In this piece I will expose why I believe more than $3 billion of all cryptoassets’ volume to be fabricated, and how OKex, #1 exchange rated by volume, is the main offender with up to 93% of its volume being nonexistent. I’ll endeavour to prove it by analyzing publicly available data.
When I set out to datamine for this piece, I had no idea I would end up talking about fake volume.
I initially meant to gather data about cryptoassets liquidity, that could be a complement to volume. I thought it would prove an interesting indicator when assessing the value of an asset.
I decided my metric of choice would be to collect orderbooks from all major exchanges, and to measure how badly market selling $50k USD worth of each cryptocurrency would crash the price. Throughout this article, I will refer to this number as “slippage” (see the annex for a proper definition). I would later refine my slippage metric by selling more or less on each exchange depending on the volume they processed, and changing the sold amount with regards to the currency market cap.
I expected that slippage should generally be a decreasing function of volume, but that some differences might show from one currency to another. After all, if you have a gargantuan volume on a given pair, there has to be a very high competition between market makers to satisfy the avid buyers and sellers. And that kind of competition is bound to densify orderbooks and reduce spreads.
Right?
Well… it turned out this was the obvious tendency, yes. But where I had expected mild differences between currencies, I found ridiculously massive discrepancies between exchanges. Not the kind that can be easily hand-waved away (“oh well, their users must behave differently”), but the kind that can only be explained by some figures being overstated as much as 95%.
Leading the pack is OKex, currently ranked #1 exchange by volume with $1.7b total volume on both CoinMarketCap and LiveCoinWatch websites.
A bit of wash trading and artificial volume inflation is to be expected in a thoroughly unregulated market. What I did not expect was the magnitude of the fraud. Consider the following chart:
It’s a representation of the average slippage and volume of all pairs among a selection of a score of cryptocurrencies with a daily volume over $100k over four major exchanges: OKex, Kraken, Bitfinex and GDAX, over the course of 24 hours.
You may for example read that the blue dot at the bottom right represents a GDAX pair, with a volume close to $200m, and a slippage of less than 0.1%
The chart is striking. It shows how, although all first three exchanges seem to behave rather similarly, OKex pairs, in red, all have a massively higher slippage with regards to their volume. Like I explained before, this can only mean that most of the volume OKex claims is completely fabricated.
Besides, for legibility’s sake, I elected to remove from the dataset all slippage data over 4%. Reintroducing the ignored data paints an even more absurd picture of OKex traffic, and requires a logarithmic scale:
Many pairs, albeit boasting up to $5 million volumes, would cost you more than 10% in slippage, should you want to liquidate a mere $50k in assets. Those pairs included, at the time of the data parsing (06/03/18): NEO/BTC, IOTA/USD, QTUM/USD. Hardly illiquid or low-profile assets.
Although those numbers alone prove to me without the shadow of a doubt that a suffocating majority of OKex volume is fake, I had not witnessed first-hand how they implemented it. I thus logged into their platform and had a look at some pairs trading history. And indeed, they fake their volume in a laughingly obvious and artificial way:
Compare this perfectly neat and absurdly consistent sinusoidal volume with what happens on an actual exchange:
Spikes, dips, snowball effect on higher volatility. Not a chart out of a high school oscilloscope.
“But it’s the day and night cycle in China!”. I do not believe it speaks highly of OKex engineers that they actually reflected upon ways to make washtrading less conspicuous than a straight constant stream of trades, but all they could come up with was a perfect sine wave.
As obvious as it is that most of OKex’s volume is doctored, how do we go about estimating whether it’s 90%, 95%, or 99% fake? I propose the following method:
Gather a list of trustworthy exchanges that all behave consistently on that regard
Perform a regression on their combined datasets, so as to be able to predict a trading pair volume from an observed slippage
Compare OKex claimed volume numbers vs estimated volume numbers as predicted by our model.
To that effect I used data from the following exchanges: Bitfinex, GDAX, Poloniex, Bistamp, Gemini and Kraken. Given the volatility of the dataset at lower volumes, I also decided to change the metric I used: instead of a $50k marketsell, I simulated a $20k one.
Here is what the data from the trusted exchanges looks like, this time showing volume as a function of slippage:
Notice that due to extremely volatile data, any model becomes absurd when slippage exceeds 0.7%. The one proposed above is the best fit I came up with for slippages below 0.7%. Over this threshold, the only reasonable assumption is that the expected volume is most likely under $1M.