According to the data collected by CoinMarketCap, a company that tracks the cryptocurrency market, from more than 250 cryptocurrency exchanges, the crypto market currently sees a staggering daily trading volume of $50 to $60 billion every 24 hours. That is a noteworthy number for an industry that has a market cap of approximately $300 billion.
As much as anyone would like to believe that these stats show the rapid adoption of cryptocurrencies, the truth is far from it. We do not deny that cryptocurrencies are gaining adoption all over the world, but not as much as these numbers might lead one to believe.
There were certain suspicious cases where the prices of some cryptocurrencies suddenly increased by a considerable margin. There was possibly no logical reasoning behind the growth, no such activities from the company behind the cryptocurrency, no major bullish signs, nothing. The trading volume too increased multi-folds, reaching from a single-digit million to 100s of millions within 24 hours. And soon after, the prices went back to normal.
This raised the eyebrows of a few companies willing to find the cause behind the price hike. And they went to carry out surveys on the trading volume across major cryptocurrency exchanges. The findings were mind-boggling. A survey conducted by Blockchain Transparency Institute reported that almost 80% of the total trading volume of the top 25 cryptocurrency trading pairs were fake. It also pointed out that for currency pairs, almost 100% of the trading was fake.
Another report from Bitwise suggested that 95% of the total cryptocurrency trading volumes were fake. Reports from The Block reiterated that fact but reported that not 95% but 86% of the trading volume was fake.
The obvious question here might be, how are these fake volumes created? And what purpose do they serve?
This is where wash trading kicks in.
Wash trading is the form of trading that does not necessarily cause a loss or profit to the trader doing it but adds to the trading volume of an asset on the exchange.
To put things straight, consider a trader who has two trading accounts on the same cryptocurrency exchange. One of his accounts holds 100 bitcoins that are worth $10,000 each. Now, through that account, he places a sell order for all his bitcoins at $10,000, while simultaneously placing a buy order from his alternate account at the same $10,000.
As soon as these trades hit the market, they are executed against each other. Or, in other terms, washed out by each other. The trader does not book any profit or loss on the trade, however, he adds to the daily trading volume by a million dollars. This creates a fake volume in the market and sends wrong signals to other investors.
Multiply the above scenario 40,000 times and you’ll be looking at the total wash trading volume that cryptocurrency exchanges see these days.
While the big market players can do this to manipulate other investors to buy or sell a particular cryptocurrency, the above-stated reports mostly allege the cryptocurrency exchanges responsible for these wash trades.
Even if all the 250+ exchanges were together involved in wash trading to show fake volumes of around $40 billion, it would take each exchange to put up $160 million worth of fake trades. Every. Single. Day.
The method of high-frequency trading helps exchanges attain this “feat.” Starting around 2012, high-frequency trading was gaining traction in the stocks and forex market. This method of trading deploys computers with exceptional computing power to place tens of thousands of trades instantly.
While regulators in the trading industry remain utterly sceptical of high-frequency trading and continue to find ways to tackle wash trading using this method, their measures haven’t made much of a difference.
Though high-frequency trading was not developed to fit this cause, it has proved quite efficient for it. And seeing the wash trading stats of the cryptocurrency market, it can be said that it has served it perfectly.
Business is not an easy thing to survive, especially so when the market is only growing, but the competition is at its peak with hundreds of players in the queue already. Same applies to cryptocurrency exchanges.
CoinMarketCap shows 2,440 live cryptocurrencies. And every exchange is racing to list these currencies on their exchange in return for hefty fees. Fake trading volumes help these exchanges appear on top of the CMC list and thus allow them to gain credibility in front of new cryptocurrency projects.
The results obtained after cutting out the estimated wash trading volume differ largely as can be seen by comparing the difference in reported and adjusted trading volumes of top 10 exchanges.
In case of the ranking according to reported volume, BitMax tops the list with a trading volume of over $13 billion in the last 24 hours. However, when switched to adjusted volumes, LATOKEN tops the list and has a trading volume of only $1 billion.
This reflects the major difference in exchange ranking that wash trading can create.
Wash traders can also manipulate the prices of cryptocurrencies with low liquidity to lure other investors to invest in the coin. Again, in this case, there might be an involvement of the exchanges themselves, who, for a fee from the project, might wash trade a cryptocurrency.
Wash trading is an illegal activity in many jurisdictions while many still haven’t addressed this issue in their law books. Regulators are consistently trying to curb the manipulation of the trading market through wash trading not only across cryptocurrencies but also in other asset trading markets.
In terms of the cryptocurrency market, wash trading does more bad than good to the market. Regulators are already sceptical of cryptocurrencies, and activities such as these give them another reason to act against it. For exchanges, it might be the race to rank on top of others, but for the crypto industry as a whole, wash trading is a serious concern that needs immediate solutions.
