According to a recent report released by the capital and technology firm CoVenture, there are several Bitcoin (BTC) exchanges that engage in volume manipulation activities. The report analyses the “true liquidity” of exchanges and what people do trade on them.
The first thing that the report found is that two of the top five cryptocurrency exchanges reported liquidity pairs that have 1 percent of their reported volume. The second thing mentioned is that true liquidity is in Bitcoin pairs on exchanges that operated since 2015.
On the matter, CoVenture Crypto explains:
“For crypto markets to mature, smarter regulation needs to be implemented in order for more established traditional exchanges to enter the space. [As] more trading venues open and more financial derivatives are offered, we think that liquidity can “flush out” a portion of the bad actors in the space as well as bring “institutional legitimacy” into the markets.”
The report shows that limited regulatory oversight pushed cryptocurrency exchanges to explore high-margin businesses. For example, exchanges started to offer Initial Coin Offerings (ICOs) listing. This relies on high volume that can be translated to higher listing fees and liquidity.
They went on explaining that total volumes are concentrated. As per the analysis, the top 10 percent of exchanges have 60 percent of the total spot volume. The top 25 exchanges handle 90% of the total spot volume.
There are exchanges that are known for engaging in wash trading. That means that they purchase and sell at the same price without changing the ownership. Some of these exchanges are related to API-driven platforms, a large volume of transactions during lower-trading hours, repeated transactions at the same price, etc.
There are some schemes in a few cryptocurrency exchanges that allow traders to make several trades to mine a virtual currency. CoVenture calls this activity “transaction mining” and these platforms stimulate transactions on the exchange. In some cases, users are making money out of these transactions.
These “transaction mining exchanges” refund fees paid in crypto or fiat in exchange tokens. These tokens have a monetary value that can be exchanged in some platforms. There are two exchanges that are known for this practice: Coinbene and Bit-Z.
Finally, according to CoVenture Crypto, there are two ways to detect suspicious reported volumes. One of the ways is to compare the average daily volume traded to the average daily visitors. It is important to understand if there are inconsistencies with other peers.
Another measure is to compare order book depth, thus how much capital it is needed to push cryptocurrency prices in a top 5 liquidity pairing down by 10 percent. As per the report, CoinBene metrics report similar trading volumes as Bitfinex but it takes $13,600 worth of capital to push the price of top liquidity pairs down by 10 percent. Meanwhile, Bitfinex takes $9.47 million.