Back in March, digital asset management firm Bitwise presented a report to the US SEC, which attracted much attention in the crypto press at the time. The document was eye-opening, showing in stark detail how exchanges faked 95% of all cryptocurrency trading. Only ten exchanges worldwide were shown to have real volume. These include Binance, Coinbase, Poloniex, and Kraken.
Perhaps most interestingly, of the ten exchanges that were shown to have genuine volume, the Bitwise report demonstrated that those markets for BTC were actually among the most efficient of any financial instrument in the world. Spreads were tight, and there was a near-perfect price arbitrage between exchanges.
Considering the SEC has long resisted the idea of an ETF due to the volatility of Bitcoin, these results put things into a new light. It’s not the cryptocurrency itself that is volatile; it’s the market manipulation by exchanges that make it behave unpredictably — hardly surprising when the vast majority of the reported volume is wash trading. Traders are paid by exchanges to buy with one hand while selling with the other, creating a false perception of high trade volumes.
Currently, there is a vast amount of institutional money pouring into the crypto space, but if the numbers are to be believed, institutions are showing a preference for Bitcoin. BTC dominance has increased from around half in January to around two-thirds at the time of writing. This is to the detriment of altcoins, which are being perceived as too volatile for institutions. Of course, altcoins have a lower trading volume overall, even when retail trading is factored in. Lower volume makes the alts far more vulnerable to market manipulation than BTC.
What Can Be Done?
Unfortunately, there are few incentives for the exchanges engaging in wash trading to clean their houses up. After all, low or no volume means they’re effectively failing in the exchange market.
Cardano is one project that’s taking matters into its own hands in order to overcome market manipulation of its ADA coin. The Cardano Foundation recently engaged liquidity services provider Algoz as a means of ensuring better liquidity, smaller spread, and reducing the incidences of manipulation by whales or trading errors.
Founded in 2016 by Fingenom Group, Algoz provides automated liquidity solutions to multiple projects across more than twenty exchanges worldwide. Along with automated market making, the company has developed in-house analysis technology which detects and protects against market manipulation of digital assets. Cardano isn’t the only project to benefit from it, as digital payments provider Electroneum and trading platform DX.Exchange are among its clients as well.
So, What’s In It for Cardano?
The endgame for Cardano is that the ADA coin achieves genuine liquidity and price stability of the kind seen in the legitimate BTC markets. This will put ADA on a level playing field with the BTC and the major alts. Therefore, ADA has the opportunity of attracting the same kind of institutional investment that’s currently pouring into the BTC markets. It will help to secure the long-term sustainability of the ADA token and ecosystem. Taking a bigger picture view, it will also work to reduce the crypto market’s heavy dependence on BTC.
It’s a pioneering approach by Cardano and sends a powerful message to the exchanges that projects don’t want the value of their tokens falsely pumped. If this strategy helps to pull the institutional investors towards ADA, then it’s possible that other coins will start to follow suit. Ultimately, this could be the first step in stamping out wash trading on the part of exchanges.
The Bitwise report caused a collective sharp intake of breath across the cryptocurrency space. Therefore, it’s heartening to see that projects are taking the market manipulation issue into their own hands, rather than merely pointing to the trading platforms to solve the very problem they caused in the first place.
If more projects started to take similar steps, the impact of wash trading could be significantly reduced. The fact that the markets with genuine volume are in such a healthy state is excellent news for the industry. Therefore, eliminating market manipulation offers the unprecedented potential of putting the entire crypto markets on a level footing with the traditional markets for the first time since the Bitcoin genesis block.
Editor’s Note: This article is a guest submission and was not authored by BeInCrypto or its staff. We have chosen to publish this article because we feel it may be of value to our readers.