By Jason Victor
March 24, 2019
Quite a stir has been made recently after a report by Bitwise Asset Management and regurgitated by the Wall Street Journal told the world what most of us already knew — there is a lot of fake volume in crypto.
First off, "fake volume," or more precisely wash trading, is nothing new. It's been done in traditional markets and remains an ongoing problem for compliance departments to this day. In a market like equities, the economic incentive structure that produces wash trading is complicated — the goal typically involves creating an illusion of liquidity in a given stock. It's a trader looking to make a quick buck, in short.
Wash trading in crypto is borne of a very different set of incentives. Typically, such activity is simply an attempt to attract trading activity to a particular exchange; in a world where effectively anyone is free to participate in the exchange business (to some extent, with some assets) there is naturally a greater diversity of venues. While this has yet to happen, I expect this competition will eventually yield innovation, as is often the case; but for now, it's created nothing more than a competition for attention, and what better way than by putting up big numbers?
I'd like to say "it's tempting" or some similar platitude, but as the CEO of this company I can genuinely say I have never felt any temptation to falsify, intentionally misreport, or mislead with regard to volume figures. So to be clear, I find this behavior contemptible. But I also find that such things are often endemic to the Internet. They are the natural byproducts of the freedom the Internet brings and the barriers to entry broken down by the innovative technologies built on top of it — like crypto.
So what do you do in practice? At Routefire, we maintain what we call a "Good List." This is a list of venues we know to be reputable and trustworthy. When we analyze the order book, we typically remove any small slices that could unduly influence the top-of-book price. We functionally assume that the kind of upstart exchanges discussed in the Bitwise report have no volume at all and thus also no relevant price discovery.
I'm glad Bitwise brought this issue up — it needs to be discussed so that services like Routefire can obtain genuine, manipulation-free data on exchange usage. However, their implicit conclusions are out of line with the severity of their findings, which I expect is a PR play by the well-known crypto bull.
And if you're really worried, use Routefire! We take care of this stuff for you.
Edit: Since writing, we have found a public "Good List" maintained here.