Surprise! Only around five percent of Bitcoin trading volume is real. There have been suspicions that the markets are overinflated for a while. In fact, fears of market manipulation have held up regulatory approval for a number of proposed Bitcoin exchange traded funds (ETFs), the eventual approval of which many enthusiasts believe will spur broader adoption of the technology by investors. Now, in a twist, a company hoping to list an ETF has reported to US financial regulators that around 95 percent of all Bitcoin trading volume has been faked by exchanges.
Bitwise, a crypto-asset management firm, analyzed 81 exchanges, finding that 71 of them exhibited patterns that reflected artificial trading volume. One way to manufacture volume is via a technique called wash trading, in which someone simultaneously buys and sells the same asset. Although the exchanges in the study reported a combined $6 billion in daily volume during four days this month, Bitwise determined that only $273 million of it was real.
The point of submitting the analysis was to show regulators that "a real market for Bitcoin" still exists despite the storm of artificial trading volume, Bitwise's head of global research Matthew Hougan told the Wall Street Journal. Solid evidence for this comes from the small number of exchanges that can actually verify that their trading data is real, he said. If approved, Bitwise's fund would be based on the volume on these exchanges, which represents only around five percent of the generally reported total.
Why would exchanges dishonestly inflate their volumes? One incentive may be to attract ICO projects that want their coins to list on exchanges that are facilitating lots of trading. Some exchanges charge these projects listing fees that can be as high as a few million dollars.
There are at least a two important takeaways here. First, the real Bitcoin trading market is an order of magnitude smaller than is broadly reported. If you are eager to see mainstream adoption, perhaps that's disappointing. On the flipside, however, if zeroing in on the exchanges operating honestly can move the needle with regulators and finally get an ETF approved, this bleak analysis might help spur the kind of adoption you're hoping for.
Like ICOs—except, you know, legal. If you've read any crypto news during the past several months, you've probably come across at least one of these buzzwords: "security tokens," or "tokenized securities," or just "digital securities." They are all referring to a relatively new type of digital asset that is designed, using smart contracts, to automatically comply with securities regulations. That's in stark contrast to most ICOs, whose organizers assumed (wrongly) that they didn't need to worry about these rules.
Advocates say blockchains-based digital assets—and in particular online marketplaces for trading these assets—can make private securities markets more efficient, transparent, and accessible to a greater number of investors. In other words, they can be like steroids for crowd investing. Read my new piece.
Blockchains and crypto-tokens don't fit neatly into existing regulatory frameworks.
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Loose Change
Fill your pockets with these newsy tidbits.
- Blockfi, which just launched interest-bearing cryptocurrency accounts, has already cut the rates paid to large account holders. (CoinDesk)
- Bitcoin mining chip maker Bitmain has let its Hong Kong Stock Exchange IPO application expire, and the company says it will re-apply at an "appropriate time." (Breaker)
- Enron's former CEO Jeffrey Skilling, fresh out of prison, is apparently contemplating a new energy venture that may involve blockchain technology. (Wall Street Journal $)
- Japanese financial services company SBI Holdings has launched a new subsidiary to manufacture cryptocurrency mining chips. (ETHNews)
