Inflated Volumes Causing Issues on Crypto Exchanges

Ever since the massive bull run of 2017, cryptocurrency has become a lot more accessible. New exchange platforms seem to be emerging on a daily basis with most of them being recognized as established and regulated entities.

Those involved with the crypto-world just 2 years back may remember that during those early days, people only knew 1 or maybe 2 reliable exchanges. Those were the platforms with significant trading volume that were considered safe for the public to use.

This is quite some progress when looking at the handful of exchanges selling Bitcoin a few years prior. CoinMarketCap is now listing more than 300 cryptocurrency exchanges on its platform, listing all important data, and helping users get a better idea of their volumes.

With the spike in new exchanges, however, trading volumes seem to be spiking as well. Almost one-third of CMC-listed exchanges report more than $50 million dollars of daily volume. And from this pool, more than half claim billion-dollar days.

On one hand, you might find this number understandable. Crypto is entering its “mass adoption” phase, right? Well, that’s all good and fine until you start to dig a little deeper. Many exchanges with enormous volumes have no Social Media engagement. None.

And this is just one of the many inconsistencies. You can find many more when reading Bitwise’s report for the SEC. And the result is quite shocking – Most cryptocurrency exchanges report fake volumes.

According to the paper, reported volumes are massively inflated with only about 5% sharing numbers that match their actual volume.

To better understand the methods used to interpret the data, and to understand which platforms are safe to use, check out this infographic prepared by Paybis:

What motivates exchanges to inflate volumes?

Bitwise’s report goes further into the reasons the motivate exchanges to report fake volumes. These can be summarized in the two points listed below:

  • Better ranking – Cryptocurrency exchanges that rank high in CMC’s exchange list receive more media attention and are seen as more authoritative. As a result, the platform becomes more popular and grows its user-base.
  • Increase in revenue – Popular exchanges are able to ask for higher listing fees. This applies to Altcoin listings, ICO’s and IEO’s. This is not only due to their supposed popularity, but also because higher trading volumes indicate high liquidity (more user adoption).

Improved metrics become available

Following the findings of Bitwise, CMC announced their willingness to solve the issue. Carylyne Chan, former Chief Strategy Officer and current CEO of CMC mentioned that Bitwise’s findings seem to be correct and will be taken into consideration for the platform’s future improvement.

A short while later, a new metric was introduced. This metric allowed users to filter platforms based on their liquidity, showing more realistic results. In time, the surprising findings of Bitwise helped the industry grow and become more transparent.

This became even more prevalent in 2020, when Binance acquired CoinMarketCap for an undisclosed amount. While the platforms agreed to keep working as separate entities, the Exchange listings saw a complete makeover.

CMC introduced a scoring system (Web traffic factor) that takes into account several web & social metrics to determine the popularity of an exchange. Volume is still one of the listed factors but is no longer enough to guarantee a high listing.

The future of crypto transparency

As we enter into a new bull market, investors are more experienced and educated than ever before. On top of that, given the current economic uncertainties, Bitcoin and cryptocurrencies are becoming a more popular wealth storage solution.

This means two things:

  1. Exchanges need to try much harder to gain their users’ trust, as their decision-making process is no longer focused on “lambos” and unrealistic dreams. New users now have experience with both positive and negative markets and are ready for everything.
  2. New waves of investors will enter the space at some point soon. These investors will have a quicker learning curve than those who came before them. They are aso unlikely to make the same mistakes and believe in shady marketing tactics that aim to have them invest in unreliable coins.

As a result of the above, it will be extremely difficult for scammy cryptocurrencies to survive, much less thrive. The same is true for exchanges that attempt to inflate their volumes.

Pair that with the continuous improvement of CMC’s metrics and you will soon be able to do top-class analysis, finding coins and exchanges that are trustworthy and safe to use.

While cryptocurrency exchanges and Bitcoin are still considered to be in their early stages, we have seen aggressive improvements in the space. These, in time, will lead to a more transparent and regulated market, which will set the stage for public adoption.

Closing remarks

You now have a better idea of the current market conditions. Cryptocurrency exchanges have not always been as transparent as they are today. Nor did they offer as many products and services.

With a common goal to “Buidl” the future, all disruptive crypto entrepreneurs will keep looking for solutions to help the space grow.

We can already see this happening with Binance, who are introducing multiple new investment products and completely restructure the way initial coin offerings are performed.

The unfortunate mishappenings that seem to paint a negative image for the crypto industry are nothing but stepping stones to help the tech and data analysis methods improve for the future.

Make sure you read more upon the most popular exchanges (listed in the infographic) and make sure you choose a platform that you can trust and understand perfectly. After all, it is your money you’re dealing with and you better feel safe than sorry.

If any questions remain, feel free to leave a comment in the section down below and we will do our best to help you out.


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