Yesterday I talked about Tether moving over from Bitcoin to Ethereum, and why that will increase Ethereum’s network effect.
As I said, the network effect is one of the most important factors in any new technology. Basically the more users a technology gains the more valuable it becomes.
Think Facebook, WhatsApp, Twitter, Microsoft Windows, Android, Chrome, etc. More users = higher value.
With that in mind, it is in a crypto’s interest to get big trading volume numbers on exchanges. This shows that people are taking an interest in it and are actually using it. It shows its network effect is increasing.
It is also in exchanges’ interest to have large volumes of crypto traded. The higher volume your exchange has the more trustworthy it seems, and the more liquid its markets are, so the fairer its prices will be – at least in theory.
Why scammy exchanges and shady crypto projects love fake volume
So, we can see that more volume is good for crypto projects and good for exchanges. The trouble is, many less than honourable projects and exchanges are happy to fake this volume via wash trading.
Here’s how it works:
Crypto projects – or investors who want to make those projects look poplar – engage in wash trading across different exchanges.
Many exchanges allow this to happen under their watch because exchanges make their money from fees. So more transactions = more money for the exchange. Not only that, but it makes the exchange actually look more reputable as its trade volume is higher.
Wash trading is basically selling and buying an asset at the same time for the same price. The person doing it doesn’t end up losing much money because they are simply selling to themselves. The only money they lose is in exchange fees.
However, those exchange fees are usually well worth it to the wash trader as it can end up pumping the price of their crypto, as it gains attention, and then they can sell it at a higher price than it’s really worth.
In regulated markets wash trading is illegal. But, as you may well know, crypto markets are unregulated.
So people can make a lot of money wash trading.
Just how much of the volume in crypto markets is wash traded and therefore fake? Around 90%, according to Bitwise’s latest market surveillance report from April 2019.
From Bitwise (emphasis mine):
All exchanges combined are currently reporting around $50 Billion in daily volume on CMC. After removing all the wash traded volume via our algorithms the accurate number is around $4-5 Billion. About 88-92% of daily trading volume is fabricated depending on the day. Bitcoin’s daily trading volume is about 92% fabricated, which is in line with the space as a whole when comparing our findings to top data sites reporting wash traded volumes.
On our list of the top 40 largest exchanges with actual volume, Bitcoin’s volume is about 65% fabricated. Almost all of this fabricated volume comes from OKEx, Bibox, HitBTC, and Huobi. Of the top 25 tokens by marketcap, Tron and Ethereum Classic are the highest wash traded tokens on our list at 85% fake volume each and coming in at #24 and #25 of the most wash traded tokens.
This is why there is a growing number of crypto investors who no longer use coinmarketcap to get crypto price information.
Coinmarketcap is now trying to address the fake volume problem. But in its place, a number of rivals have sprung up that only use figures from exchanges with verified volume.
OpenMarketCap.com is probably the most well-known of these, but there are others.
As it says in its FAQ:
What is OpenMarketCap?
OpenMarketCap (OMC) is a cryptocurrency data tracker that only uses prices and trading volumes from trusted exchanges in calculating average prices and total volumes for coins.
Why are your trading volumes lower than the numbers on CoinMarketCap?
CoinMarketCap calculates trading volume and prices using data from over 245 exchanges, many of which report fake or suspicious trading activity based on research by Bitwise. By including exchanges with suspicious trading activity, other crypto-trackers significantly over-estimate the total trading volume.
OMC presents a more accurate representation of cryptocurrency prices by calculating trading volume from 10 trusted exchanges. We selected these 10 exchanges based on the Bitwise report. See our list of trusted exchanges.
So, what can you do to avoid getting scammed by cryptos and exchanges with fake volume?
The best way to avoid cryptos and exchanges with fake volume is to only use exchanges that have passed Bitwise’s testing.
As Bitwise said in its report:
We found 17 of the CMC Top 25 exchanges to be over 99%+ fake with many greater than 99.5% fake volumes, including 35 of the top 50 adjusted volume rankings. These exchanges have been completely discounted from appearing on our new site and rankings tables. Over 60% of all exchanges ranked on popular data sites have little to no volume and were found to be over 96% fake each.
These are the top exchanges in the world by real volume, according to Bitwise’s latest rankings:
If you want to get up to date numbers, you can find their rankings page here: https://www.bti.live/exchanges/.
However, the best way to avoid getting scammed when investing in crypto is to educate yourself. And if you want to do that, you should make sure you’re available at 2pm on 16 July.
That’s when Sam Volkering – who bought Bitcoin at $12, and made a 20,000% gain in Ripple – will be giving a special online presentation.
In it he’ll be sharing two crypto plays that he believes could turn £50 into £10,000, as well as sharing his insight on the crypto market and showing you the number one thing you can to getting scammed in crypto.
Until next time,
Editor, Exponential Investor