Look on the Bright Side: Crypto Winter Kills Fake Exchange Volume

Conor Maloney

March 23, 2019

Make no mistake, the recent decline known as “Crypto winter” has been devastating for industries in the space. While CEOs put a brave face on when facing the public, there’s only so many ways to put a positive spin on laying off over half your work force.

That’s something we’ve seen recently with Steemit, ConsenSys, ShapeShift, and BitHumb, although the latter seems rather surprising. Surely a company with over $1 billion in daily trading volume can afford to hang on to 150 staff members, right?

Fake Trading Volume

Multipe exchanges have been accused of falsifying trading volumes, with varying degrees of evidence. Doing so makes the exchange look like its doing more business and gets its name out there, thus drumming up more business – here’s how it works.

Traders sell and then immediately re-buy a financial instrument, eating the fees to make it look like an inflated number of traders are taking part in trading and that there is more demand for a particular asset than there really s. The process can also be carried out with bots.

It’s called wash trading, and like many practices that are illegal in the traditional financial sector, it’s unregulated and thus totally legal in crypto. One thing we’ve really seen over the years is an influx of professional, veteran stocks and forex traders with an understanding of these manipulation tactics realize that they can take the skills they’ve honed at personal risk and in secret in the regulated markets and apply them to crypto where there are many inexperienced traders to prey upon as well as no regulations.

Exchanges could arguably be turning a blind eye, encouraging, or even orchestrating this type of activity to generate more fees and, of course, attract more traders.

Why Do Exchanges Participate In Wash Trading?

Competition amongst the exchanges is fierce. They are under pressure to seek high-margin activities outside the scope of traditional financial regulations. These activities rely on high volume which equates to higher listing fees and liquidity. Eventually, traders become drawn to higher-volume exchanges, which then facilitates the listing of more trading pairs, creating a cycle of growth.

An even more underhanded reason for doing this is listing fees. Projects spend an average of $50,000 for exchange listing, and many exchanges are created purely in an effort to convince projects to pay them for listings. Faking trading volume is a huge reason to do that – the more trading activty there is (or appears to be), the higher they can charge projects for listing.

“If you’re faking volume, you’re doing it for one of two reasons. You’re doing it to get listing fees, so the founders can get rich off of the poor sods buying the coin thinking there’s interest. Or because you bought the coin and you want the price to go higher. In both cases, you’re committing fraud.”

Silver Linings

One “good” thing about the bear market is that it makes it much harder to hide this kind of activity within a bustling space. In a more cautious trading atmosphere, bad actors can be weeded out, and doing that will stimulate more growth over time.

In the case of BitHumb, for example. the layoffs have already re-opened old allegations of fake trading volume. While nobody is hoping for the bear market to continue, it may be part of a natural cycle that ends up strengthening the cryptocurrency industry and trading ecosystem over time.