Bitwise’s report to SEC suggests unregulated crypto exchanges fake 95% of Bitcoin [BTC] trading volume

Bitwise Asset management is in the news after it informed the United States’ Securities and Exchange Commission [SEC] that 95 percent of Bitcoin [BTC] trading volume reported by unregulated cryptocurrency exchanges were fake or non-economic in nature.

The report dated 20 March was submitted to the SEC in line with a rule change as part of their application to launch a Bitcoin Exchange Traded Fund [ETF]. Bitwise’s proposal is yet to receive any response from the SEC.

Data for 81 exchanges recording a trading volume of more than $1 million per day were included in the study. Using exchange data from CoinMarketCap, Bitwise argued,

“Despite its widespread use, the CoinMarketCap.com data is wrong. 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.”

According to the analysis, the per day Bitcoin trading volume accounted for about $6 billion, in terms of spot markets. However, this figure is misleading, the report said. It adds,

“The vast majority of this reported volume is fake and/or non-economic wash trading.”

This “vast majority” accounts for approximately 95% of the total volume. Bitcoin’s actual market, if the wash trading is not accounted for, is lot smaller, orderly and more regulated than is actually reported.

Bitwise juxtaposed the workings of Coinbase Pro, which they deemed a “real exchange,” and CoinBene, the exchange with the highest BTC volume and deemed a “suspicious exchange.” The former reported $27 million in BTC volume on a per day basis, when compared to the $480 million daily BTC volume recorded on CoinBene.

The report compared the two exchanges’ trade printing on their respective website, web traffic and real-world footprint, suggesting that there was a lack of clarity with exchanges like CoinBene, compared to regulated ones like Coinbase Pro.

“It is surprising that an exchange claiming 18x more volume than Coinbase Pro would have a spread that is 3400x larger.”

On analyzing the hourly candlesticks of “suspicious exchanges,” Bitwise noted that the arrangement and sizes were fairly consistent and hence, did not depict real-time activity. The report cited the example of CHAOEX, which poses an average daily volume of $70 million and indicates a monotonic chart i.e. showing identical volume valuations every hour of the day.

“This volume pattern is insensitive to price movements, news, waking hours, weekends, or other real world factors.”

Despite the false trading volumes, the Bitcoin market “was uniquely resistant to market manipulation,” the report said.  It argued that the market was structured in such a way that outlier coins and unregulated exchanges cannot exert unnecessary control on the collective coin market.

“We have demonstrated that the bitcoin market is an extremely well-arbitraged market, with a proven ability to ignore outlier prices, and that both the fundamental market structure and our specific NAV calculation methodology provide unique protections against potential efforts to manipulate that market.”

Coincidentally, the Bitwise report comes in the same week as a report from The Tie, which stated that some exchanges faked trading volume to attract users to their platform. The main culprits here were BitMAX, LBank, BW, and ZBG. According to the findings, the expected volume of these exchanges was less than 1 percent of their reported volumes.

Several cryptocurrency proponents praised Bitwise’s report and its findings. Anthony Pompliano, the Co-founder and Managing Partner at Morgan Creek Digital stated,

“This report is really important. Please read it. I couldn’t be more proud to be an investor in @HHorsley @Matt_Hougan @teddyfuse @martha_shear and @BitwiseInvest today”

Jeremy Allaire, the Co-founder and CEO of Circle stated that a report like this was an important precursor for the crypto-market to go mainstream,

“Great work from @BitwiseInvest helping the market understand what’s real and what’s fake. If we want crypto capital markets to go mainstream we need data investors can believe in.”

Tushar Jain, the Managing Partner at MultiCoinCap suggested action against CoinMarketCap,

“This excellent research from Bitwise shows how @CoinMarketCap is completely (and perhaps deliberately) misleading users on exchange volumes. This atrocious behavior from CoinMarketCap deserves some attention from law enforcement.”