The Cryptocurrency Wash Trading Problem

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On the first of May, CoinMarketCap announced that all the exchanges that will not provide mandatory data by June 2019 will be promptly removed from their calculations. The cryptocurrency data provider stated that the reason for this move was to provide greater transparency, accountability and accurate disclosure to the crypto space. In pursuit of transparency, all cryptocurrency exchanges will be required to provide mandatory API data including live order book data and failure to comply to this, CoinMarketCap stressed that any exchange will be promptly removed from its price and volume calculations. This condition will come into effect as of the 14th of June 2019.

Fast track the issue of crypto exchanges not submitting factual information as regards trading volumes or rather the concept of wash trading. Was trading by definition is a scenario where a trader buys and sells a security for the express purpose of feeding misleading or wrong information to the market concerned. Why CoinMarketCap is becoming strict with exchanges is because it is the number one provider of crypto trading information. As of 25th April 2019, Forbes conducted research regarding crypto exchanges and the legitimacy of their trading volumes.

Cryptocurrency exchanges are generally unregulated and this is beginning to become a concerning the maturity of the crypto space. The Blockchain Transparency Institute compiled a report at the end of 2018 detailing information collected from the top 25 crypto pairs from sixty seven different exchanges listed on CoinMarketCap and came up with shocking levels of wash trading evidence. The practice of wash trading is apparently so rampant where traders buy and sell their own orders to create an appearance of higher trading volumes than there really are as pertains a particular asset.

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Yesterday, Cryptobriefing posted a damning article after the findings of the research carried out by the Blockchain Transparency Institute pointed fingers at the crypto exchange Binance being involved in wash trading. The percentage of market manipulation displayed on Binance was not specified but it is worth noting that there are a good number of exchanges whose numbers are over 90% genuine such as Liquid, Kraken, Coinbase, Poloniex, Lykke, Gate and Bisto with Kraken being the ‘cleanest’ of them all. Kindly take a quick look at the graph provided here at the time of the report showing the real volumes as opposed to those projected on a few exchanges.

The Forbes article was coined ‘95% of volume could be wash trading…’ which seemed to agree with one of the key points from the research by Blockchain Transparency Institute that most of the trading volume pairs reported were in actual sense about 1% of what was presented. I do not know about you but I find that grossly flabbergasting. I mean there are so many strides being made in cryptocurrency and I can imagine as the investor pool diversifies and increases, they would not be happy to know that the figures being presented to them are fictional. For the most part that is. Even an anonymous crypto surveyor of sorts based in Cyprus known as Cryptointegrity comprised of independent volunteer researchers from Europe and Asia reported in February 2019 that as high as 86% of trading volumes are completely artificial.  

So what is the resolve by CoinMarketCap going to do? The data provider partnered with Data Accountability and Transparency Alliance (DATA) on a three part executive agenda. The first part is as mentioned earlier, the mandatory provision of data by exchanges that wish to have their calculations remain on the site. The second phase is in-depth analyses of the information from the exchanges, which might include wallet addresses information, live market pair status and trading data history.

The third phase is providing data users with informed insights into blockchains as they continue to grow verified exchanges onto their databases. As it stands, 12 crypto exchange companies are on board. Wash trading effect reaches as far as trading bots that make all their returns based on the information provided on exchanges. Not to mention potentially ruin investment opportunities especially with institutional investors that are steadily becoming the driving force behind adoption and evolution of crypto and blockchain.

Not to mention that the SEC could potentially use this as a basis of their growing concern over the volatile and unchecked nature of digital assets seeing that until now Bitcoin ETFs are yet to be approved. I mean the reality that the genuine trading volumes are as low as 8-50% and it’s a point to impress users, then crypto stability is in big trouble. It causes a lot of issues regarding transparency as well as trust in the information that every crypto enthusiast relies on. The extent of the effect of wash trading remains to be seen but hopefully the CMC can restore some sort of verifiable figures as soon as possible.

 

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