The market is under fire the last few days as the general public have finally realized that a major chunk of liquidity on exchanges does not actually exist. This has been taken as a negative for cryptocurrency growth and adoption, but I guess someone forgot to tell Bitcoin’s price action!
As a primer, Bitwise Asset Management gave a presentation to the SEC where they showed the officials how crypto volume is manipulated. While I don’t agree with their investment philosophy or financial products, Bitwise’ presentation was perfectly summed up and contained useful data that everybody needs to see.
Maybe this is being perceived incorrectly. Maybe this is actually excellent for cryptocurrencies. Most of the world sees cryptocurrency as ‘fake internet money’. That perception is likely to worsen in the short term due to reports like these – given those people are even paying attention. But what does this mean for long term developments?
A brief look into how volume was faked reveals a manipulation tactic called ‘wash trading’. Wash trading is a known evil, especially in crypto. It is when a single account or entity simultaneously issues buy and sell orders on an exchange. They sell their cryptocurrency (minor market downturn occurs) and then buy it back (at the lower price; creates a tiny surge). This volume shouldn’t be considered as it doesn’t represent real demand, supply, or trading. It is simply selling and buying back crypto at the same time in order to create the illusion of liquidity.
Transparency – Practice what you Preach
Everybody involved with blockchain or distributed technology uses the narrative of transparency and blocking corruption as their main talking points. How can we advocate transparency when our markets aren’t transparent? We should be more concerned with portraying the technology and markets for what they really are – not what we want them to be. This is likely to be a revelation for cryptocurrency trading and institutional investments. Most institutions have a tiny presence in the market but nothing meaningful. Certain institutions may use it as a neat little platform for them to manipulate liquidity and rake in some profits. But for meaningful capital inflow to Bitcoin and its peers, we need to see the market for what it really is and work toward strengthening it.
It’s very likely Goldman Sachs, Morgan Stanley, and all the other huge banks and corporations are aware of the fake liquidity in cryptocurrency. For them, the maturity of the market trumps technological development. They’re more interested in their return on investment than how it can fundamentally change the world. But let’s be honest, so are most cryptocurrency investors.
Up till now, the industry has unfortunately been extremely hypocritical. Crypto enthusiasts call out the banking cartel for their lack of transparency when crypto markets themselves don’t have any. Of course, when we talk of transparency, it is with regard to transactions and networks. So the added transparency to the financial market side of crypto will be a huge boost to credibility.
Long Term Effects
Rather than focusing on the present, we should look at the long term effects of this event. This revelation means the entire industry will now overcome ‘fake volume’. Now that the problem is not just known but also publicized, we will see many solutions come forward. The first of those is the analytics firm Messari. Messari has decided to release a ‘Top 10’ index that shows true volume on the top 10 exchanges. Many such solutions will emerge to give a more pragmatic view of the market.
Influential people like Vitalik Buterin and Jackson Palmer (amongst others) have openly spoken of the negatives of the market. Their vision is to put their time and effort into the technology as the markets are far too young. Vitalik has gone as far as to tell people to only invest a fraction of their capital in cryptocurrency and to be prepared to lose even that as the markets are hyper-volatile and anything can happen. His sentiments honestly echo the truth. A high allocation to cryptocurrency is the reason why most cryptocurrency hedge funds are failing. Inexperienced and hyperactive fund managers jump from public equities and private investment straight into cryptocurrency because they made 10x holding some Bitcoin and can explain what a blockchain does. The dynamics are far more complicated. The fundamentals of cryptocurrency are not comparable to the fundamentals of traditional investments. Bitcoin doesn’t have an operating margin, a business model that can be tweaked at your will, or potential for cost reduction. The closest thing to fundamentals in crypto boils down to two things: the news and sentiment.
The basic outcome I see is net positive. We lose some short term credibility, but we gain long term traction in the right direction. It is impossible to please everyone, so we might as well take the ethical route. This ethical route also turns out to be the best option for the future.
Why Didn’t This Come Out Sooner?
To be overly blunt, nobody cared. Yes, we knew that this was happening, but we didn’t know the extent. The volume surges that seem normal on the outside were actually wash trades. It takes a certain amount of studying volume profiles as well as buy & sell walls to understand what is normal and what is manipulated.
