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The Capital

Crypto-Exchanges’ Wash Trading Is Killing Cryptocurrencies en masse and There’s Nothing You Can Do About It

By DxOne Exchange on The Capital

Cryptocurrency exchange platforms are inflating their Bitcoin trading volumes, or ‘wash trading’ to earn higher profits.

Last year Bitwise Asset Management issued a report on Bitcoin (BTC) trading figures that stated that 95 percent of Bitcoin trading volume, as seen on CoinMarketCap (CMC) was due to so-called wash trading.

Wash trading has always been a serious pressure point for the cryptocurrency markets. Though exchanges have taken steps to identify fake volumes, there is still more to do. Today we’re investigating Wash Trading and exploring whether major cryptocurrency exchanges artificially inflate their volumes?

What is Wash Trading?

Wash trading is a kind of market manipulation where someone including traders, brokers, or even an exchange conducts buys and sells a security for the sole purpose of feeding misleading information to the market for manipulating the market.

For wash trading, a single entity can serve as both the buyer and the seller of a specific coin, thus pumping the volume and motivating other traders to follow the false price movement.

Who is Engaged in Wash Trading?

We are not saying that all players are involved in wash trading but historically, several key players have engaged in wash trading.

  • Investors with a pool of investment (selling and buying the same asset)
  • Brokers and Trader (work together to post fake trades so as to boost the price of the asset)
  • Exchanges (to generate fake volume in order to lure in more investment)

How Do These parties Perform Wash Trading?

The traders, investors, brokers, and exchanges collude with one another to inflate volume for their own profits. They deploy various methods mentioned below, but their practices are not limited to the ones mentioned below.

  • Printing Fraudulent Volume (the exchanges use algorithms that post trades that never happened, thus printing more volume to their tape),
  • Paying third-parties to perform Wash Trading ( these key players engage with market makers and pay them to perform wash trading in favor of their own exchange),
  • Fee-tier wash trading (exchanges do this by offering benefits such as lower fee tiers or preferential trading to traders that attain high volumes of trades to generate higher volume for their exchange)
  • Exchange-level wash trading (Exchanges often perform wash trading on their own platforms by simultaneously buying and selling a single asset with itself or an affiliated party) and,
  • Trade mining (this happens when exchanges economically incentivize trading activities by paying traders to trade, typically in an exchange-specific coin)

Is Wash Trading Even Legal?

No, in various countries including the U.S. and Japan, wash trading is illegal. It was officially banned in the US in 1936. Well, during those times, wash trading was extensively used to create false signals of interest in security to pump the value so exchanges could profit from shorting the stock.

High-frequency trades, i.e., an exponentially increasing number of trades have made it increasingly difficult to monitor, regulate, and wash trades.

Why Crypto Exchanges Indulge in Wash Trading?

When it comes to Cryptocurrency trading, volume is king. Exchanges make money by charging their users for the transactions or trades they make. By having more activity on their platform, they can have a higher rank on the popular website CoinMarketCap, which helps them attract new users.

Exchanges also make money by charging fees from new cryptocurrency projects that want to get listed in their marketplace, and higher the popularity of the exchange higher rates they can command.

Wash Trading at Major Exchanges

Today, Cryptocurrency exchanges are creating transactions to beef up their trading volume numbers like 67% to 95% of bitcoin exchange volume is faked through wash trading.

Cryptocurrency exchanges do because they are highly dependent on the number of transactions happening on their exchange to pump up their value.

The Blockchain Transparency Institute in its 2019 inspection report revealed that global wash trading has decreased by 35.7% among the top 40 exchanges.

While among the top 5 cryptocurrencies, Bitcoin has the lowest wash trading volume at around 50% while Bitcoin cash has the highest at 82%, followed by Ethereum, Litecoin, and XRP at 75%, 74%, and 55%.

So, What is Happening at the Major Exchanges?

CoinMarketCap has not been able to provide users with the correct trade volumes or identify fake trading volumes. But we can not blame CoinMarketCap alone for this as most of the exchange platforms are centralized, making it possible for them to inflate their figures by trading the same cryptocurrencies between a pair of bot accounts repeatedly.

But when it comes to exchanges in the US and Japan, wash trading is not that common. The world’s biggest cryptocurrency exchange platform in terms of volume trading, Binance has less than 10% volume of trade wash traded.

Among the top 20 cryptocurrency exchanges by trading volume, the top ten cleanest exchanges are Binance, Bitfinex, Coinbase Pro, Kraken, Bitstamp, bitFlyer, Gemini, itBit, Bittrex, Poloniex. These exchanges were put through three different testes:

  • The time period of visualized data in order to detect anomalous or artificial patterns in trading volume of the exchange),
  • trade size histograms (this is a data visualization technique that helps people to visualize the percentage of trading volume on an exchange that occurs at particular trade sizes over a specified period, as defined by the paper),
  • and volume spike alignment (this was done to assess whether each exchange responded to the same developments and whether the charts demonstrated similar patterns, considering the global nature of most cryptocurrencies).

Among the top 20 crypto exchanges, the most heavily impacted exchanges from wash trading are Bibox and OKEx. It is unfortunate and highly questionable that more than 75% of the volume on their platform is wash traded.

Today, the crypto economy is facing its biggest hurdle in terms of wash trading. The industry needs to address this issue in order for the US Securities and Exchange Commission (SEC) to approve a Bitcoin ETF and other cryptocurrencies.

Once the exchanges become more transparent and solve the issue of wash trading on their platform, more investors will trust digital assets and the world economy will incline towards cryptocurrencies.

Did we cover everything? Let us know what we missed in the comments below.



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