Fake it ‘till you make it: Juicing exchange volume and what comes next
Coindesk recently ran a story about a sophomore at Moscow State University who runs a two-man operation called Gotbit that will vault your exchange into Coinmarketcap relevancy.
For many embedded in the industry, wash trading and market manipulation are not cause for pearl-clutching — I mean there is a whole institute devoted to accurate accounting of actual volume. Remember the infamous Bitwise Asset Management presentation to the SEC basically telling the entire cryptocurrency market: ‘We found ten exchanges that have a true spot market’ (Alameda Research recently published a full-scale analysis of exchange volume and estimated that around 70% of market volume was real versus Bitwise’s pessimistic 60% — the discrepancy is due to Alameda’s calculation that only 9% of market trades occur in North America due to the stringent regulatory environment).
Here at Transform, as we researched IEOs looking hard at many exchanges, we frequently came across faked volume just at the eye-test level. In fact, we even ran across freelancers on Fiverr who would build a whole currency exchange for less than $1,000 (this particular one even has 3 five-star reviews). If you couple that with services at Gotbit, you could have a noteworthy exchange for $16,000.
Read our complete IEO reports here: Part One & Part Two
On its face, $16k for a visible exchange sounds like a fantastic investment, but this is dangerous and threatens the survival of the entire market.
We can understand the temptation, as we detailed in our first research report, exchanges are making money hand-over-fist, and have outperformed every other market cryptocurrency segment over the last two years. In 2018, Binance made more money than Deutsche Bank. Per day, even smaller-scale exchanges like Gemini and Bitflyer are making close to a quarter of a million with 65 percent margins. At the moment, Circle’s purchase of Poloniex for $400mm looks like an absolute steal.
For developed asset classes, these numbers are outrageous. By comparison, Nasdaq and the CME charge less than 0.01% in fees, which is why these traditional exchanges offer side services like prepared data analysis. Binance and Changpeng Zhao seemed to understand this in the genesis of the IEO, which has doubled the pleasure for exchanges as they have surpassed both ICOs and STOs this year raising an astounding $1.625 billion during H1 2019.
For the genuine trader, the ultimate question is this: how much of this is real and how much is just absolutely goosed? Exchanges are unregulated and suffer no consequences for creating illusory transactions. Moreover, was the exchange handling my orders set up on software that cost as much as a mountain bike?
All told, exchanges are not looking to strictly police volume inflation because it will hurt their rankings, so where does this leave everyday traders and interested institutional investors? We believe that volume manipulation could eventually lead to exchange consolidation as the sheer amount of exchanges is untenable, which we are covering in our 3rd IEO report, coming soon.
As the leading blockchain advisory company, Transform Group supports exchanges that are doing the hard work of presenting honest transaction volume and removing market manipulators. Our aforementioned and forthcoming IEO reports and internal market experts are there to guide startups through listing and many other aspects of the business.
