A few weeks ago, Bitwise Asset Management released a report that concluded that as much of 95% of the crypto trades at leading exchanges are fake (see the MIT Technology Review article or the Wall Street Journal article for summaries of the results).
The question I’d like to ask here: why would crypto exchanges want to generate fake trades?
- Exchanges want users and investors to think their businesses are booming. None of the exchanges want people to realize that there are far fewer crypto trades going on than the hype would lead you to believe.
- Exchanges want to run up the revenues of miners. Fake transactions (say, one party trading with itself) still count as transactions as far as miners are concerned. Think of unmined crypto as a bank, only there’s no security guard out front. What can miners do to run off with the coin? You got it: fake transactions.
- Exchanges want to support the fiction that cryptos are decentralized, or that decentralization is practical. In reality, crypto wealth is far more concentrated into a few hands than any fiat currency. These handful of crypto-rich want to hide the fact that they hold the keys to the kingdom. The exchanges are only too happy to play along with this fiction.
- Bitwise Asset Management may simply be badmouthing its competition. Bitwise runs a crypto index fund, so it’s not an exchange per se. But it does buy and sell cryptos on behalf of its clients, and thus it generates bona fide transaction traffic. If regulators come down on the unethical exchanges who are running up transaction volume numbers, Bitwise’s crypto business would account for a greater share of the transaction pie.
Regardless of the motivations of the exchanges, the fact remains that it’s hard to tell what’s on the level in the crypto world – if anything. This isn’t just a case of buyer beware. It’s more a matter of realizing that this world is populated with scammers and their marks. You’re not a scammer? Then you’re a mark.
None of the companies mentioned in this article are Intellyx customers. Jason Bloomberg neither owns, nor plans to own, any cryptocurrency or other cryptotoken, either long or short.