Analysis

More Regulations, Fewer Chances of an ETF as Wash Trading Data Revealed

Bitwise Asset Management recently presented a series of alarming findings on the Bitcoin market to the SEC. What's next?

It’s not exactly bold to say that market manipulation is happening in the Bitcoin market. While Bitcoin’s distributed-ledger network is somewhat more transparent than most financial markets, the distribution of wealth is, unfortunately, just as uneven as it is in most of the rest of the world–although most of the largest players are individuals, not banks.

And market manipulation is a major problem in regulated markets–therefore, it’s unwise to ignore the likelihood that it’s taking place on a comparable (or even larger) scale than in most of the financial markets we interact with on a daily basis.

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Market manipulation on the Bitcoin network has been a major concern of the US government’s financial regulators, particularly when it comes to the approval of Bitcoin ETFs.

“What investors expect is that trading in the commodity that underlies that ETF makes sense and is free from the risk of manipulation,” US SEC Chairman Clayton said at the Consensus Invest Conference in Manhattan last year. “It’s an issue that needs to be addressed before I would be comfortable.”

A growing number of firms have put their hats into the ring to get their Bitcoin ETF application approved, each of them downplaying the threat of market manipulation in one way or another. However, Bitwise Asset Management–one of the latest firms to apply for the chance to launch a Bitcoin ETF–has taken a slightly different approach.

In what could be described as a touch of reverse psychology, Bitwise told the SEC in a recent presentation that in fact, market manipulation is a major concern when it comes to Bitcoin. However, the firm has worked to identifying precisely where, how, and why it is happening, apparently in hopes that by unearthing the “real” Bitcoin market, it can dispel the SEC’s fears over how bad market manipulation really is.

95 Percent of All Bitcoin Trading Volume is Fake

The data that Bitwise presented was shocking. Among the findings was the claim 95 percent of all reported Bitcoin trading volume is fake; that the $6 billion average BTC daily trading volume is really just $272 million. Only 10 of the 81 exchanges that the firm analyzed seem to be reporting “real” trading volume.


Bitwise claims that the misinformation around trading volume is being spread by CoinMarketCap, a website that reports minute-by-minute trading data on nearly every cryptocurrency and every crypto exchange in the world. The site is relied upon by nearly everyone who has anything to do with the cryptocurrency industry–its data is regularly used by major news sources, including the New York Times and the Wall Street Journal.

Indeed, CoinMarketCap has significant influence over the cryptocurrency industry, both inside and out. According to a Bloomberg report, the site is one of the 500 most-visited websites in the world, and its actions have directly influenced cryptocurrency prices in the past. In one instance when the site removed several South Korean exchanges from its platform last year, Bloomberg says that the move “resulted in a sharp decline in most cryptocurrencies’ prices listed on the site.”

“Despite its widespread use, the CoinMarketCap.com data is wrong,” reads the Bitwise report. “It includes a large amount of fake and/or non-economic trading volume, thereby giving a fundamentally mistaken impression of the true size and nature of the bitcoin market.”


And this isn’t the first time that CoinMarketCap has been accused of reporting fake volume (although the last set of accusations were from a much less reputable source.) In May of last year, a cryptocurrency trader named Andrew Rennhack created a google spreadsheet that he dubbed ‘Honest CoinMarketCap.’

At the time it was created, the spreadsheet showed that Bitcoin’s 24-hour trading volume was $1,508,351,500.00, while Coinmarketcap lists it as $8,281,980,000.00, a discrepancy of roughly 80 percent–not quite as severe as Bitwise’ claim that 95 percent of BTC trading volume is falsified.

CoinMarketCap didn’t respond to Rennhack’s claims. However, this time around, the site came out and admitted that concerns over fake data on its platform are indeed “valid.”

As a result, CoinMarketCap told Bloomberg that it would be adding additional information and tools–liquidity measures, hot and cold wallet balances and traffic data–to assist its users in seeing a more accurate picture of the cryptocurrency markets.

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How Does Inflated Trading Volume Affect Everyday Crypto Traders?

Why has wash trading and inflated volume reporting become such a huge problem in the cryptosphere? The simple answer is greed–cryptocurrency exchanges with higher trading volumes can charge higher listing fees for new coins.

According to a report by CCN’s David Hundeyin, the scam is well-illustrated by CoinBene, a cryptocurrency exchange that CoinMarketCap lists as the exchange with the highest trading volume in the world.

“The scam is transparent,” he wrote. “Fake a high trading volume, and attract ICO suckers who want to get their sh*tcoin listed on a high volume platform without going through the regulatory processes of say, Coinbase or Gemini.”

