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Pump-and-dump: new report sheds light on true liquidity of cryptocurrency exchanges

Pump-and-dump new report sheds light on true liquidity of cryptocurrency exchanges

A new report published by multi-strategy asset management platform, CoVenture, sheds more light on how cryptocurrency exchanges indirectly promote artificial volume and don’t do enough to police artificial volume activities occurring on their exchange.

Crypto exchanges do not operate like traditional financial exchanges. Loose regulations has led to many crypto exchanges engaging in secondary businesses that have traditionally been out of reach to traditional financial exchanges. These high margin businesses include ICO listing fees and internal proprietary trading. All of these business models depend on high volume for profits. Exchanges with high volume can charge the highest fees from ICOs who want to list on their platform, collect the most revenue from high trading fees, and have the liquidity and user data to prop trade on their own platform, reads the report from CoVenture.

From a business standpoint, cryptocurrency exchanges face a “chicken or the egg” problem. In order to achieve high volume, investors need to trade, yet investors tend to gravitate towards exchanges with high volume. For this reason, exchanges use tactics such as market making, token giveaways in the form of “airdrops”, new token listings, and even rebates in order to entice retail traders to use their platform.

From a trader’s perspective, one of the most important considerations when choosing an exchange to trade on is volume. But not all volume is created equally. Some unregulated exchanges have been known to directly or indirectly engage in a form of market manipulation called wash trading. Wash trading is when a trader/s places a buy and sell order at an identical price without changing ownership of the underlying asset. They use bots to automate these orders leading to an artificially increased volume. This gives unsuspecting traders the illusion of liquidity, claims analysts at CoVenture.

In a newly published report, crypto exchange, Bithumb, is used as a study case:

Bithumb is a South Korean cryptocurrency exchange that has high reported volumes globally. More recently, Bithumb has been under fire from various counterparties with accusations of wash trading. They have responded with their own accounts for their unusually high spike in November 2018 volume: they had launched a promotional event called “Super Airdrop Festival” which refunded users 120% of their accrued trading fees.

From September to October 2018, the BTC to KRW trading pair represented just 10% of global fiat trading pair volume. From October to November, the BTC to KRW trading pair increased over 400% dominating just over 50% of global fiat to BTC trading volume. According to CryptoCompare’s API, this is directly a result of Bithumb increased reported volume. During this month, the BTC to USD and BTC to JPY trading pair volume dropped 16% and 30% respectively. BTC to KRW volume drops off considerably after November 11th back to historically normal levels (~10%).

Within this high volume period (Nov 2018), Bithumb’s average 24 hr volume increased by over 284% from 323 million to 1.24 billion, while unique daily visitors decreased by 20% (according to Alexa Web Traffic Rankings). The Blockchain Transparency Institute, a crypto data analytics firm, has estimated that 85% of all Bithumb trades are facilitated through API. This appears to
refute Bithumb’s claim that this volume spike was due to new retail traders attracted to their “Super Airdrop Festival”.

Average daily visitors vs 24 hr volume – Alexa web traffic rankings, source CoVenture.

How might exchanges indirectly promote wash trading?

Cryptocurrency exchanges typically employ a business model of making a percentage on each trade called “maker” and “taker” fees. These fees paid in crypto or fiat are deducted before each trade is executed. Transaction Mining Exchanges (TME) flips this business model on its head. They similarly collect “maker” and “taker” fees paid in crypto or fiat but they refund all the
paid trading fees back in the form of their native exchange tokens.

These tokens created by these exchanges usually have some holding incentive such as special voting rights for ICO listings. The more trading that occurs, the more exchanges have to pay out in exchange tokens, creating a large demand in these new exchange token markets. Traders can either sell their exchange tokens on the exchange token market for crypto or hold their token for price appreciation. This creates a net zero trading fee for traders and sometimes even rebates (in the form of 120% trading fees).

Exchanges benefit immensely from transaction mining. They jumpstart organic user trading volume, profit from their token valuation (often holding >50% of token supply), and sidestep ICO regulation.

Transaction Mining Exchanges such as Coinbene and Bit-Z are relatively young companies (Coinbene started in November 2017) and have leaped from relatively unknown exchanges to consistently ranking within the top 25 exchanges by reported volume on CoinMarketCap. The danger, however, is that these Transaction Mining Exchanges indirectly incentivize wash trading bots to flock towards their platform to benefit from net zero trading fees.

True liquidity

According to the report, Blockchain Institute of Transparency, a crypto data analytics firm, has researched exchanges and their order books, trading volumes, and web traffic to compile a list of the top 5 trading markets and which exchanges they are on. Below is a ranking of the top trading pairs by volume reported by coinmarketcap.com, a frequently visited price data site by retail traders. According to BIT, many of these exchanges have less than 1% of real volume. They based these metrics on web traffic, API, and volume data points. While this statement may seem surprising, CryptoCompare’s API findings seem to corroborate this claim.


The report noted that Binance notably has high organic web traffic and in Q1 2018, reportedly outpaced Deutsche Bank in profits (200m vs 146m). Bitfinex and Kraken are two of the only venues to short BTC/USD without settlements priced back in BTC. Bitflyer’s BTC/JPY futures consistently take the lion’s share of volume. Coinbase is one of the most popular user-friendly exchanges for retail crypto traders. In December 2017, Coinbase reached the #1 most downloaded iPhone app on the App Store.

Researchers at CoVenture concluded that the crypto markets face a number of information inefficiencies. First, most investors and traders continue to rely on coinmarketcap.com for information on exchange volume which include exchanges with inflated volume. Second, the top trading pairs by volume appear to be based on the Tether token, however we analyzed that liquidity remains highest in the BTC/USD trading pair. Third, analysts show how currency trading volume could be easily manipulated.

“In order for the crypto markets to grow and 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,” concluded the report.

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