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Only 5% of Bitcoin Transactions Are Real

Bitcoin Fakes

Over the past few years, the SEC has turned down no less than a dozen proposals for bitcoin exchange-traded funds (ETFs). The common view in the street is that the continuing SEC smackdown on these financial products stems mainly from its distaste for a potentially anarchic technology.

While this idea is not exactly flawed, the oft-cited defense by the independent government agency that its main concern is the protection of the interests of the retail investor is not any less meritorious.

Not least when highly alarming reports about the frequently inscrutable world of crypto trading keep popping up—and the latest is every bit as scandalous.  

According to crypto asset management firm Bitwise, the impressive bitcoin trading volumes frequently reported by exchanges on platforms like CoinMarketCap could be greatly exaggerated. According to the firm, only 5 percent of trading volumes reported by unregulated exchanges is genuine: The rest is artificially inflated.

The thorny issue of fraudulent trading volumes on bitcoin exchanges has dogged the industry for years. However, trying to determine the extent of market manipulation has been tough because…you guessed it, the majority of exchanges are unregulated.

Bitwise Asset Management says it came to its conclusion after analyzing trading activity for 81 bitcoin exchanges over a period of four days in March.

The firm analyzed patterns that reveal real or artificial trading and concluded that 95 percent of the reported trading volume was questionable including the presence of patterns that indicated that trading volumes had been manufactured.

Indeed, the actual figure is even less than that. Bitwise says that only $273 million of the reported $6 billion daily volume was legitimate. It cited CoinBene, BW.com, BitForex, OEX and Bibox as the top five unregulated exchanges.

But the Bitwise report also had an ulterior motive ...

The San Francisco-based company submitted its research data to the SEC as part of an application for a bitcoin-based ETF. Matthew Hougan, Bitwise's head of global research, said that the report marked the first time that data had been systematically analyzed and formally corroborated with anecdotal evidence.

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Hougan has promised that if granted approval by the SEC, his company will only trade off the 5 percent volume it considers legitimate.

The firm has even released a tool to track accurate bitcoin trading volumes.

Bitcoin wash trading

That Bitwise report resonates strongly with another one released in December by the Blockchain Transparency Institute, a team of blockchain data researchers.

That report took a deep dive into CoinMarketCap's top 25 bitcoin trading pairs and came up with equally damning findings. According to the report, 80 percent of the leading bitcoin pair volumes are wash traded.

Wash trading is illegal in most jurisdictions and involves traders simultaneously buying and selling their own orders with the express objective of inflating trading volumes in a bid to lure in other traders.

Other critical findings by the organization include:

  • At least four bot strategies are used to inflate trading volumes
  • Majority of pair trading volume is less than 1 percent of what’s reported on CoinMarketCap
  • Of the top 25 pairs, only Binance and Bitfinex do not appear to grossly wash their trades
  • All 30 of OEX's top traded tokens appear are wash traded

Though not directly related, the organization also reported that blockchain projects spent an average $50,000 during the year on exchange listing fees.

Cooperation from exchanges a tall order

Investors eagerly waiting for the day they will be able to trade bitcoin over the counter via an ETF will be hoping that companies like Bitwise are able to win the SEC over sooner rather than later.

A major challenge that proposed ETFs in the past have been unable to overcome is to secure information sharing agreements (ISAs) with exchanges. The SEC has stipulated that ISAs with leading exchanges is a key requirement for compliance with the Securities Exchange Act. Bitwise is looking to work with only reputable exchanges which is in itself a major endorsement. Hopefully, these exchanges will consent to share relevant market trading data with the firm.

By Alex Kimani for conil.me

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