A new study conducted by Bitwise shows that 95 percent of Bitcoin spot trading is faked — primarily by unregulated exchanges. The data points towards the sobering reality that most cryptocurrency trading is ripe for manipulation.

We’ve all heard of wash trading before. It’s when an exchange buys and sells the same asset or stock, like Bitcoin (BTC), to create the appearance of actual trading activity in a market. Wash trading has been heavily criticized as a major problem in the cryptocurrency space for some time now. After all, it distorts our conception of volume. How much of cryptocurrency trading volume is real nowadays, anyway?

As it turns out, not a lot. The study, first reported by the Wall Street Journal, found that around 95 percent of bitcoin spot trading is faked. Shockingly, “substantially all of the volume” on 71 out of 81 exchanges consisted of wash trading. Some of the exceptions were Coinbase Pro, Kraken, Gemini, Binance, and a few others. However, the report is nonetheless very disappointing.

These results are far worse than those from a similar study done in September 2018 by the Blockchain Transparency Institute, which found that 67 percent of cryptocurrency trading volume was fake. The real number is probably somewhere in between the 67 percent and the 95 percent found by Bitwise.

Fake Volume, High Listing Fees

Let’s be honest with ourselves: there is no incentive for exchanges to be honest about their numbers.

When coin listings cost upwards of hundreds of thousands of dollars on some exchanges, why wouldn’t an exchange lie about its volume? By wash trading, exchanges can keep raising their listing prices. There really is no reason for exchanges to be truthful.

Yet, some would argue that listing fees are paradoxically necessary. After all, we know exchanges are a business like any other, and by having listing fees the so-called ‘scam coins’ get weeded out.

Of course, this is all incredibly controversial. The main problem we should be focusing on is not necessarily listing fees but wash trading — because the latter is comparable to false advertising.

Until widespread wash trading is resolved, the US Securities and Exchange Commission (SEC) and other regulatory bodies will remain skeptical of the cryptocurrency market. In fact, the SEC has already used this reasoning to reject Bitcoin ETFs many times now.

The Good News

Although the fact that 95 percent of Bitcoin trading volume is fake may be depressing, the report put out by Bitwise nonetheless contains some good news.

First of all, when you remove the fake volume, Bitcoin’s real trading volume is actually quite healthy. For comparison, gold has a market cap of ~$7T with a spot volume of ~$37B (0.53 percent daily turnover). Bitcoin, with its $70B market cap, has a spot volume of around ~$270M (0.39 percent daily turnover). Not bad.

Additionally, arbitrage between the 10 so-called “real exchanges,” according to Bitwise, has improved significantly. Price deviations between these exchanges are very tight. This means that Bitcoin now has a real, unified global price based on the real volume of these leading 10 exchanges. When considering the real trading volume of Bitcoin, we now also know that the CME and CBOE Bitcoin futures market volume is in line with the rest of the Bitcoin market, totaling around $91M.

Coincidentally, nine out of the 10 of these top exchanges with real trading volume are registered as a Money Service Businesses and regulated by FinCEN (with the only exception being Binance). The price correlation among these exchanges is only getting tighter, and these exchanges are instituting more and more practices to prevent market manipulation.

In effect, we are seeing a real market developing underneath all of this overbearing wash trading — and that’s very optimistic news, despite the overall depressing report by Bitwise.

[bctt tweet=”In effect, we are seeing a real market developing underneath all of this overbearing wash trading.” username=”beincrypto”]

Cryptocurrencies Need Real Demand

One thing this report has made clear is that we frankly cannot rely on free market mechanisms to establish proper trading practices on exchanges. This is because there is simply zero incentive for exchanges to be truthful. Instead, it has to be partly enforced from the top-down. In Japan, for example, all cryptocurrency exchanges need licenses from the Financial Services Agency (FSA), the leading financial authority in the country.

However, we must push back against those who say that state intervention is the primary solution to all this.

Ultimately, the reason wash trading is so widespread is simply due to the fact that cryptocurrencies are still a mostly-speculative asset.  There is no legitimate use-case for most of them, and much of the market relies on the ‘greater fool theory.’ So, given these conditions, we shouldn’t be surprised that exchange practices are especially dubious, as a result. Instead, we should keep building the digital infrastructure necessary for the cryptocurrency ecosystem to thrive; honest trading and proper regulation will naturally follow.

What do you think of this report? Are you surprised by its findings? What do you believe to be the best way to fight wash trading? Leave us your thoughts in the comments below!

Anton Lucian

Raised in the U.S, Lucian graduated with a BA in economic history. An accomplished freelance journalist, he specializes in writing about the cryptocurrency space and the digital '4th industrial revolution' we find ourselves in. Email.

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