Most of the volatility in Bitcoin is from unsuspecting retail traders who think they’ve found their golden duck, they enter trades based on where volume is going and it zooms the opposite direction. This happens nearly every time we see Bitcoin rocket upwards (its succeeded by a large move downward). But other than speaking about the manipulation, nobody viewed this as a serious issue as long as they were able to ride the wave and lock in a significant amount of gains.
Most traders were sure $6000 was the limit to downside. This came from the ‘mining fallacy’ that stated miners wouldn’t let Bitcoin fall below a profitable level. This is completely untrue as stocks continuously fall below issued capital amounts or intrinsic value. Gold has also fallen below the cost of mining, so what makes people think Bitcoin is immune from this? If anything, it makes Bitcoin more susceptible given the rampant manipulation that everyone claims to know exists. A quick study of previous bull runs and their ensuing corrections show us more often than not, Bitcoin hits the peak of the previous bull-run. In this case, that level is around $950. You might think it’s a crazy thing to call for, but if you rule it out, you close your mind to the infinite possibilities that could occur.
Only recently people started to legitimately care about the manipulation and volume busts as they lost a fortune when Bitcoin price halved ($6000-$3000). But if a large entity like Bitwise didn’t publish a formal report, these people still wouldn’t have cared.
Conclusion
I often call the current banking system ‘the banking cartel’ given their close ties and interdependent actions. But in all honesty, there is a ‘whale cartel’ in Bitcoin that controls the market. This can only be overcome by achieving a high level of real liquidity and volume to shrink the amount of control these whales have in the market. I specify Bitcoin in general because we don’t know if other altcoins have the same kind of whale movement. Altcoins so far have merely tracked Bitcoin price sentiment, so it may just be a case of replication over manipulation. As Andreas Antonopolous said, “Bitcoin adoption is low because it’s volatile; Bitcoin volatility is high because of low adoption”. It is essentially a paradox that will require a significant growth driver. This growth driver is likely to be a force external to the Bitcoin network as we have seen in Venezuela.
Transparency is key going forward. We require more and more transparency in order to live by the doctrines we advocate. This may be a short term trough for Bitcoin, but this will help us grow organically rather than through fake volume and controlled price movements. Bitcoin is most certainly not dead. With each hack, the Bitcoin network gains more resilience. Once this feature is replicated in the market, nobody with half a brain will be able to call Bitcoin an immature market.
Sources
• Bitwise and NYSE Arca Report
• Images – OMC and CoinDesk
- AB
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Can’t the same be said of “Wall Street”?
Definitely, @preparedwombat
The problem is many people can do it in crypto as it's a small market. Less capital needed for manipulation. Where as Forex is a $5 trillion market based on DAILY volume and NYSE has a total market cap of $37 trillion. Crypto is merely a fraction.
Thanks for your comment!
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I'm coming from your wallet transfer and please send more! I comment when I can and I will take free money 24/7/365.
I think all crypto and money in general has "whale cartels." The big guys can always move markets. The more little people and mainstream adoption, the less that matters, but in general - the rich get richer. I think this is also known as "pump and dump" and there are many groups and places that actively use this strategy.
Plus - if someone actually sold and then bought - why is that fake?
For little people, all we can hope to do is be in the selling position when the pump is on and be able to buy when it is off.
In my case - you can use my accounts anywhere to predict markets. When I sell, the price will go up the next day. You can take that advice to the crypto or fiat bank!
Thanks for the comment @fitinfun
You put forth some very pertinent points. In this case, it isn't real liquidity as it is done with the intent to steer markets into a particular direction. I know intent alone is not enough so stick with me.
When the someone places a sell order, it is considered a true transaction when they are fulfilling someone else's demand to buy. In this case, nobody is really benefiting. Majority of wash trades are done at a single price. I place a sell for 40 BTC at $4100 and I also place a buy at $4100. It goes from me to me but because my sell went in first, it created a huge asymmetry of demand and supply. This caused retailers to jump in with shorts.
A common false perception these retail traders have is not the understanding that volume is two side (buyer and seller).
