90% of Exchange Volume Suspicious: Time for Investigation?

90% of Exchange Volume Suspicious: Time for Investigation?

We reported last week about (alleged) suspicious trading activity at Kraken, as described by an unnamed institutional investor who recently switched to the platform. Prior to that, a major investigation into fraudulent trading activity in Australia saw 2 domestic exchange licenses rescinded. Finally, on March 18, an industry report from The Tie indicates that almost 90% of worldwide crypto exchange volume may be suspicious or outright fabricated. Do we have a crisis in cryptocurrency exchange credibility? Is it time for regulators to step in? What does this fraud mean, if anything, for the average retail crypto investor?

It’s an open secret, at this point, that many cryptocurrency exchanges create phoney volume using methods like wash trading, where assets are swapped back and forth within an exchange, even though they’re not actually trading hands between investors. Why would an exchange do something like this?

Well, as cryptocurrency bear markets drag into their second year, there are too many crypto exchanges competing for too little business. Blockchain development continues to advance, so it’s entirely reasonable for exchanges to assume that there will be more and better business in the future. By getting into the industry now, they could be well-positioned for success if and when the next parabolic bull market comes.

To make this ambition a reality, however, struggling exchanges have to survive in the meantime. This means competing for business against other struggling exchanges. Crypto exchanges are most visible on sites like CoinMarketCap.com, which displays trading data for cryptocurrencies and exchanges. Exchanges that appear at the top of their charts, due to high 24 trading volume, attract attention and gain new customers.

The Tie report analyzed trading data from 100 exchanges, including major brokers like Coinbase, Gemini, Binance Exchange, Poloniex, and Kraken. They determined that if all crypto exchanges were doing authentic business at comparable rates to these large exchanges, daily industry trading volume would be somewhere in the neighbourhood of $2.1 Billion. Daily reported volume was actually $15.9 Billion.

faking cryptocurrency volume

Inaccurate cryptocurrency trading volume is more of a risk to the industry than investors. Image: Elnur/Shutterstock.com

Faked trading volume doesn’t do any direct harm to investors but it does damage industry credibility. Investors might be right to wonder that if an exchange were willing to commit a seemingly innocuous act of fraud, might they also do something more insidious?

For now, the retail investor scene seems content to look away. Perhaps low trading volume is just too depressing. It’s unlikely that phoney volume will be deeply investigated by regulators unless other unscrupulous brokerage actions are discovered alongside wash trading.

However, this reality speaks to the need for a more mature industry, one with transparent conduct and federal regulatory standards. Cryptocurrency, as a publicly traded asset, can’t mature past its adolescence if its brokers can’t be trusted. Phoney volume may not seem like a big deal but it’s emblematic of a struggling industry in great need of revitalisation.

Featured image: Creativan/Shutterstock.com

Additional Resources:

Investing is speculative. When investing your capital is at risk. This site is not intended for use in jurisdictions in which the trading or investments described are prohibited and should only be used by such persons and in such ways as are legally permitted. Your investment may not qualify for investor protection in your country or state of residence, so please conduct your own due diligence. This website is free for you to use but we may receive commission from the companies we feature on this site. Click here for more information.