“In return for helping them jump the queue, charge them as much as $3 million per listing, and smile to the bank as their sh*tcoin inevitably sinks and eventually turns into a deadcoin. It’s almost like a victimless crime.”

“Almost” a victimless crime–however, unsuspecting users who may have believed the hype around one of these coins could stand to lose a lot of money with absolutely no opportunity for recourse.

Not All Bad News: The Futures Market Has a Bigger Impact Than We Thought

Amongst all of these grim, jaw-dropping findings were a few positive points. Bitwise claimed that the fact that Bitcoin’s daily trading volume is so much less than what is being reported means that the actual Bitcoin market is “smaller and more regulated” than it seems.

Alon Karniel, VP of Marketing at Algoz, the crypto arm of the Fingenom Group, pointed out to Finance Magnates that in fact, “[Bitwise said that] despite the fake volume data, when considering the bitcoin real market cap, the actual volume is reflecting healthy market compared to the gold market.”

Alon Karniel, VP of Marketing at Algoz, the crypto arm of the Fingenom Group.

Additionally, Bitwise’ report also pointed out that because the “real” BTC trading volume is so much smaller than what is widely believed, Bitcoin futures market is much larger in relation to the spot market.

Indeed, the average combined daily Bitcoin futures trading volume on CME and Cboe is equal to some $91 million, a little less than one-third of the $272 million in Bitcoin that Bitwise size is traded on crypto exchanges every day. The sum of the futures market’s volume is approximately 83 percent of the $110 average daily Bitcoin trading volume on Binance, the cryptocurrency exchange with the largest “real” volume.

The fact that the Bitcoin futures market is relatively so much larger to the Bitcoin spot market means that the futures market has a much greater effect on the Bitcoin ecosystem than previously believed (although Cboe is planning on suspending its Bitcoin futures product in the near future.)

Bitwise also explained in its report that the Bitcoin futures market has significantly contributed to the health of the BTC ecosystem as a whole. According to the report, the launch of Bitcoin futures products on CME and Cboe “fundamentally transformed the bitcoin market, creating a two-sided market and easy hedging for the first time.”

Further, “the launch of futures, the development of lending and the arrival of major market makers combined to dramatically improve the efficiency of the bitcoin market in 2018, creating a dynamic, institutional-quality, two-sided market for the first time.”

Even if the ETF Doesn’t Get Approved, Bitwise May Have Inspired the SEC to Take Regulatory Action

Bitwise’ strategy of addressing these major problems has definitely made huge splashes within the cryptocurrency world. But will it be effective in getting its Bitcoin ETF application approved?

“They provided somewhat of an honest view on the market answering to most of the problems the SEC was referring to in the past,” Karniel explained. “Although we are sure that the SEC will appreciate the honesty, not sure that waiving all the flaws the Bitcoin markets still suffers from will help Bitwise get their wishful approval.”

On the other hand, companies who haven’t adequately acknowledged the SEC’s concerns in the past haven’t had much luck, either. “There were multiple entities who filed ETF proposals with the SEC (like Gemini and CBOE), and even started in dialogues with the SEC,” Karniel said. “However, it appears that all such requests failed to fully address the Commission’s concerns around market manipulation, custody, liquidity, pricing, and arbitrage.”

Even if a Bitcoin ETF approval isn’t in the cards for Bitwise, its report may cause the SEC to take action against fake volume reporting in the crypto world. “In order to curb fake volume the SEC will have to set clear rules for trading in which investors’ money will not be exposed to price fluctuations resulting from manipulations and high-risk volatility, and of course to enforce these rules,” Karniel explained.

This could eventually eliminate much of the fraud that plagues the crypto economy. “By doing that, entities who want to stay in the game will have to follow the new rules in order for the investors to invest through them,” said Karniel. “Those who do not follow the rules will remain out of the game, which in itself will reduce many exchanges that exist today and are not [regulated] by anyone.”

Putting the Cat on the Table

Indeed, Bitwise’ report has really ‘put the cat on the table,’ to quote a Finnish expression that describes the act of speaking frankly and honestly about difficult topics. And it’s likely that the SEC will not be the only government or self-regulatory body that changes its behavior according to the findings.

However, as CEO of Pactum Capital Daniel Cawrey pointed out in a CoinDesk report, it’s possible that “fake volume on crypto exchanges isn’t the half of it”–even among the exchanges that do allegedly report “real” volume, close ties with unregulated and arguable untrustworthy companies like Tether present an entire set of new problems.

Truthfully, so many questions remain in the cryptocurrency industry that the Bitwise findings may have merely opened a regulatory wormhole that we may not see the other side of for a long, long time. But hey, you have to start somewhere.

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