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One of the lead investigators at CipherBlade, Richard Sanders, alleges that the cryptocurrency exchange HitBTC is the “largest-scale criminally fraudulent entity” in the industry.

According to Sanders, HitBTC is a “wolf in sheep’s clothing.” Though the firm portrays itself as “the most advanced” exchange in the market with high levels of security and liquidity, this may be a facade. Sanders argues that the exchange is insolvent and designed in a way that allows them to selectively scam their customers.

Fake Volume

HitBTC has often been accused of faking its trading volume. This year’s Bitwise report on exchange volume singled it out specifically, noting that it is “easy to show that HitBTC volume is almost entirely fake.” The statement was made in an addendum clarifying the firm’s stance on several exchanges that are known in the community. Bitwise used the same order book and volume analysis techniques it applied to other exchanges.

The research showed that HitBTC exhibited the same abnormalities observed in Huobi and OKEx, which led Bitwise to infer that all of them had vast amounts of fake volume built on small real user bases. Third-party researchers reached the same conclusions.

But while OKEx openly recognized the problem and Huobi seemingly changed its tactics to avoid detection, HitBTC responded by “bending with the wind.”

“HitBTC has managed to attract many institutional participants contributing to institutional (read mass) adoption and market efficiency. This, in turn, has resulted in different order size – order frequency relationship. To many lacking sophistication and financial literacy, this does seem like an anomaly that these gifted individuals attempt to portray as manipulative trading practices while in fact, this does represent solely the client profile. Note that our overnight volumes are consistent with the day-trade pattern: unlike humans placing round digit orders and having to eat and sleep, machines don’t sleep and react consistently on emerging market patterns,” states an official response from HitBTC.

In other words, the exchange attributed its lack of human trading patterns to the dominance of algorithmic traders. That is a plausible explanation for some of the analysis techniques, though not all of them. Bitwise compared volume patterns during high volatility events, which showed that exchanges with wash trading tended to show more uniform volume. Trading bots, on the other hand, would react even more prominently than humans to sudden price changes.

HitBTC’s traffic figures are the lowest among all of its “close” competitors, clocking in at 1.27 million for $550 million in volume. Bittrex with its reported volume of $15 million has twice as many views.

Binance.US, a U.S. regulated company where institutions might actually be trading, is currently among the most prolific exchanges in terms of volume per view. With a monthly traffic of just 330,000, or 11,000 per day, it manages to hold almost $6 million in daily trading — $545 per daily view. HitBTC’s average is $12,921. And even then, this is without considering HitBTC’s higher bounce rate. Almost half of viewers navigated away from HitBTC after viewing one page, meaning these users are unlikely to have made a trade.

This is, however, expected from their assertion, which maintains that institutional trading bots make up most of the volume. While the wash trading is no longer obvious from simple checks of their platform, there seems to be no particular reason why algorithmic traders would so overwhelmingly prefer HitBTC — especially given allegations that its APIs steal money.

Possible Evidence of Trading with User Funds

Following the Bitwise report, several firms have conducted third-party audits to regain the trust of investors. Sanders lauded Kraken and Bitbuy as examples, with both conducting proof-of-reserve and security audits.

Meanwhile, HitBTC has failed to conduct audits of any kind, and its team remains anonymous to this day — yet another sign of suspicion.

The lack of scrutiny could be the reason why there is a vast discrepancy in how crypto tracking sites rank the exchange. At the time of writing, HitBTC ranks No. 18 on CoinGecko’s rankings by trust score while on CoinMarketCap it is positioned first (based on liquidity).

Sanders maintains that there are other ways to evaluate the solvency of exchanges when no actual audit exists. He proposes an analysis through a comparison between wallet balances and hot and cold wallets.

“A quick peek at their Ethereum wallets and noticed a disproportionate amount of interaction with the WETH smart contract — a disproportionate amount that tells me, without even comparing trading volumes, based on my extensive experience on cases of this nature, it’s pretty likely HitBTC staff have and are day-trading customer funds — poorly,” said Sanders.

Additionally, in the last Proof of Keys — an event where investors move their cryptocurrencies off exchanges to stress-test their reserves — HitBTC struggled to confirm customer withdrawals and demonstrated “minimal balance relative to volume.” At the time, there was a spike of public reports alleging that the exchange was locking customer funds. HitBTC responded by stating that these were isolated cases stemming from anti-money laundering checks.

Continuous Withdrawal Struggles

Sanders points out that HitBTC’s Reddit is uniquely riddled with complaints of fraud and frozen assets. It also appears to have been “under maintenance” for the past seven months, with no new posts since then. A steady stream of complaints has since emerged elsewhere on Reddit.

It seems only those that received significant community or media coverage were solved.

“Take for instance this story, where an ‘AML case’ had sat for five months and was quickly remedied after the said case was described at a conference. When it will impact HitBTC’s ‘bottom line,’ HitBTC will ‘resolve’ the issue,” explained Sanders.

This type of “selective scamming” (where HitBTC only concedes after “bad PR”) leads Sanders to believe that the platform is “robbing Peter to pay Paul.” The losses that customers suffered over the years are, in general, too small to be viable for lawsuits and could be the main reason why HitBTC is still operating. When Crypto Briefing requested a comment on these latest claims, HitBTC referred to their earlier responses regarding AML checks.

The analyst concluded by stating that there are significant structural similarities between HitBTC and Bitconnect ⁠— a Ponzi scheme listed by HitBTC ⁠— that was slammed with two cease and desist letters and hit by continuous denial of service attacks before it shut down. Given all these factors, Sanders urged all users to withdraw their money from the exchange before it’s too late.

While there is no absolute evidence that would completely disprove HitBTC’s counter-arguments, their logical foundation is extremely shaky and only allows for semi-plausible deniability. The overwhelming amount of reports and evidence points to questionable business practices and strong signs of insolvency for HitBTC — which the exchange would have every interest to hide.

Andrey Shevchenko contributed reporting.