Crypto Volume Could be Called into Question
The volume of the growing cryptocurrency markets is one of the biggest draws for the coveted support of institutional money. Major investors on Wall Street simply do not want to pour money into an industry that doesn’t have the volume to ensure long-term safety of their investments. But for the crypto space, the past two years have been characterized by the kind of explosive growth conducive to a respectable volume and massive market capitalization. Consequently, 2018 has been the year for institutional intervention in the changing and growing space.
But not everything is above-board when it comes to these mysteriously high levels of participation and volume in the crypto markets. BitForex has grown more than nearly any other crypto exchange on the market, having come from obscurity to an incredible USD $5 billion daily transaction volume on their site. They aren’t alone, either. Startups all over the world have seen tremendous growth, and the exchange market has been among the most prosperous for businessmen looking to make their millions on the blockchain using the evolving cryptocurrency market.
According to some analysts, the quick ascension of market volume for some major players on the cryptocurrency markets is no coincidence—it’s a big problem. BitForex, for example, is the target of recent criticisms when it was discovered by researchers that its reported daily volume exceeds its competitors by a significant margin, while the exchange reports one of the smallest web traffic each day.
This can mean one of several things. But according to top experts in the financial sector, this mismatch of traffic and volume is likely resultant from both the lack of substantive anti-fraud measures taken by the exchanges and the trading and volume-related incentives that the sites are using in a bid to artificially increase their trading volume on the path to gaining more institutional traders on their exchange site.
Inflated Volume Impacts
The impact of sites boasting artificially inflated trade volumes is significant, both for the longevity of the market itself and the overall health of the entire cryptocurrency exchange ecosystem. For the average investor, misleading volume statistics could lead them to believe that “cashing out” at good times in the market will be easy. When the volume on a particular asset or exchange is high, it is generally assumed that there will be enough buyers on the market at any given time to easily execute a sellout.
But when these numbers are not as accurate as they can be, investors may be looking forward to a mirage of a payday. Because if the volume is actually much lower in reality than the site might suggest, there might not be buyers ready to capitalize by purchasing in bulk during a high-point in the market. The result is a market where far more people are trying to sell their bags than are trying to hoard them, or buy more. When this happens, it could be dangerous for the entire community and prices across the board.
A Regulatory Question
For regulators trying to catch up the fraudulent activity within the relatively new crypto markets, some professionals are suggesting that a careful evaluation of market-driving statistics on leading exchanges is in order. Many regulatory authorities are already trying to do so, with projects by regulators in several countries focusing primarily on responding to allegations of artificial inflation in market cap and volume statistics on the top exchanges in crypto world.
But this might not stop some exchanges from abusing their power to try to boost involvement. According to former crypt exec Neil Woodfine, many exchanges will continue to use the excuse that “everyone is doing it” to justify the unethical and borderline fraudulent business practices. But, he warns, this trickery will become evident very quickly to the new trader, who will immediately realize that his trades are “not executing at the price they want” because of a lack of actual volume driving the market in which they participate.
Transaction Mining and Artificial Volume
Another factor that might contribute to inaccurate listings of volume on major exchanges is the growing practice of transaction mining. Transaction miners take advantage of incentivized markets which pay traders to conduct business on their site. On BitForex, for example, traders can earn around $1.20 per $1 in trade they pay in the standard transaction fees. Because of this, some traders or groups work together to trade assets back and forth consistently to “mine” this effectively free money.
Though the promotion on BitForex is at least expected to end relatively soon, this has not stopped hundreds of traders from creating sophisticated bots or networks of bots that spend all day trading back and forth, effectively printing money for their owners and creators. This is a driving reason behind the manipulated trade volumes on some of these top exchanges, although BitForex executives have repeatedly stressed that they do not approve of the manipulative practices in any form.
Wash Traders Targeted
Some governments and regulators are working quickly to try to respond to wash traders, or currency traders who attempt to make money simply by trading the same assets back and forth and reaping the profits. The United States Department of Justice has recently announced a probe into the issue within the crypto markets, and New York’s attorney general remarked that the crypto markets have clearly failed in establishing its own clear rules and standards for the people running crypto exchanges.
BitForex Called Out
According to the CEO of Hacken, Dmitriy Budorin, BitForex is clearly among the “worst offenders” in what he calls a pervasive “parade of inflated volume” among top exchanges on the market. Budorin runs a company called Crypto Exchange Ranks, an organization which assigns scores to exchanges based off of metrics like security and liquidity of assets.
On exchanges like BitForex, another clear indicator of problems with inflated volume is a high ratio of volume to assets in top wallets. Crypto exchanges with truly significant volumes should have wallets with correspondingly high assets held. But with the pervasiveness of bots on the network, as well as the influx of wash traders looking to make a quick buck, these exchanges continue to display all the red flags for a manipulated—and dangerous—market.