Your statement of whales in every market is true. Just that with crypto being hardly a fraction of the Forex market, you need much less capital to influence the market.
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What a great post and yes wash trading is a major problem for exchanges that are looking to compete but offer a shitty experience/product or low trade volumes. Instead of actually competiting they're trying to make a quick buck because they know they are doomed to fail
Exchanges may be part of the ecosystem now but hopefully, we can find better ways to do this in the future, to have more DEX would be a start! Followed you too, im sure ill learn tons from keeping up with your posts
Thanks for your support @chekohler !
I'm glad you liked the article. The problem is the smaller exchanges that claim they have $500 million or so in volume. If you're interested, check out the Bitwise report (listed in sources at the bottom of the post).
It clearly shows how these guys manipulate their volume. This likely isn't even wash trading but straight up faking volume. Wash trading is another evil and solutions to fix that haven't come up yet. I'm working on some theories myself and would love to coordinate with exchanges to help implement this
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I am still a noob in trading but am glad i choose binance as my main trading app
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If you decide to margin trade, don't look beyond BitMex and Deribit
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Donyou believe there will come a time when major companies will start to invest and use crypto in a day to day basis. If the answer is yes then the future for crypto will be secure and huge.
If no then it will always be volatile.
Boom and bust or is that Fiat?
At least the blockchain has value the paper in my pocket only has value as long as the bluff succeeds.
Just ask our Venezuelan friends.
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I do believe that day will come @andyjem
The process is already underway. Large investment companies are slowly increasing their exposure to these markets. You are 100% correct. We have no control in how fiat gets valued. Tying money's value with an institution such as a government is dangerous. We need to detach monetary systems from the unstable realm of politics
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Dear @reverseacid, I received your memo and I answered your call, thank you for sharing this very detailed publication, you achieved a great article.
The manipulations, the lie and the lack of transparency in the end will always take their toll on any medium, in life choose the path of ethics, transparency and truth is always better and in the case of a currency that is based on the People's trust will be strengthened if you really know that you can trust this system and have a level domain of the movements that are generated in it, otherwise "panic" will be created and people will start to flee.
That is my particular appreciation of the subject you wrote.
Blessings to you!
Pr EV
Hello @fucho80
I agree with what you've put forth. We need people to start trusting this system in order to get them to use it.
Thanks for your comment and support!
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We know that fake volume is bad for the market their is little doubt about that, but were the mystery is, what is the U.S government doing behind the scenes?
Good perception @crypto-simple
Tbh, we don't even know if the US government created Bitcoin in the first place!
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a japanese name so must be a japanese or an otaku/weeb whatever you like to call it lolz
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Reggards dear @reverseacid.
While reading your invaluable post, recurrently came a word to my mind: "Bluffing." As in poker, sometimes a false move must be made.
I know that the world of cryptoactives, like the stock market, is highly volatile and complex. In addition, the reality of what happens there is in the hands of a few.
But sometimes simplicity is the mother of all inventiveness.
Thanks for the comment and support @juanmolina
Couldn't have put it better myself. Crypto trading strategy is all about simplicity and perception.
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Keep giving us more of these post, please.
Definitely will @juanmolina
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The exchange's fake trading is seen out,
As long as you look carefully at buying and selling,
I have been used to it for a long time.
I have participated in many exchanges.
Many have fake,
I already used to get used to it.
Very true @cloudblade
But rather than accept it, we have to battle it!
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I find your post very interesting. There are many things that I don't know about the cryptocurrency markets, although I have bought and exchanged some coins with exchanges such as Bittrex and Binance (by the way, they're very good). You have many interesting posts, I'm glad you include them in this post.
I assume that the effectiveness of markets as well as for exchanges is to have liquidity or in some way demonstrate it even if it is fictitious. Maybe that's their philosophy. This is my opinion.
Btw, I came here through my friend @crypto.piotr
Thanks for your kind words @jadams2k18
Yes, they attempt to show liquidity but it isn't real liquidity. In one way these exchanges manipulation numbers in another way, the trades are just within one single account. Both these parties are at fault, thought the trustworthy exchanges are much less at fault. Exchanges like Coinbene, Bitforex, and BitBNS that fake huge amounts of volume are the real bad guys.
