• Chainalysis has published a new report according to which the fake Bitcoin trading volumes among the top 25 cryptocurrency exchanges have declined significantly. 
• Only BitForex recently reported a trading volume which is beyond a “realistic” level. 

The issue of market and data manipulation is a serious problem in the cryptocurrency market. In the past, the US Securities and Exchange Commission (SEC) has repeatedly justified its rejection of a Bitcoin Exchange Traded Fund (ETF) with this issue.

The scale of the problem is enormous. In the first quarter of 2019, the crypto index fund provider Bitwise Asset Management published a report according to which 95% of the total trading volume on unregulated exchanges was counterfeit. The data can easily be manipulated by the exchanges, as trading is largely recorded beyond the blockchain in the order books of the exchanges.

Chainalysis has recently taken up the topic again and investigated whether the market is still dominated by manipulated market data. For this purpose, Chainalysis has compared the on-chain transactions of the exchanges with the reported off-chain trading volumes.

Counterfeit trading volumes have declined significantly

According to the new report by Chainalysis, among the top 25 cryptocurrency exchanges in terms of trading volume there are very few that artificially inflate and counterfeit their trading volumes in 2019. According to the analyst firm, there is only one exchange in the top 25 with BitForex that is likely to report fake trading volumes to simulate larger market activity and liquidity.

To perform the analysis, Chainalysis used the “Bitwise 10” to calculate a ratio of reported trading volume to on-chain volume for exchanges. The Bitwise 10 are ten large exchanges (Binance, Bitfinex, bitFlyer, Bitstamp, Bittrex, Coinbase, Gemini, itBit, Kraken and Poloniex) which have a good reputation in the crypto industry and where no manipulation has been detected in the past.

The ratio indicates how large the trading volume between users of an exchange is when more funds flow into the exchange from outside. Chainalysis assumes that this ratio remains relatively similar for large exchanges with similar user bases without falsifying the trading volume.

Accordingly, Chainalysis determined an average ratio of 6:1 over two years for the Bitwise 10. This means that the Bitwise 10 see about 6 Bitcoin in the trading volume for each Bitcoin they receive on-chain. Any exchange with a much higher ratio, Chainalysis says, will most likely manipulate its trading volume.

Huobi, OKCoin, UPbit, Bithumb no longer counterfeit their data

Most striking was BitForex. At times, the exchange reported a trading volume ratio of 40,000:1. This means that BitForex reported a trading volume of 40,000 Bitcoin for each Bitcoin deposited on the exchange, compared to only 6 for the exchanges in Bitwise 10.

In addition, Chainalysis analysed 24 other exchanges and concluded that 12 other exchanges whose ratio of reported trading volume to on-chain volume differed significantly from that of Bitwise 10 in 2018. These included the exchanges Huobi, OKCoin, UPbit, Bithumb, Bit2c, Bitbank, Bitso, CoinCheck, Coinfloor, CoinOne, Korbit and Zaif.

Based on the data, Chainalysis concluded that it is likely that these 12 exchanges reported a counterfeit trading volume in 2018, particularly between July and January 2019. Since 2019, the trading volumes of these 12 exchanges have developed closer to those of the Bitwise 10, suggesting that the false reports have been stopped.

All in all, the top 25 exchanges in terms of trading volume in 2019 seem to provide mostly realistic data, which is a very positive sign for a maturing cryptocurrency market.