Author Topic: Chasing fake volume: a crypto-plague  (Read 46 times)

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Chasing fake volume: a crypto-plague
« on: May 16, 2018, 04:49:07 PM »
It seems that you are paying some attention to exchanges with fake volume. I can assure that when it comes to this topic, not many investors are truly taking it seriously. In this piece I will expose why I believe more than $3 billion of all cryptoassets’ volume to be fabricated, and how #1 exchange rated by volume, is the main offender with up to 93% of its volume being nonexistent. I’ll endeavour to prove it by analyzing publicly available data.

I decided my metric of choice would be to collect orderbooks from all major exchanges, and to measure how badly market selling $50k USD worth of each cryptocurrency would crash the price. Throughout this article, I will refer to this number as “slippage” (see the annex for a proper definition). I would later refine my slippage metric by selling more or less on each exchange depending on the volume they processed, and changing the sold amount with regards to the currency market cap.

I expected that slippage should generally be a decreasing function of volume, but that some differences might show from one currency to another. After all, if you have a gargantuan volume on a given pair, there has to be a very high competition between market makers to satisfy the avid buyers and sellers. And that kind of competition is bound to densify orderbooks and reduce spreads.

I would like to slip the thorough analysis and let you have your own consideration. You are encouraged to leave a comment on this result:

1. OKex is a ghost town

OKex ranks first in the list with the total market cap of $1.7 million. Data can be collected from 02 websites: CoinMarketCap and LiveCoinWatch.
A bit of wash trading and artificial volume inflation is to be expected in a thoroughly unregulated market. What I did not expect was the magnitude of the fraud.
As obvious as it is that most of OKex’s volume is doctored, how do we go about estimating whether it’s 90%, 95%, or 99% fake?
I used data from the following exchanges: Bitfinex, GDAX, Poloniex, Bistamp, Gemini and Kraken. Given the volatility of the dataset at lower volumes, I also decided to change the metric I used: instead of a $50k marketsell, I simulated a $20k one.

Arguably, the regression I used could not be very accurate on very high volumes, for lack of a robust dataset. It only seems fair, then, to discard the BTC/USD pair. Still the number remains ridiculously high: about 92.9% off all OKex’s volume is most likely fabricated.

2. Huobi, a close runner-up
Similar to OKex, Huobi shut down following China regulatory crackdown, to better re-open later under the licence. Following the same methodology:

Huobi data, and estimated % fake volume
81.8% of made-up volume, not quite as shameless as their most direct competitor but still extremely high.

A quick glance at their trading history easily confirms that although the volume appears much, much more organic than OKex’s, there still exists a strong background of constant low-key wash trading:

3. HitBTC and Binance
For a variety of reasons, I had suspicions about two leaders in the altcoin space, HitBTC and Binance. It’s easy to see that, for a given volume, both exchanges, especially Binance in orange, appear significantly less liquid, and as such, suspicious.

Running the same analysis we did for OKex and Huobi before yields the following results. First for HitBTC:

The numbers cannot be deemed significant. Although they prove that HitBTC is slightly less liquid than the reference exchanges, such a small difference between claimed and re-estimated volumes can stem from a number of reasons, including mere variance.

Binance results are however more intriguing:

A 70% difference with our mathematical prediction is worrying. But it serves to remember that the input of the model is slippage in a given trading pair, which is not entirely endogenous to sheer volume.

Indeed I know from having experienced it first-hand that Binance has a pretty restrictive policy when it comes to API-trading. I spent some time debating them how I believed such rules to be utterly stupid, as they would only hinder their exchange growth and liquidity.

Indeed, because of these restrictive trading rules, it is quite likely that many people running market making strategies across several exchanges would be reluctant to implement the same strategies on Binance, as they would constantly get banned without ever knowing the actual limits they should not have crossed.

With fewer professional market makers, it is easy to see how orderbooks become thinner and the hereby introduced model might be completely off. It could however serve well to keep a close eye on Binance claimed volume in the future, although inspecting their volume history does not show any obvious suspicious activity.

By my reckoning, over $3 billion dollars of daily volume is nonexistent. Possibly more. Yet somehow, the practice is, if not encouraged, at least thoroughly ignored by popular data aggregators and most of their users, when all anybody really has to do is have a look to figure out that something is amiss.

Cryptoassets are in a dramatic bear market at the moment, following the bullish frenzy of 2017. It is my belief that growth cannot resume until we have achieved a sound enough trading environment. The ecosystem market cap and awareness have blown way past the point when we could afford to allow such blatant manipulation.

“Crypto doesn‘t need regulation!”, we all claim. It is high time we proved it. Because as it stands the state of crypto is arguably a testament to the failure of the free-market.

Finally, I have not listed all exchanges that I believe to be doctoring their volumes. Off the top of my head, simply by looking at trade history charts, Tidex, Liqui and Wex are all guilty to some unquantified extent (unquantified, but probably high). Most likely many more. Investigating the OKex future contracts, if possible by any means, could also yield interesting surprises, as they also claim huge volumes on futures.

Popular exchange Bittrex is absolutely clean. As best as I can tell, so should be exchanges such as Cryptopia or Kucoin (with a shade of a doubt on the latter, which I know for sure kickstarted their activity with a ton of very obvious washtrading)

For lack of data, I have not explored most Korean exchanges. Bithumb seemed OK, but I’d have to double check. No idea about Coinnest or Upbit.

The writing only delivers my personal opinion. You are advised to do more research and enrich your knowledge. It should be borne in mind that cryptocurrency market is fiercely risky. You are highly recommended to conduct thorough analysis. Good luck!