In this article we review how CoinMarketCap is taking steps to counter the rankings manipulation in volume it had been subject to for at least the last 2 years. We review what changes are being made exactly and how they could actually bolster chances for the eventual approval of a Bitcoin ETF sometime in the near future. 

A screenshot of coinmarketcap.com’s sorting of exchanges by the new Liquidity metric.

CoinMarketCap Combats Manipulation, Introduces New Exchange Volume Metric

Founded in 2013, CoinMarketCap is one of cryptocurrency’s most famous and oft-visited websites. Almost everybody that is associated with crypto in any way has visited at least one time in their lives, while some avid traders or enthusiasts visit it several times daily. For the last 6 years, CoinMarketCap, or CMC for short, has been the go-to resource for where to find the current price of a coin. It currently lists a whopping total of 4,836 different cryptocurrencies, including both coins that run on their own chains and tokens that run on the chains of platform coins.

In addition to tracking the total number of coins and their current prices, CMC also tracks the total number of markets (pairings across all exchanges), the total market cap of all coins, the 24 hour volume of all cryptocurrency trades (as reported by exchanges listed on CMC), and the percentage dominance of Bitcoin (BTC) as compared to all other coins. This wealth of information can be used to not only ascertain the direction of individual cryptocurrencies and general market trends but the rising or falling popularity of altcoins as compared to Bitcoin.

Next to price, the most important measurement used by viewers is volume, as a coin’s volume can reveal a lot about what kind of activity it has relative to other coins. Volume is also important for exchanges, as (up until very recently) the rank of exchanges listed on CMC depended solely on either the reported or adjusted total volume of each exchange. As CMC is a tremendously influential website in the crypto world, this means there is a huge amount of incentive for exchanges to create as much trading volume for their product as possible, as a higher ranking means more visibility on the website, and more customers along with it.

Since the great bull run of late 2017, there has been an ever increasing amount of competition in the crypto exchange industry. It’s no secret that several exchanges engage in the practice of manipulating their volume in order to create an artificial buzz around their business and gain customers from those looking for new exchanges on CMC. In a report filed with the SEC in March of this year, Bitwise Asset Management laid out their findings that up to 95% of all crypto exchange volume was faked, and the result of manipulation. Bitwise’s report was part of their case to launch a Bitcoin ETF whose price was based on exchanges with trading volume they deemed to be legitimate, as the SEC had previously stated that one of their biggest concerns with approving a Bitcoin ETF is that its price could be too easily manipulated by only a handful of people.

On November 11th, the team at CoinMarketCap finally responded to this issue, introducing a new metric to measure exchanges known as Liquidity. The term liquidity traditionally refers to an asset’s degree of being readily available to be bought or sold at a fair market value. For example, cash tends to be considered the most highly liquid asset of all, as it can be exchanged for a wide variety of goods, services and other assets. On the opposite end of the spectrum would be items such as highly-specific collectibles or pieces of art, which are considered to be largely illiquid because they cannot be readily exchanged. According to CMC’s announcement of the new metric in their blog, Liquidity is given the following definition:

“The Liquidity metric by CoinMarketCap takes into account a wider range of key variables from the order book, such as the distance of the order from the mid-price, the size of the order and the relative liquidity of the asset in question.

The metric has been designed to measure liquidity in an adaptive manner and the calculation is made by polling the market-pair at random intervals over a 24-hour period and averaging the result. This takes into consideration differences in global time zones and the fact that order-book depth changes constantly due to immediate market conditions…

The adaptive methodology will make the Liquidity metric very difficult to “game” as orders would need to be placed close to the mid-price, or risk being counter-productive to the Liquidity metric scoring.”

As of now, the metric has only been rolled out to include the rankings of coin pairings and exchanges, but CMC has plans to introduce it to individual coins as well. For now, a coin’s total volume is the next best measurement of its actual liquidity. As pointed out in the following tweet, less than 1% of all crypto assets listed on CMC actually have any sort of relatively measurable trading volume, which gives an idea of just how illiquid the markets for most cryptocurrencies actually are:

In a recent interview with Bloomberg, Ripple CEO Brad Garlinghouse expressed his belief that only about 1% of all cryptocurrencies had any sort of potential to succeed in the long run, echoing the findings that only a tiny sliver of cryptocurrencies on CMC actually possessed a market with any sort of measurable trading volume:

“I have said before that I think 99% of all crypto is likely to go to zero. But, there is that 1 percent that is focused on solving real problems for customers and can do that on scale… That is going to be game-changing and will continue to grow significantly in the years ahead.” – Brad Garlinghouse, CEO of Ripple.

As a quick review, here are the most common ways in which market volume can be “faked”:

  • Wash trading. This refers to the same trader being on both the buying and selling end of a trade. By buying and selling coins to themselves over and over, a single trader can make it appear that a coin (and by extension, exchange) has more activity and trader interest than it actually does.
  • Bot trading. Most major exchanges have API interfaces that allow users to run trading bots to automate trading strategies. Frequently these bots operate at high speeds, conducting several trades a minute. Whether trading with themselves or other bot owners, high frequency trading bots can also be used for the sole purpose of volume inflation.
  • Margin trading. Several exchanges offer leveraged trading opportunities, meaning that the trader only needs to put up a fraction of the overall amount being traded, with the rest being lent by the exchange (or other exchange users). In essence, an exchange can bolster the size of a trade by up to 100x using margin trading, meaning that reported volume for some exchanges can be as much as 100 times greater than the actual amount deposited by a trader.

With the introduction of the Liquidity metric, it will be much harder for exchanges to fake their volumes, as employment of these 3 different tactics will yield far lesser results as far as altering the final liquidity scoring is concerned. The top 10 exchanges by Reported Volume (each 24 hours, using today’s figures) are as follows:

  1. BitMEX – $2.756 billion
  2. EXX – $1.687 billion
  3. BKEX – $1.470 billion
  4. Bithumb Global – $1.335 billion
  5. LBank – $1.291 billion
  6. P2PB2B – $1.262 billion
  7. BW.com $1.262 billion
  8. BitMart – $1.177 billion
  9. MXC – $1.144 billion
  10. Binance – $1.136 billion

In stark contrast, the top 10 exchanges when listed by Liquidity are:

  1. HitBTC – $62.16 million
  2. Binance – $60.35 million
  3. Huobi Global – $32.03 million
  4. Bitfinex – $20.73 million
  5. Coinbase Pro – $15.31 million
  6. Kraken – $13.66 million
  7. Bittrex – $13.53 million
  8. DigiFinex – $13.17 million
  9. MXC – $11.92 million
  10. OKEx – $10.27 million

The only exchange to appear on both lists is Binance, which likely means they are the most honest exchange to report volume totals to CMC out of all the exchanges in the first (Reported Volume) list. Most of the exchanges on the second list are more commonly-known to the cryptocurrency trading community than those on the first, demonstrating the tremendous advertising power behind reported volume manipulation.

Along with a handful of other exchanges, Binance was deemed by Bitwise to be one of the most honest of exchanges in terms of volume reporting, which was their reasoning for including them in determination of the spot price of BTC for their would-be ETF. It also explains how they could appear on both top 10 lists while no other exchange could claim that honor.

Interestingly, and with coincidental timing, it was announced yesterday that the SEC decided to review its rejection of the Bitwise Bitcoin ETF on its own accord; whether or not this had anything to do CoinMarketCap’s recent reformulation of trading volume calculations is pure speculation.