Cryptocurrencies and wash trading

Yes, it is still happening

This is a follow up study on fake volumes and wash trading, a plague that has been affecting cryptocurrencies for a long time and will certainly continue to do so in the future.

Wash trading is an abusive practice that misleads the market about the genuine supply and demand for a stock

The reason for wash trading are multiples:

1) Exchange with high turnover ranks high on CoinGecko, CoinMarketCap and similar websites and gain additional fees.

2) Coins with high turnover are likely to attract more traders as liquidity begets liquidity, even when it’s fake. For example, in 2017 many ICO issuers paid market makers to artificially increase the volume of their token on exchanges.

By reading this article you will learn how to spot wash trading and which are the red flags that you must know to avoid falling for such traps, when choosing your trading venue and when choosing the ‘next bitcoin’.

For this analysis I focus on the last 24 hours of trading activity on Bitcoin Cash, on the x-axis you find the name of the exchange and on the y-axis the $ amount that traded. The cutoff to be on this list is 150M $ daily traded so some exchanges are missing. This is not a problem, as it is reasonable to assume that volumes follows a Pareto distribution for which 20% of the exchanges capture 80% of the volume.

The total volume sums up to 15.2B $ which is really high, as a comparison AAPL (Apple) has an average daily volume of 11.4B $ and SPY (the SP500 ETF) of 23.5B $.

Let’s have a look at the first pair responsible alone for 3B $ of turnover, BCH/BTC on the exchange BitOnBay.

source: CoinGecko

The exchange has only 8 pairs and its volume is generated 99.9% from crosses against BCH — red flag

Source: BitOnBay exchange, 48 hours of trading

Volumes are distributed evenly throughout the day — red flag

Source: BitOnBay exchange, order book

Large trades happening exactly at mid price when the bid/ask is so wide and when the on-screen liquidity is so thin — huge red flag & this is where the wash trade happens

source: BitOnBay Twitter page

Very little social base not in line for such volumes if compared to other exchanges (Kraken, Bitfinex, etc) — red flag

It is fair to assume that majority of the volume on this platform is fake, so I will proceed to remove from the previous list all those platforms that exhibit a similar behavior in their books and flows. The chart below portraits the remaining exchanges.

Exchange with no obvious patterns of wash trading

The alleged real volume shrinked to circa 5B $, a 66% reduction from the one reported on CoinGecko.

Also, this is assuming that 100% of the volume on the above exchanges is legit, which might not always be the case given that malicious actors are able to pain the tape also on the bigger exchanges.

The takeaway is that you should always do proper due diligence when looking at the reported volume and be skeptical of high numbers that look too good to be true. Don’t trust, verify.

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