Cryptocurrency exchanges and wash trading seem to go hand in hand. In a largely unregulated market where any old Joe from the street can create an exchange on his laptop with no oversight, it’s hardly surprising that illegal activities go on. Staff at well-known exchange Upbit were arrested over falsifying trading volume last year, and evidence emerged last week that KuCoin had been allegedly trying to boost volume on certain tokens by selling tailored programs after threatening to delist low volume tokens. New research has now emerged that throws more light on the extent of wash trading within the cryptocurrency ecosystem.
CoVenture Confirms BTI Report
The research, undertaken by CoVenture Crypto, sought to discover the “true liquidity” of exchanges. It addresses how much of the volume flowing through their servers is from actual users as opposed to someone, or most likely an algorithm, artificially trading tokens back and forth to generate false liquidity. This research was undertaken on the back of a similar study performed by investigative body Blockchain Transparency Institute (BTI) in December last year, which found that 87% of all the reported volume on the top 25 exchanges was fake.
CoVenture found continuing discrepancies between reported volume and what was actually happening on the exchange – for example, the cost of crashing the price of a top 5 market on Bitfinex by 10% would cost around $9.5 million. Performing the same feat on Coinbene, which supposedly has the same trading volume, would cost a mere $13,600. This just shows how much of a deceiving metric ‘daily volume’ is, and how it does not translate into liquidity. They also found that most of the wash trading occurred with stablecoin pairings, typically USDT, and Bitcoin pairings were typically the least impacted.
Regulations Needed to Legitimize the Space
CoVenture also backed up the BTI claims that falsifying volume data was endemic, with many of the top exchanges by volume on CoinMarketCap actually achieving less than 1% of their stated volume and the rest being down to strategies such as wash trading. This suggests that in the two months since the BTI report, very little has happened to curb the illegal activities of these less reputable exchanges, with the CoVenture report suggesting what needs to happen in order to achieve this:
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.
Many countries around the world are actively discussing, or already implementing, crypto regulations, so it will be interesting to see how the field had changed this time next year.