Though it may not seem likely on the surface, a report highly critical of exchanges which regularly exaggerate their BTC trading volume may prove to be just what one crypto asset firm needs in order to make their case to the SEC as to why their Bitcoin ETF should succeed where all others may have failed.

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Almost All Major Exchanges on CoinMarketCap are Fakers, Says Bitwise

An analysis published by Bitwise Asset Management last week demonstrates that up to 95% of bitcoin spot trading is faked and the result of manipulation by unregulated exchanges. The in-depth analysis found that “substantially all of the volume” reported by 71 out of 81 bitcoin exchanges listed on CoinMarketCap was “wash trading,” which is a term used to describe one party both buying and selling bitcoin, in order to create an appearance of increased activity at that particular exchange.

Out of a combined $6 billion in daily BTC trading volume across the 81 exchanges, a meager $273 million was found to be the result of legitimate, non-manipulated trades. In explanations behind its decision to deny multiple Bitcoin ETF applications, the SEC has repeatedly cited the risk of trading manipulation as a reason why investors could not be guaranteed to be getting a fair investment in such an ETF.

bitwise reported vs. actual vol

Source: Bitwise document submission to the SEC


This conclusion was reached due to the fact that, as has been established among markets which determine the spot prices for other commodities, there are no fraud detection or manipulation reporting services in place with bitcoin exchanges. Such services would need to be created and put in place before the SEC felt comfortable in approving a Bitcoin ETF.

SEC Hard to Appease Regarding Bitcoin ETF

The SEC is now notoriously well-known among crypto investors who have been anxiously awaiting a stamp of approval for any one of the dozen Bitcoin ETFs filed over the course of the last 2 years. Such an approval is predicted to be a catalyst for a tremendous rise in the price of BTC, which would assuredly bring along the rest of the crypto market for an upward ride. However, time and again they have denied Bitcoin ETF applications, sometimes (as in the case of that of the Winklevoss Twins) more than once.

Not only would a Bitcoin ETF open BTC’s ability to be traded by Wall Street institutions and small-time stock traders alike, it would also act as a stamp of approval by the U.S. government, giving cryptocurrency in general an air of legitimacy that some investors feel is sorely needed. Ironically, such a decision would also take away from bitcoin’s ability to truly operate free from government oversight, moving it away from Satoshi Nakamoto’s libertarian ideals, and toward centralization/institutionalization. However, getting the SEC’s nod of approval for a Bitcoin ETF has proven to be anything but easy.

In specific, the SEC made it clear in their decision regarding the Gemini Trust Bitcoin ETF (organized and sponsored by the Winklevoss twins) that reliance on a single exchange to determine the spot price of BTC was inherently risky. They felt that price manipulation in outside exchanges could have an unwanted effect on prices the exchange used to generate the price of its ETF. As stated in their decision to deny the approval of the ETF:

“The Commission agrees that, if (Gemini) had demonstrated that bitcoin and bitcoin markets are inherently resistant to fraud and manipulation, comprehensive surveillance-sharing agreements with significant, regulated markets would not be required, as the function of such agreements is to detect and deter fraud and manipulation.

But because the underlying commodities market for this proposed commodity-trust ETP is not demonstrably resistant to manipulation, (Gemini), as the ETP listing exchange, must enter into surveillance-sharing agreements with, or hold Intermarket Surveillance Group membership in common with, at least one significant, regulated market relating to bitcoin.”

Only 10 BTC Exchanges Stand Out as Honest Among 81

Overshadowed on CoinMarketCap by the manipulating offenders, there are a handful of honest exchanges which do not engage in market manipulation, according to Bitwise. Exchanges deemed by Bitwise to have “real” trading volume, and their daily BTC trading averages include:

  • Binance ($91 million)
  • Kraken ($17 million)
  • Coinbase ($16 million)
  • Bitfinex ($14 million)
  • Bitstamp ($13 million)
  • bitFlyer ($9 million)
  • Gemini ($3 million)
  • Bittrex ($3 million)
  • itBit ($2 million)
  • Poloniex ($1 million)

Outside of this list of 10 exchanges, all other exchanges listed by CoinMarketCap as offering BTC/USD or BTC/USDT pairings engage in some form of trading manipulation, which can best be characterized as buy and sell trades being offered and fulfilled by the same party. The biggest exchanges engaging in this behavior (and their respective daily volumes) are:

  • OEX ($527 million)
  • BitMEX ($428 million)
  • CoinBene ($370 million)
  • BitForex ($330 million)
  • FCoin ($300 million)
  • com ($282 million)
  • EXX ($211 million)

According to Bitwise, signs of an exchange with organic (real) trades include:

  • a random distribution of buy (green) and sell (red) trades in its most recent trades history, as trading activity that perfectly alternates or goes all in one direction suggests unnatural trading patterns
  • a greater than-random number of “round trade sizes”, which are orders for trades with whole numbers or not many decimal places, such as 1.0, 0.6 or 0.1 BTC, as human traders are more likely to place orders using round figures
  • uneven “candle” formation, which means that prices do not move uniformly up or down over given periods of time
  • small buy/sell price spreads, of 0.01% or less, as small spreads are indicative of a market that is “well arbitraged”

Conversely, exchanges engaging price manipulation have been demonstrated to possess the following characteristics:

  • the most recent trade usually prints inside the prevailing bid and ask, meaning it does not reflect the last buy or sell price but a price in-between the two
  • trading activity is evenly (non-randomly) distributed between buy and sell orders, without much variation
  • most recent printed buy and sell trades are almost always of the same amount, suggesting that one user is simply buying and selling coins to themselves
  • most trades are not very well distributed in size, meaning they are all roughly the same size
  • most trades do not use round numbers but sometimes carry out eight decimal places in specificity (specific down to terms of single satoshis)
  • significant spreads between buy and sell prices, of 0.1% or more (ten times bigger than what is observed in non-manipulative exchanges)
bitwise suspicious exchange

Source: Bitwise document submission to the SEC


Why the Bitwise Bitcoin ETF May Stand a Chance

Bitwise runs one of the first cryptocurrency basket funds for their clients, which means they are specialists in price determination. As such, they believe themselves well-suited for the task of running a Bitcoin ETF, and in January, they filed an application for such with the SEC. With less than a week to go before the SEC is legally required to make a decision regarding Bitwise’s attempt, their most recent report may counter-intuitively go a long way in helping to prove their case for approval.

This is because Bitwise’s ETF price will correlate with a price average take from the 10 exchanges demonstrated to be trustworthy, making it much harder to manipulate than previous examples. For example, the Bitcoin ETF application filed by Gemini stated that it would rely upon a single exchange (Gemini Trust) to provide the price of its ETF.

In a 227 page supporting document provided to the SEC, Bitwise outlined the rationale as to why their ETF was different and uniquely resistant to market manipulation:

“The Bitwise Bitcoin ETF Trust intends to provide direct exposure to bitcoin, priced off the equivalent of a crypto consolidated tape, while custodying assets at a regulated, insured, third-party custodian. This down-the-middle approach is based on an accurate understanding of the bitcoin market, which is more orderly, regulated, and efficient than is commonly known.”

The SEC has until the end of March to either come up with a decision on Bitwise’s ETF, or else choose to postpone it until a later date. If the SEC approves the ETF, it will all but assuredly be the catalyst that long-term BTC investors have been looking for needed to spring a new bull market to life. If the SEC decides to deny Bitwise, they will assuredly have to provide a unique line of reasoning for doing so that has not been provided in their previous decisions.