As Yoseph Young explains it, in illiquid markets and trading platforms with inflated volumes, it is relatively easy to manipulate the price of small cryptocurrencies. While it takes many major factors and an unlikely correlation of events to bring down the price of major cryptocurrencies like Bitcoin and Ethereum, researches demonstrate that a similar result can be achieved in a market with small cryptocurrencies with capital in the range of $50,000 to $100,000.
John Koestier sheds more light on the phenomenon of exchange manipulation by exploring another report, this time from one new cryptocurrency exchange rating service CER that has accused Korea-based Bithumb, the world’s second-largest crypto exchange by volume, of faking much of its trading volume since late summer 2018.
This occurrence is called wash trading, or simultaneously selling and buying at the same time to create misleading and artificial activity.
Bithumb ranked at the bottom of the top ten global exchanges as measured by CoinMarketCap, at around $350 million in daily trade volume. But by November 11, Bithumb peaked at $4.4 billion, more than 12 times as much. Today, Bithumb ranks second on CMC’s list of crypto exchanges as measured by reported volume at $1.4 billion. (Bithumb does not appear on CMC’s “adjusted volume” ranking.
So why is this so according to CER?
In addition, average transaction size ballooned from .21 BTC in the beginning of the summer to a very significant 5.88 BTC, or $37,600 USD, from October 15 to November 11.
According to CER, other coins showed similar patterns, including LTC, ETC, XMR, ZEC, OMG, and BTG.
One coin, WTC, showed the most intense artificial activity, CER says.
“WTC stands out from all the coins we observed, as it was only listed on the exchange on the last day of August and had the shortest pump period which started on October 28th and lasted till November 11th,” CER states in a document shared with me. “For that reason its pump was one of the most intensive. The inflated daily volume of Waltonchain jumped by 350 times from 348k WTC (on average prior to the pump) to 122.5mln WTC (on average during the pump) only to then drop by by 1,450 times in one day from 206.7mln WTC to 141.8k WTC on November 12th.”
As you might expect, BitHumb dismissed the allegations out of hand.
“Bithumb is doing nothing to inflate trading volume. Bithumb is not selling mining-based coin. Bithumb is trying to get more customers by providing various promotions just like any other company in the world as a normal business.”
Why are Exchanges Showing Fake Volume?
CCN clarifies significance of this and why to exchanges do it. According to BTI, the majority of the traffic and volume of cryptocurrency exchanges come from affiliate links cited by CoinMarketCap. Some exchanges have had 83 percent of their referral volume from CoinMarketCap.
Hence, it is of utmost importance for cryptocurrency exchanges to appeal to investors on cryptocurrency market data platforms with high volumes, as investors tend to avoid digital asset exchanges with low liquidity due to the difficulty in buying and selling low market cap cryptocurrencies.
“It was also noted from data on SimilarWeb that up to 90% of referral volume from new and aspiring exchanges comes from rankings pages with up to 83% from CMC alone, providing the motive for many exchanges to grossly overstate volume through wash trading practices,” the report concluded.
One immediate solution to fake and inflated volumes is to encourage market data providers to attempt to filter out wash and bot trades. But, as of current, unless regulations require otherwise, it is extremely difficult for platforms to recognize and eliminate exchanges that grow their volumes illegitimately.
U.today elucidates the hidden dangers of these practices. If exchanges with highly inflated trading volumes remain unnoticed, it may significantly tarnish the reputation of the whole industry which strives to come out of a legal gray zone and become more transparent.
Inexperienced traders may want to test out a new platform that swiftly made it to the top and, therefore, seems highly reputable, but later they have to deal with broken English, generally bad service and potential security issues. Consequently, investors will start losing confidence in the market.