The Problem of Fake Volumes in Cryptocurrency Exchanges

Over the last few years, thousands of new cryptocurrency exchanges emerged and grew in popularity.

Those involved with the crypto-world just 2 years back may remember that during those early days, people only knew 1 or maybe 2 reliable exchanges. Those were the platforms with significant trading volume that were considered safe for the public to use.

Long and behold, today, more than 300 cryptocurrency exchanges are listed on Coinmarketcap (CMC) alone. There are many more platforms that are yet to be “officially recognized”.

In the midst of this rapid growth in different platforms, trading volume seems to be increasing as well. Almost 100 of the aforementioned exchanges report a daily trading volume higher than $50 million dollars. And from those, almost half are crossing the billion-dollar crossmark.

“What are you trying to say?” you may ask. Well, it’s pretty strange for crypto exchanges to have such enormous volumes when their Social Media channels are quiet and their user base is much smaller than other, more popular platforms.

These inconsistencies continue and become even more prevalent when reading the official report of Bitwise, with regards to fake volumes on exchanges.

You heard that right. Apparently, many of those exchanges are reporting fake trading volumes. In fact, the numbers are so different that only 5% of the reported volume is actually real.

Cryptocurrency exchange Paybis prepared an infographic to help you understand how the data was collected and which platforms present their actual volume:

Why are cryptocurrency exchanges reporting fake volumes?

Bitwise’s paper further analyses the collected data and points out two reasons for which most of these relatively unknown exchanges report fake volumes:

  • Increased popularity – Cryptocurrency exchanges that rank on the top of CoinMarketCap’s Exchange List receive more attention from the media. This results in the platform becoming more popular and authoritative in the crypto space.
  • Revenue growth – Popular exchanges are able to demand higher fees for coin listings, including ICOs, IEOs, and new Altcoins. A higher trading volume indicates increased liquidity for the listed coins, which means that more people will be willing to trade them.

Better metrics are becoming available to the public

As a result of these disturbing findings, CMC decided to introduce a new metric to help investors get a better understanding of the platforms they are dealing with.

The liquidity metric, which became available late last year, allows investors to explore different exchanges based on their actual liquidity.

Carylyne Chan, CMC’s Chief Strategy Officer had mentioned earlier that they would take Bitwise’s findings into consideration and create more trustworthy metrics to help investors make better choices. 

By using this new metric, users are able to filter through the misinformation and get a better overview of the most popular cryptocurrency exchanges.

Over time, the somewhat “bearish” discovery of Bitwise will help the crypto industry grow a become more accessible to the public.

Future outlook

As Bitcoin and other cryptocurrencies continue to make front-page news, the average investor becomes smarter and more educated. 

This means that it will be much harder for exchanges to gain people’s trust, as they will reflect on past events and be critical in their decision-making process.

Much like irrelevant cryptocurrencies, so scammy exchanges too will soon perish. Instead, with the growth and improvement of CMC’s metrics, it will be easier to analyze and discover reliable platforms and promising coins.

While exchange platforms and Bitcoin are still in their early stage of development, we have already seen a lot of progress towards a more honest and regulated market. And we believe that this trend won’t slow down any time soon.