Earlier this week, the Blockchain Transparency Institute (BTI) published a report claiming that the global crypto exchange market is faking $6 billion of its daily volume.
The researchers at BTI evaluated the user activity and traffic of the market’s biggest crypto exchanges, comparing their projected trading volume to other metrics.
Slippage, a method utilized by cryptocurrency researcher Sylvain Ribes in his investigation of crypto exchanges, was employed by the researchers to analyze order book liquidity and to confirm whether exchanges are demonstrating accurate volume.
Half of the Daily Volume is Fake
Currently, according to CoinMarketCap, the daily trading volume of the crypto exchange market is around $13 billion.
BTI claimed in its report that $6 billion in daily crypto trading volume is faked, nearly 50 percent of the market’s daily trading volume, mostly because of various wash and bot trade strategies implemented by digital asset exchanges.
Its research, which cited web traffic, engagement, and volume from trusted sources like Similar Web, revealed that more than 70 percent of cryptocurrency exchanges have inflated their trading volumes by at least three-fold through opaque and deceptive activities.
“Tallying up the volume numbers of the top 130 exchanges, it is estimated that over $6 billion dollars in daily trade volume is being faked with over 67% of daily volume being wash traded. Over 70% of the CMC top 100 is likely engaging in wash trading by at least 3x their stated volume,” the report read.
But, BTI emphasized that some cryptocurrency exchanges like Bittrex, Kucoin, and Bithumb have legitimate volumes, given that their unique visitor counts are proportional to their trading volume.
Most exchanges listed on cryptocurrency market data providers have tens of thousands of unique visitors a day and hundreds of millions of daily trading volume on a daily basis, showing numbers that cannot be justified.
The researchers said:
“A few differences can be seen where a few exchanges such as Bittrex, Kucoin, Cryptopia, and Bithumb have much higher unique visitor counts than their volume would expect to show. This gives further evidence of their accuracy as they could report much higher volume. Instead they appear to be accurately reporting that their users spend less per session.”
Why are Exchanges Showing Fake Volume?
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.