One of the most common errors traders make when analyzing cryptocurrency markets is taking an exchanges’ bid and ask data and traded volumes at face value. When doing this type of analysis, the trader has to exclude the trading venues mentioned on multiple ‘fake trading volumes’ reports, like the one Bitwise published in March 2019.
There’s really no way to know if the top exchanges inflate their volumes by granting special access and zero fees for market makers.
Even the exchanges themselves have no way to know if a group of users are related or conducting multiple transactions among themselves to inflate prices or volumes. There are hundreds, if not thousands of influencers, pump and dump chat rooms, trading apps, and the like.
Therefore, not every wash trade or transaction between related entities has been brainstormed by the exchange or the crypto projects with a foundation or marketing team.
As Philip Gradwell, chief economist of Chainalysis, explained:
“If you want to get serious money into crypto, you have got to build up their confidence that there are actually good trading venues […] If you’re an exchange and you have good incentives to report real volume, you may actually get institutional money coming in, but if you don’t have those incentives, they’ll stay away.”
Investors usually speculate that these unethical practices happen only at exchanges located on remote islands. However, the U.S. Commodity Futures Trading Commission fined Coinbase after an employee “self-traded” to create the illusion of volume and demand for Litecoin (LTC) before Sept. 2018.
In case you’re wondering, decentralized exchanges (DEX) have also been used for ‘wash trading’ activity as there are barely any impediments, apart from network gas fees.
Take notice how the 22,000 Bitcoin margin short increase at Bitfinex initiated as the price dropped below $34,000 and remained at a steady pace…