Are Crypto’s High Trading Volumes a Scam?

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Are Crypto’s High Trading Volumes a Scam?

Not unexpectedly, when cryptocurrencies’ values climb, the amount of trading in them rises as well, creating a feeding frenzy. Despite their brief history, cryptocurrencies have amassed trade volumes that would make a global firm jealous.

When the price of a bitcoin (BTC) topped $40,000 in late July 2021, trade volume reached $9.2 billion. This represented a price and volume resurgence. For months, daily average volume has been drifting below $2 billion, only to begin to rise in late November 2020.

In comparison, General Electric Business (GE), which became a publicly traded company in 1962, trades over 5.6 million shares every day, totaling approximately $560 million.

The primary benefactors of increased trade volumes are bitcoin exchanges, who profit from transaction fees.

But there’s a catch: certain cryptocurrency exchanges have been falsifying their volume figures in order to boost their exposure and attract more consumers. That’s simple to accomplish in the opaque realm of global crypto trading.

An attempt is now underway to compel the exchanges to provide true data. This effort is being driven by financial media and cryptocurrency-related websites, at least some of whom have been fooled by misleading volume statistics posted by crypto exchanges.

  • Some cryptocurrency exchanges are reportedly inflating their volume figures by utilizing bots to increase transaction volume.
  • The goal is to increase the exchange’s profile and attract new investors.
  • The websites that follow the crypto business are attempting to address the issue.

How Crypto Sites Can Fake Volume

According to Coindesk, a student at Moscow State College started a firm that assists obscure crypto exchanges in faking high trade activity. He accomplished this by creating numerous accounts on an exchange and utilizing bots to regularly trade between the accounts.

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The idea is to generate enough trading volume to place exchanges on lists monitored by the widely regarded CoinMarketCap website, therefore attracting the attention of genuine cryptocurrency investors.

According to a Coindesk post from July 2019, this Russian kid’s firm is just one of several across the globe that assist nascent exchanges. “You have to fake it until you make it.”

Trading Incentives

A Bloomberg analysis detected abnormalities in the trade volume of Singapore-based bitcoin exchange Bitforex. The exchange offers an incentive scheme that is connected to the transaction fees that the exchange charges its customers.

Users may earn $1.20 in digital tokens for every $1 spent on transaction fees with the Transaction Mining program. Several users on the site had several accounts and utilized bots to enhance trade volume across their accounts and earn a lot of tokens.

If the value of the dispersed tokens rises, the transaction is lucrative.

These transactions are known as wash trades, and the US Justice Department has already launched an inquiry against cryptocurrency exchanges that participate in the practice.

The lack of a link between the number of website visitors and trade volumes is another warning signal for Bloomberg.

Trading volumes in the billions of dollars are being reported by cryptocurrency exchanges with little website visitors. According to Bloomberg, eight venues with the greatest volume to visits ratio account for 40% of deals at the top 30 exchanges classified by Coin Market Cap.

Why Trading Volumes Matter

Large trade volumes on cryptocurrency exchanges serve two functions.

For starters, they assist to minimize huge price fluctuations in a cryptocurrency’s price following a major sale. This is the advantage of liquidity, which most investors cherish.

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Second, they are proof of a cryptocurrency platform’s dependability and markers of user trust in an emerging business that has risen to prominence as a result of scandals and frauds.

Trading volumes are also crucial price movement indicators: an increase in trading volume is often seen as a prelude to a large price change.

An Ongoing Problem

This is not the first time bitcoin exchanges have been accused of inflating trade volumes. In a report published in 2018, trader and investor Sylvain Ribes discovered that OKEx, a China-based exchange with among the biggest trading volumes, saw massive slippage when a $50,000 transaction of cryptos was conducted. When he reduced the trade amount to $20,000, the outcomes were comparable. Ribes arrived to the conclusion that about 93% of OKEx’s volume was faked.

Experiments on other cryptocurrency exchanges yielded similar results. He calculated that 81.2% of trade activity on Huobi, another major Chinese exchange, was false. HitBTC and Binance, perhaps the largest crypto trading platform, both reported significant slippage.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the author to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site.

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