes from these exchanges suspicious.

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DOBI (left) and BitMax (right) — Reported USD trading volume. Source: CoinGecko

We have summarised the statistics on two groups of exchanges (the snapshot was taken on 2-Apr-2019 at 5 PM UTC):

  • top-100 exchanges by 30d adjusted reported trading volume
  • top-10 exchanges by 30d adjusted reported trading volume
  • top-10 by 24h change in reported trading volume (out of top-100)

Pegged volume

However, fraudulent exchanges may easily peg their trading volume to the volume reported by the trustworthy exchanges. Further examination of the volume reported by CoinMex shows the volume dynamics that is far from being organic and justifiable. Other exchanges (such as CoinTiger and Bit-Z) have volume profiles, which do not raise questions, yet our previous report has indicated clear signs of suspicious trading behaviour on these exchanges.

Volume change and web visitors

The application of other popular metrics may help to identify fraudulent exchanges with pegged volumes. Although web traffic may be inflated as well, the ratio of reported trading volume to the number of visitors usually gives an insightful indication of the non-organic client flow. Please note that (1) SimilarWeb data does not include traffic via iOS or Android apps, (2) exchanges with a high share of institutional flow via API tend to have a higher volume per visitor.

The table above shows a positive correlation between the 24h change in volumes and healthy (in green) volume per visitor, which justifies a new metric based on 24h volume change. There are some exceptions that may be justified. itBit has a relatively high volume per visitor that may be explained by the focus on institutional clients. Low increase in volume on Indodax and BtcTurk may be explained by their focus on local markets (IDR and TRY respectively) and restricted arbitrage opportunities.

Crypto-integrity

Fraud detection in cryptomarkets and crypto liquidity…

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