Bitwise Calls Out to SEC: 95% of Bitcoin Trade Volume Is Fake, Real Market Is Organized

At the 1997 edition of the annual Worldwide Developers Conference — an event put together by iPhone-maker Apple Inc. to communicate directly with its community of developers and users — a participant asked founder and then-CEO Steve Jobs the following question:

"What do we do about the press? Wall Street Journal reporters get up in the morning, sell Apple short and then go write stories about us. And, it’s clear that it’s perception versus reality. They don’t know s--- about operating systems. They don’t know anything about tools. They don’t know what’s going on in the future. They don’t know that we’re building icebergs, and building from the bottom up."

The bitcoin (BTC) market is in a somewhat similar position. The mainstream media has published quite a handful of negative headlines. A considerable population of traditional finance folks, who can't wrap their heads around the need and use of bitcoin, are happy to point at inconsistencies in the market to back their "I told you so" declarations about how they believe bitcoin is a farce.

Jobs replied by comparing the way the press treats new developments to how people tend to treat a child whom they saw as an infant, disregarding the fact that the child might have matured considerably since then.

In the case of bitcoin, the lag time is not only true for the press, but also for regulators and traditional finance professionals. Additionally, it appears that the crypto community is accepting and following the notion — perhaps unintentionally — by educating the public about how bitcoin and the crypto space at large are evolving. There have been scads of reports with the aim of doing just that. The latest is from Bitwise Asset Management, an American crypto asset fund manager.

Bitwise has recently prepared a 104-page white paper. In it, the fund manager argued that the bitcoin market still has inconsistencies regarding trading data, but the legitimate part of the market has a "remarkable efficiency."

The report builds on a presentation Bitwise had made to the United States Security Exchange Commission (SEC) in March of 2019 to back up its cryptocurrency exchange-traded fund (ETF) application filing.

Here's are the most important points, with some perspective, from the report.

Approximately 95% of reported BTC trading volume is fake

As part of the research, Bitwise analyzed trading data of some 83 exchanges. Researchers said they looked at the trade size histograms, volume spike alignment and spread patterns of these exchanges. They concluded that there are only 10 exchanges with 100% real trading volumes, and these 10 exchanges collectively account for 5% of the reported trading volume.

Bitwise classifies the 10 exchanges as real volume exchanges or reference exchanges. The 10 exchanges include Binance, Bitfinex, bitFlyer, Bitstamp, Bittrex, Coinbase Pro, Gemini, itBit, Kraken and Poloniex. Among the 73 exchanges that Bitwise condemned as displaying fake volumes are OKEx, HitBTC and Huobi.

As expected, there were questions raised about the reliability of the Bitwise study considering that these popular exchanges aren't regarded as real volume exchanges. Bitwise pointed out that the trading data of the three exchanges doesn't follow that of Bitwise's real volume exchanges. It also referenced existing research that found similar patterns with the three exchanges to support its findings.

Fake Transaction Volumes Estimated by Different Researchers

Using the data above, the average daily volume of these three exchanges would have increased the volume of legitimate trading in the Bitwise study from $554 million to $622 million. But the researchers said that it wouldn't have materially changed their conclusion.

HitBTC published a blog post in response to Bitwise's report in which it says it that it has a different customer profile compared to other exchanges, particularly those that the report branded as legitimate. That's because the exchange supports algorithmic trading, whose patte