At the end of 2019, Bitwise has released a 104-page white paper discussing how the manipulation of the cryptomarkets is happening and what the companies do to make the most out of it. One of the main points of discussion though was the fact that the reported volume of cryptocurrency was much higher than the actual trading volume. The findings were shocking to say the least as it came to light that almost 95% of crypto exchanges’ reported volume was absolutely fake.
Volume is the total amount of any currency swapped around in a designated time period. An exchange usually shows how much was traded during the last 24 hours. The prices of cryptocurrency are always affected by the reported volume. This is a full circle-jerk to be fair but follow us on this one.
Liquidity refers to the availability of said liquid assets to a market. In the case of cryptocurrency, this would be the reported volume. In terms of crypto, liquidating the asset means trading it into a national currency. The amount one receives is heavily dependant on the market and the exchange rate. Trading volume directly affects the liquidity prices due to the fact that it may create the feeling of a deficit or overflow of the crypto on the market. It’s very easy to see for bitcoin where different exchanges have different volumes of bitcoin and thus the price is also slightly different from the exchange to exchange. Since difference the lower liquidity the less stacked the order book will be thus it will result in the trading volume going down in tandem. So basically if liquidity is down, the prices will be changing and the liquidity is affected by the reported volume of a cryptocurrency.
Why Report a Fake Volume?
One of the biggest reasons is to manipulate popularity and attract new users. The higher the volume is more authority cryptocurrency has. This is due to the fact that the volume affects the listing on crypto charts. This draws more media attention and increases the value of the cryptocurrency. The more value the higher profit for the company.
Another reason is that the higher listing will attract higher fees from the cryptocurrencies that want to be listed on their platform. In this manner, the higher volume results in more trading and thus increase in the liquidity. This attracts traders who then utilize their leverage to open their positions for a much higher value than the investment needed. The exact strategy of how to use leverage when trading is heavily dependant on the trader themselves and varies from culture to culture. However, it is obvious that the more interest there is from traders, the higher the daily exchange volume the better it is for the profits. Due to these fake reports, the CoinMarketCap (CMC) has added a new metric to its website. The liquidity metric allows users to compare different cryptocurrencies to each other and figure out which one has a boosted liquidity and which one doesn’t. The Chief Strategy Officer of CMC, Carylyne Chan has stated in her interview that this new meter is supposed to “clean up the misinformation.”
Six out of ten in total platforms, which presented the actual volume were all based in the United States of America. In the same pool, the only platform which his not considered to be a Money Service Business (MSB) is Binance. Additionally, the most important fact is that the US-based crypto exchanges are all regulated under the New York State Department of Financial Services (NYDFS), which is a department of the new york state government ad the regulatory body of financial services and products including banking and financial services laws. The document presented by the Bitwise is quite clear on their idea that this is mostly due to the fact that these companies are much better regulated than the ones outside of the US and thus have been truthful in their showcase of the actual volume of a cryptocurrency.
Evolution of the Cryptocurrency Market
Basically, a lot has changed since cryptocurrencies became popular around 10 years ago. We went through different turmoils with bitcoin reaching its all-time high in 2018. The market was designated as “wild wild west” back in the day. Yet it is becoming apparent that more high-level institutions like banks, governments, and countries are getting involved trying to find ways of creating the government-backed cryptocurrencies with Venezuela’s Petro, Chinese digital Yuan, South Korean digital Won.
Fake volumes in the cryptocurrency market are still an issue, however, it has already been shed light on and thus the attention has been shifted to creating safeguards to avoid such manipulations. Unfortunately for small and irrelevant cryptocurrencies, they will inevitably disappear as bitcoin gains more authority as a currency and a long-term investment due to the overall stability of its pricing. This goes against the scamming crypto platforms as well due to the fact that the investors are keener on transparent and trustworthy platforms.