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Oh My! I didn't know that about Coinbene, Bitforex, and BitBNS. It's important to know very well an exchange if we're gonna invest on it.
This is the reason we are in need of All in one Decentralised Exchange: DeX.
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Absolutely @ccnew
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And this is how you write a post on the Steem Blockchain. Well done, sir!
Glad you found it useful @ddrfr33k
Thanks for your comment and support!
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A really enjoyed reading this post. Fake volume and manipulation will help to improve the good side of it.
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Thanks @chesatochi
It is essential to remove the fake volume. We need to grow organically based on facts. This is a huge boost to market transparency in crypto.
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It is when a single account or entity simultaneously issues buy and sell orders on an exchange. - interesting
A great written post which I will share. Whitewashing and the lack of transparency will be found everywhere if it comes to making a big income. We all know it does exist and it is a scam.
The huge banks are not different and want to get rid of the cryptocurrencies asap.
We will never know the truth or what is fake news.
The market will develop and grow but it needs time. If you want to invest always do the amount you can miss and you will be fine.
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Spot on @wakeupkitty
You hit the nail on the head. We cannot push money we cannot afford to lose into such a young market. With time, as you study more and more and see the potential, that amount keeps increasing!
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STOPTo support your work, I also upvoted your post!
That just bitcoin volume..
Altcoin volume would be pretty much like 98.5-99%
It's possible @sames
But I think it's more likely alts have slightly lower levels of manipulation and it's just replication of price action.
ETH is the most heavily manipulated as per this report
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I see Kurecoinhub has started accepting steem.
Haven't heard much about that exchange @lucyho
I would recommend staying away from smaller exchanges as they tend to be shadier.
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I joined an airdrop for them but I didn't fund my account, it was about 60 cents, so I am very wary.
Those aren't the only honest exchanges! Here are a list of the Blockchain Advisory Institutes trusted exchanges from Dec 2018. https://www.blockchaintransparency.org/december-2018-rankings
Here are the Wash traders: https://www.blockchaintransparency.org/trading-advisory-list/
I've been through that list. I have an issue with the fact that BTI isn't willing to show their methodology. They showed their old one, but said they developed a new one for the report and never revealed it @bitbrain
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I suppose it makes sense that they wouldn't want the wash traders to be able to find a loophole and spoof their method.
Dear @reverseacid
Yet another excellent publicaion buddy. A bit to old to upvote. :( Sorry about that.
I realized lately that some people think that decentralized exchanges will solve problem of fake volumes. What's your take on it? I myself seriously doubt that anything would be really very different.
I was close to a friend who was hired (developer) by some ICO and he told me that one of their marketing ideas to "build trust" is to manipulate with volumes on exchanges. So investors would believe that there is some liquidity (which didnt really exist).
How sick is that? And how short-term thinking.
Well. Is WallStreet very transparent? I think transparency need to have some limits if we don't want to scare away most of investors. Transparency brings so many dangers.
Again, great read buddy. enjoy upcoming week :) ps. do you hate mondays as many people do? or you dont care? just wondering.
Yours
Piotr
Haha @crypto.piotr
No issues on the upvotes, just glad you enjoyed the article.
It is a crude tactic indeed but it is an age old tactic even in Wall Street. Morgan Stanley recently created synthetic shorts for Lyft after its IPO so institutions can bet on it going down. This was what everyone was expecting. Same way, insiders give falsified data on stocks to induce higher volume and price growth.
DEx's will solve this particular issue of exchanges faking volume. In terms of token issuers manipulating volume, DEx's will not do anything.
Wall Street is not transparent, but the point of crypto is to be transparent. That's where my ideals for this article stem from.
Everyone hates Mondays, my friend. I wouldn't trust a person who doesn't :D just kidding!
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Awesome comment @reverseacid
Thank you for taking the time to reply. Appreciate it a lot.
Cheers
Piotr
Hi @reveracid.
I think fake volume may also affects STEEM's price feed which is an input for other things like SBD/STEEM printing. It is something out of our control however this issue should be managed in some way to mitigate that risk.
I guess that is quite complex to create a technology that identifies fake volume.