If Just 5% of Cryptocurrency Trade Volume is Real, What Does That Mean for Altcoins?
In late March two sets of research groups released reports detailing their conclusion that a vast majority of cryptocurrency trading volume was fake.
Research from TheTie estimated real trading volume to be 25% of that posted on CoinMarketCap. Bitwise, in their official application to the SEC for an ETF, estimated real volume to be even lower, at just 5% of the commonly advertised market cap. Going by those figures, Bitcoin is the only cryptocurrency with anything even close to $1 billion in daily trade volume.
Taking data from OpenMarketCap which reflects the findings from the Bitwise report, let’s look at what the top cryptocurrencies actually look like when ranked by adjusted trading volume.
Real Crypto Trading Volume
This snapshot shows the top twenty coins with 95% of their allegedly fake volume removed. If you open up CoinMarketCap and compare coins ranked by trade volume, you see not much difference between the top eight – except that Litecoin and Bitcoin Cash should be swapped around.
Moving further down however, we start to see some major discrepancies in what exchanges are reporting and what’s actually taking place. According to CoinmarketCap, the next five biggest coins by daily volume should be Ethereum Classic, Zcash, Dash, Stellar and NEO.
But according to Bitwise and OpenMarketCap, those should read: Binance Coin, Cardano, Ethereum Classic, Nano and Paxos Standard Token.
Qtum is ranked 14th on CMC with $197 million volume. OMC places it at 45th with daily volume of just $4.5 million. Others such as Dogecoin, Monero and OmiseGo fall drastically further down the rankings with fake volume removed.
There are some coins which are underrepresented on CoinMarketCap, such as Waves which ranks 29th on CMC, but 14th on OMC. You may also notice the recently launched Fetch (FET) is placed above NEO, Stellar and IOTA – there may be a reason for that which we’ll cover below.
Only 10 Exchanges Post Real Volume
This data is based on the assumption that only 10 of the world’s cryptocurrency exchanges actually post any real volume, seen below.
The rest constantly post trades which cancel each other out over the course of time – essentially adding fake buys and sells to the orderbook while keeping the overall balance sheet at zero.
Bitwise arrived at these figures by taking the daily trade size, trade volume and bid-ask spread into account, and then presenting them in graph form. Seen in graph form, it becomes easier to spot patterns – such as these ones which show how the average trader tends to trade in whole numbers, and without very much BTC.
Compare that to the graphed data from the fake exchanges and we see very few similarities. On Exrates we have almost nobody trading with less than 2.5 BTC, while on BitForex there are zero trades above the 6 BTC line.
The stark and erratic differences between these exchanges and say, Coinbase, should be evidence enough that something is amiss. That’s unless we’re to believe that traders somehow change their habits when they use exchanges like Exrates, BitForex, etc.
More Vectors of Analysis
Taking a similar approach to volume patterns, we see below the typical volume spike alignment among trusted, registered exchanges. All tend to follow the same pattern with few deviations.
Compare that to suspect exchanges like those pictured below, and you see little rhyme or reason to reported volume figures. Trades on these exchanges appear to operate completely independently of the wider market, showing little in the way of human-like patterns. The same lack of regular patterning appears when comparing bid-ask spread.
The Bitwise paper which was handed to the SEC notes that inflated volume figures are common wherever self-reporting is involved:
“Volume inflation is familiar to any self-reported league table (dark pools, etc.). But in crypto, the incentive to inflate volume is pernicious and strong: Exchanges that appear at the top of the lists used by leading media organizations can attract listing fees (often millions of dollars) from ICOs and alt coins.”
Even Binance is Suspect
So Fetch (FET), the token recently launched on Binance launchpad, is posting daily trades of $21 million according to OMC, making it the 16th most traded cryptocurrency ahead of Stellar and NEO.
The reason for this may have something to with the fact that Binance is also suspected of inflating its trade volume – specifically for its own Binance Coin (BNB), as well as the tokens it recently conducted an initial exchange offering (IEO) for. Data from BearMarketValuations.
Suspicious enough is the fact that BNB has been posting trade volumes higher than that of Bitcoin. If those numbers are correct, it would mean that BNB has daily turnover significantly above that of any other traded asset in the world.
The same pattern plays out with Binance Launchpad IEOs, as seen here by Celer Network’s huge trade volume compared to Bitcoin’s, yet a complete lack of interest from Google searches at the same time.
OpenMarketCap, in its attempt to furnish crypto investors with real data, conducts regular votes where exchanges can be added or removed from the Trusted list. A vote to kick Binance off the trusted list commenced on April 9th, the day of writing. The results haven’t been made known as of yet.
What About Altcoin Liquidity?
This paints a pretty dire picture for the average altcoin investor – particularly those who judged their coins and tokens to be of high liquidity. It may surprise a Dash holder to learn that according to Bitwise and OMC, just $5 million of Dash’s reported $300 million daily volume is real.
Even a popular and much-talked-about coin like Zcash, ranked 10th by CMC, only finds itself ranked 34th by OMC, with a daily volume of just over $6 million. Ultimately, no coin except Bitcoin has volume exceeding $1 billion, and even Tether trades struggle to cross the half billion mark.
The large volumes posted by Bitcoin Cash, Ethereum, Litecoin and EOS may explain why these coins often seem to lead market surges. And it may also explain why prominent crypto personalities such as Andreas Antonopoulos tend to recommend sticking with high-liquidity coins if you’re a holder.
Of course, that’s just one particular course of action, and as seen by the altcoin bag makeup of someone like Vitalik Buterin, there are still serious people willing to dip into the altcoin market.
That said, given the low liquidity numbers presented here, the average alt holder may have to hold onto his bags for longer than previously expected before cashing out.
Fake volume is something that everyone always suspected, however many would have taped off Chinese exchanges like ZB.COM and assumed that was the worst of it. But the data presented here basically renders the data provided by CoinMarketCap not only useless, but misleading and probably harmful.
Assuming the data presented by Bitwise and OMC is accurate, does this change how you view your investment strategy? While holders might squirm at the fact their coin has 95% less volume than expected, there’s also a silver lining to all of this.
Namely, that with real trade volume so low, it means you’ve entered the altcoin market at an even earlier time that previously thought. For those worrying that you were too late to the game to profit from altcoin movements – judging by the amount changing hands, you’re basically in on the ground floor.
Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.