Crypto Conspiracy – ICO Teams are Paying for Inflated Volumes


Conor Maloney

October 25, 2018

The rumors of inflated trading volumes are nothing new in the crypto world. OKEx was recently accused of doctoring exchange volumes to take the “number one” spot as the exchange with the highest volume in the world, with investor Slyvian Ribes publishing a report claiming that as much as 95% of the volume may be fabricated.

Scams, deception, and fraud are all rife in the crypto space, and the ICO market in particular has contained a significant criminal element with 1 in 5 ICOs being scams, but that’s not the only way to pull the wool over the eyes of investors.

To incentivize more investors to purchase tokens, it’s often valuable to give the appearance of high volume to indicate that a particular token is a sought after commodity and has a high liquidity that makes it easy to trade seamlessly on exchanges.

It seems that it is also common practice for token teams to pay for inflated trading volume – here’s how they do it.

Paying for Inflated Figures

The Blockchain Transparency Institute released data stating that 67% of the relatively unregulated cryptocurrency market is affected by wash trading, the creation of artificial trading activity. Data aggregators like Coinmarketcap have a tendency to ignore this kind of activity as well as ‘pay-to-play’ arrangements which are reportedly commonplace between small-cap coins and unscrupulous exchanges out to make a buck.

“Exchanges with the most unique visitors per month likely have the most customers, which generally means they have more daily traders and hence higher trade volume.

When the trade volume of a particular exchange calculated this way is significantly less than the trade volume the exchange claims, that suggests that there is wash trading going on. This is a form of market manipulation.”

Wash trading is, in regulated markets, illegal in many countries such as the US. Exchanges take bribes from smaller tokens to list them which of course boosts volume a little, but there are also firms which sell services offering to inflate volumes according to The Block’s analysis of said firms’ marketing materials, with the following notable example among them:

“We make volumes on any exchanges where you are listed. Your project becomes more and more prestigious because of good trading volumes and CoinMarketCap listing.”

There it is, explicit offers to fabricate the volume in order to trick investors into believing you have a more valuable product on the market.

One such firm, Token Boost, offers multiple package services:

Minimum package
$70 000 total volume – 3,5 ETH per week
Stable package
$175 000 total volume – 7 ETH per week (20% discount)
Standard package
$450 000 total volume – 16 ETH per week (30% discount)
Full package
$700 000 total volume – 21 ETH per week (40% discount)
It’s worth noting that while highly unethical and fraudulent, this is all (for the time being) completely legal practice in the cryptocurrency market, and the BTI believes that $6 billion of the daily reported ‘volume’ in the crypto market is actually fake wash trading.

The Fight Against Fake Trading Volume

The CEO of FRST, a Chicago data technology provider, says that many trading firms are understandably put off from the crypto market due to the untrustworthy nature of the data we’re given, citing the lack of tools capable of spotting fabricated volume as a major issue.

“There are a lot of companies out there who say they would love to move a foreign exchange guy to build a new crypto desk, but they are generally unsatisfied with the tools,” Karl Muth, chief executive officer of FRST, said. The firm recently announced it raised $3.4 million to build out its team. Investors include CMT Digital and Vestigo Ventures, the firm announced.

FRST has developed a desktop application through which the firm offers backtesting as well as trading solutions, allowing clients to determine whether their trading strategies are viable and would have outperformed the market in the past using previous data to test the future use case for that strategy. The firm’s tools analyze granular data which can help traders identify when volume has been falsely inflated by wash trading and when it is legitimate.

Muth stated that FRST has identified a particular form of wash trading where exchanges transfer coins over and and over again between different wallets to inflate the volume either for the exchange, the token, or both.

“This activity — wash — will show up as on-chain, legitimate volume and will ‘fool’ traders’ triggers and algorithms that have threshold volume variables,” Muth said, noting that one particular exchange rebalances its entire treasury at the end of each day to include this data into the ‘volume’. Muth claims that traders using FRST’s platform can identify wallets involved in this kind of trading activity by connecting wallets with unusually high back-and-forth transfer together.

“FRST’s technology to identify which wallets are related — and distinguish between movements of tokens among wallets that are closely-related and unrelated, traders can set rules and build models that excludes related-party activity and more accurately portray the amount of market activity in a given token,” Muth said.

Some trading shops have been actively manipulating the market for years, such as DV Trading and DRW in Chicago. DV Trading was recently fined $5 million by the CFTC for wash trading which took place between 2013 and 2015 by three of their in-house traders. Of course, this fine was for wash trading in the regulated markets, not in crypto, but DV Trading has long been active in the crypto space as well.

Meanwhile, DWR has been accused of spoofing the market in an article asserting that the firm:

  1. Found a perceived flaw in a futures contract and exploited it.
  2. Described companies that took the opposite side of their bet as “suckers.”
  3. Bet was not as profitable as initially expected.
  4. Placed thousands of bids to move settlement prices in their favor (aka “Banging the Close”).
  5. Described contract as the “ultimate of illiquid products. No one else around.”
  6. Regularly pulled bids after 15-minute settlement period (aka “Spoofing”).
  7. Never got their bids hit

Along with research groups like the Blockchain Transparency Institute. Muth believes that his firm, FRST, has the power to combat this kind of adoption-hindering activity and bring more transparency to the world of crypto trading.

Subscribe to our newsletter

Interested in other cool crypto content? Check out Interview with Q: The cryptocurrency trading BOT maker and Wanchain: One chain to rule them all?

Follow us on twitter @cryptoiscoming