Bitcoin Trading Hoax?

A recent study suggests Bitcoin trading to be a hoax: can we believe this?

An analysis published by Bitwise this week claims 95% of bitcoin spot trading is faked by unregulated exchanges. The study is consistent with regulators’ concerns that cryptocurrency markets are manipulated.

Bitwise found the average bitcoin spread to be about one penny at Coinbase Pro. This exchange reports about $27 million in average daily volume.

In comparison, they found the average spread to be about $15 at CoinBene. This is the largest reported exchange on CoinMarketCap.com. Yes, that is 15 dollars (compared to cent, above). Bitwise also found other extreme examples of exchanges with spreads upwards of $300. “It is surprising that an exchange with almost 18 times the volume of Coinbase Pro would have a spread that is 1,500 times larger,” Bitwise said.

Surprising indeed!

No sensible trader* would transact on an exchange with such huge spreads when Coinbase Pro is available. The volume listed at such exchanges must therefore be bogus.

Exchanges certainly have underlying motives to report fake volume. Volume is attractive for new initial coin offerings. The latter would want their cryptocurrency listed on an exchange where maximal trading takes place. Fees for these new initial coin offerings can run from $1 million to $3 million per listing: nice profit for the exchanges.

It all makes sense…

…except who is this Bitwise? I don’t want to blindly accept any conclusions before checking the source.

Bitwise is an asset manager in the process of trying to issue the first-ever bitcoin ETF. They recently met with the SEC to discuss the application and submitted analysis they thought would be helpful to regulators.

I see a clear conflict of interest here. If people can’t trust what they see from the exchanges or brokerages, then they may not trade bitcoin. Alternatively, they may choose to trade bitcoin in a “safer” vehicle that is professionally managed—presumably by someone able to navigate apparent volume to get good execution. This would be a reason for some to use a bitcoin ETF.

Personally, I neither agree nor disagree with the study. I simply think the investigator has underlying motives when reporting these conclusions. As a result, I would want to see the numbers myself for verification.

* — “Smart money” is responsible for the majority of volume; I’m not mentioning institutions here, though,
       because I honestly don’t know how much the intstitutions trade bitcoin at this early stage.