Spring is just around the corner …or is the crypto winter still here?
Recent reports from the digital asset market, i.e. exchanges trading bitcoin and 2,000 other tokens, show sharply increasing trading volumes. Following a long crypto winter, things are heating up. In fact, February 20 had the highest trading volume in 300 days. Daily volumes are now twice what they were at the darkest of winter.
These numbers are of course encouraging for all of us active in the digital asset space. Let’s look closer at the numbers. The source we use to find out what is happening in the market is the most commonly used website, coinmarketcap.com. The trading volumes they present come from 240 exchanges worldwide. This gives a comprehensive list of all relevant markets, so we should be able to trust the data, right?
Coinmarketcap gives the option to look at reported volume or adjusted volume. Interesting. Are they telling us that maybe we can’t fully trust the reported volume? It actually makes sense when you think about it. They list 240 exchanges with respective trading volume, and they are the most common go to website for anyone checking the latest market trends. Anyone operating an exchange would obviously like to get on top of that list. Much like any amateur author who asks all her friends to order the new book and write a review, all on the same day, in order to trick the Amazon algorithms and push the book up the Hot New Releases list. You need a lot of good friends to succeed. Can you tell who your friends are in the digital asset market? You don’t have to. It is actually much easier to manipulate trading volumes than to go up against Amazon. The markets are not regulated, so no authority will confirm your trades or volume. Artificially high volumes should by all logic be common. Getting on the top lists or not can make it or break it for your exchange, and you’re not even breaking any laws by inflating your numbers. So, we should be happy that Coinmarketcap provides an adjusted volume. Clearly that should represent the correct volume, right?
This is Coinmarketcap’s explanation of adjusted volume:
Adjusted Volume — Volume from spot markets excluding markets with no fees and transaction mining
Volume from spot markets simply mean that this volume will filter out volumes from derivatives markets. Good, that should make the numbers more relevant. Now they also exclude markets with no fees and transaction mining. Transaction mining is the term used for exchanges giving their own exchange tokens as a rebate to those who make transactions. The more you trade, the more tokens you get. It became obvious that these exchanges have a lot of fake volume, and so they are removed in the adjusted volume. Similarly exchanges with no trading fees are removed. It makes sense that the risk of fake volumes is higher in a market with no fees.
We now agree that Coinmarketcap has improved the quality of the data by their adjustments, but does that leave us with reliable numbers? No, it’s unfortunately obvious that these numbers are still not reliable. Coinmarketcap applies an either-or methodology. Either they include an exchange or they exclude them. Clearly the truth is not that all volume is 100% correct from the exchanges they include and most likely the excluded exchanges are not made up of only fake volume. How large of an error we see in the volume, is impossible to estimate. As long as the trading of digital assets is done on unregulated markets, we will never be able to see true volumes. What we do know is that without reliable data sources, we risk making wrong decisions based on manipulated data. For every serious participant in these markets, starting with the retail investor, it is critical that we soon start to see more reliable data. How else can we tell if spring has arrived?
At Tritum Digital Assets we are building a new trading ecosystem for high quality price formation in a regulated environment.
The author is a co-founder of Tritum Digital Assets and a former Vice President of Nasdaq and Head of Economic Research, responsible for reporting all volumes of Nasdaq’s Nordic Exchanges. He is also a former Finance Director of the US Consolidated Plan, the UTP Plan. The plan governs transaction information from all US securities exchanges, is approved by the SEC and provides millions of investors with reliable data.