Three Ways to Spot Crypto Exchanges with Fake Volume

All the rage currently is around the proposal by Bitwise to the US SEC for approval of a bitcoin exchange traded fund (ETF). The 227-page document included the “first-of-its-kind” analysis of order book data from 81 crypto exchanges. Yikes! The results were stunning.

One nugget revealed was “95% of reported volume is fake”.

If you’re a fat cat institutional investor like Jamie Dimon or a crypto whale like the Winklevoss Twins with too many bitcoins to count then you’re probably like this is old AF.

But what if you’re a regular investor buying crypto and waiting anxiously to see the coins “get listed on an exchange”? It may be time for you to drop some new questions in the subreddit or Telegram group.

wait — — 95% fake?

On Twitter the news turned nasty as Binance CEO CZ blocked Mike Dudas of The Block (oh the irony) who he felt was not being “positive”.

well that escalated quickly..

Earlier CZ posited his view that sadly most investors who fall for the fake volume — banana in the tailpipe — also won’t even bother to read the 227 page proposal. Ouch!

Of course if you’ve been in this space for more than a week you have to admit that CZ has a point. Too many retail investors and traders approach crypto like buying lottery tickets or scratch offs and hoping for a win.

“When get listed on exchange so we can moon and buy lambo?”

C’mon peeps, stop being your own worst enemy. This mentality just attracts scammers and gets you easily separated from your chips.

Given these current market realities and the need to make things more plain and accessible — I decided to net out the three tell tales signs to identify these exchanges with fake volume.

We can’t simply tolerate suspicious exchanges wash trading or pumping and dumping volume. Their goal is to make more money when they charge your project team to get listed. Then the leaders disappear into the night with your cash or say they got hacked. Ain’t nobody got time for that!

Here are the three clues Bitwise identified to spot exchanges with fake volume using their proprietary screen-shotting analysis tool.

Trade Size Histograms — for Well-Known Exchanges Show Natural Patterns

These histograms show the percentage of volume that is captured within each trade size bucket (0–0.1 BTC, 0.1–0.2 BTC, etc). They reveal consistent, intuitive patterns: Percentage weight in each bucket declines as trade size increases, and there are noticeable peaks at whole bitcoin sizes (1, 2, 3, etc). X-axis is from 0 to 10 BTC.

Consistent, intuitive patterns: percentage weight in each bucket declines as trade size increases

Suspicious Exchanges volume histograms look completely different

Volume Spike Alignment — Provides Another Vector of Analysis

In a globally integrated market like bitcoin, you would expect exchange volume to rise and fall at the same time across all exchanges. It does for well-known exchanges. Many other exchanges, however, fail this test, showing disconnected and/or random patterns. Some of them maintain constant volumes over time while others rise and fall at different times than any other market.

In globally integrated market volumes rise and fall at same time

Random patterns and consistent volume over time at suspicious exchanges

Spread Patterning Analysis — Provides A Third Vector Of Analysis

Spreads on well-known exchanges show a consistent pattern, anchoring on zero with random variability, and then spiking periodically to reflect momentary surge in volatility and change of the order book. Spreads on suspicious exchanges exhibit a variety of anomalous patterns, including central tendencies that hover around an unusual fixed amount, or spreads that stay fixed for extended periods.

Consistent spread pattern anchoring on zero at well known exchanges

Suspicious exchanges show a variety of spread pattern and can stay fixed for extended periods

Now that you know three ways you can spot exchanges with fake volumes, take a holistic look when you’re considering trading or getting listed. And never leave your coins sitting on an exchange for an extended period of time.