The crypto industry has a major problem with how trading volumes are reported to data aggregators like CoinMarketCap.com. Much of the volume is overstated for a variety of reasons, and complaints of “fake volume” permeate the industry. Numerous studies have been conducted that document the “fake” level and disclose the reasons for such misrepresentations, but the core of the issue is the published rankings of exchanges, which today are based on, you got it, trading volume reported. Researchers are now pondering other methods for producing these rankings going forward.
During 2018, the Blockchain Transparency Institute developed new tracking algorithms to detect via analytical means where over reporting was taking place in the crypto exchange network. Their results were shocking. Per one report:
Over 80% Of The Top 25 BTC Pairs On Coinmarketcap Is Wash Traded…
The report also revealed that:
Most of these pairs have an actual volume of less than 1% of the volume reported on Coinmarketcap. Of the top 25 BTC pairs crypto exchanges, only 2 were discovered not to be wash trading their volume: Binance and Bitfinex.
The next part of the puzzle came when Bitwise, an asset management and research firm, prepared a special report for the benefit of the SEC, regarding Bitcoin volume. The company confirmed that 95% of Bitcoin trading volume is fake. CoinMarketCap.com, the most quoted data aggregator in the crypto system, “has posted daily trading volume for Bitcoin of nearly $6 billion per day, but the actual figure, based on several reliable analytical methods, is more likely to be $273 million per day, concentrated within the top ten exchanges”.
Why the fake volume and what can be done about it? The reasons vary, i.e., wash trading, promoted “bot” trading, and other gamesmanship that has been prohibited on traditional regulated equity exchanges. The driver is the competitive need of exchanges to draw new customers and extort high listing fees from ICO tokens seeking to be listed on an active exchange. The thinking by researchers is that a change in the ranking rubric could put an end to deliberate attempts to over state volume statistics.
There is another development that could force the change, as well – the issuance of exchange tokens from an “Initial Exchange Offering”, where rewards are granted in the form of tokens for trading. Per one researcher:
Ranking exchanges purely by volume – reported or otherwise – may soon be a fallacy in and of itself, as the trend of “initial exchange offerings” gives rise to more “transaction mining.” Transaction mining is where users earn tokens for making trades; this may increase the volume but does it mean the exchange is more significant?
ViewBase, a “market insights and community” platform centered around cryptocurrency, recently released a whitepaper that discusses possible ranking alternatives to basic trading volume stats: “Rankings could be based on real facts, like how much crypto they hold or the value of all their tokens combined.”
The firm listed three possible alternatives. The first one follows from the above quote, i.e., use total value of all tokens at the exchange. The second method only looks at ether balances, but the last method expands that figure to include the value of all ERC-20 tokens. The term relates to all tokens that comply with the number “20” standard that deals with smart contracts on the Ethereum blockchain platform – “Ethereum Requests for Contract” or “ERC”.
Why would this technical drill down offer reliable data? Per ViewBase: “A vast majority of Initial Coin Offering (ICO) tokens are issued on the Ethereum blockchain, ranging from established projects like Omisego to the latest IEO tokens like Fetch.AI and Celer. Hence it is reasonable to expect the valuation of ERC20 tokens deposited on an exchange to be reasonably proportional to its reported trading volumes.”
Either one of these methods would necessarily reshape the “Top Ten” rankings, as we know them today, but each method replaces volume with some measure of the actual crypto holdings of exchanges. The process of change has started. ViewBase concludes: “If we’ve learned anything from all the fake volume scandals over the past year, it’s that volume is not necessarily the best way to judge an exchange. While it’s an important metric, especially for traders who require a lot of liquidity, there is a lot more to exchanges than the number of times tokens change hands.”