Crypto Exchanges Found to Be Duping Users Through Inflated Bitcoin Trading Volumes


This year has seen Bitcoin return to the headlines as the leading cryptocurrency has soared to the high prices it is associated with. The cryptocurrency reached a 17 month high in June and some crypto experts have expressed skepticism towards the trends being shown by the cryptocurrency.

When a market experiences a big jump in a small period of time, it may be an indication of market manipulation or of someone artificially moving the market according to John Griffin, a finance professor at the University of Texas. The volatile trends being shown by Bitcoin may be a sign that manipulation is rampant, the professor added.

Transactions involving cryptocurrency are executed on public ledgers called blockchains and the trade of cryptocurrencies is done on crypto exchanges. There are over 200 digital exchanges globally which offer cryptocurrency trading. Most of the crypto exchanges are not regulated as traditional asset exchanges.

The absence of proper regulation means that traders and investors have no way of knowing for certain whether the prices and volumes reported are a true reflection of the activity on the market or whether these figures are being manufactured.

Challenge for Regulators

Financial regulators across the world are faced with the task of ensuring that crypto exchanges report the correct figures and the markets are not manipulated.

In some countries such as America, some crypto exchanges have been banned from doing business with citizens due to the lack of regulation around crypto trading. BitMEX is currently under investigation for suspicions that the exchange contravened the rules banning it from allowing American citizens to trade on its platform.

Regulators also need to get the problem under control so they can protect consumers as is their mandate. Exchanges manipulate their numbers to attract more investors to the exchange and by extension, more money. The fake volumes are also designed to push the exchange up the rankings of cryptocurrency exchanges on CoinMarketCap.com which is a popular site used by crypto investors to see which exchanges are doing well and are offering the best trades.

One method used to manipulate markets is using two accounts and having trades executed between the two back and forth several times over. These trades then reflect as high trade volumes which will be inaccurate. This makes crypto trading risky business as one could be guided towards a particular exchange or coin by inaccurate volumes.

Measures to Solve this Challenge

Regulators are trying to put in place measures which will bring the manipulation of crypto exchange markets under control. The Financial Action Task Force (FATF) has recently started imploring exchanges to provide information about accounts that send or receive large sums of money. This way, the trades can be verified and it can be ascertained whether the trades are legitimate.

These rules may be difficult to implement as most exchanges are big on maintaining the privacy of their users.

Tools to make exchanges more transparent are in the works and these tools will be able to pick up spoofing. Spoofing involves sending orders and canceling them at the last minute and this creates the impression that there is high demand for the particular coin. Bitsian, a company that has developed one such spoofing detection tool, reported that they discovered over 100,000 instances of spoofing on one exchange.

Improvements in transparency are crucial for the progression and growth of crypto exchanges. As large corporations such as Fidelity and Facebook enter the industry, there is hope that transparency will improve.

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