In an attempt to gain regulatory approval for a Bitcoin exchange traded fund (ETF), Bitwise Asset Management attacked the accuracy of data listed on cryptocurrency tracking site CoinMarketCap.com. The claim came in a study filed with the U.S. Securities and Exchange Commission and made public on March 21.
In the filing, Bitwise claims on page 23 that 95 percent of the Bitcoin (BTC) trading volume reported by CoinMarketCap.com is “fake and/or non-economic in nature, and that the real market for bitcoin is significantly smaller, more orderly and more regulated than commonly understood.”
The study is part of Bitwise’s application to create the Bitwise Bitcoin ETF Trust, a proposed exchange traded fund. It claims that “the bitcoin market, which is more orderly, regulated, and efficient than is commonly known,” and that its “application and supporting data mitigate the Commission’s concerns around market manipulation, custody, liquidity, pricing, and arbitrage.”
The SEC has refused approval of all cryptocurrency ETF’s proposed so far citing concerns about exposing investors to fraud and market manipulation.
In its proposal, Bitwise attempts to alleviate the SEC’s concerns by committing to base its fund on that authentic 5 percent—the results reported by the 10 funds out of 81 studied that it found to have honest trading volume.
The Bitwise study comes on the heels of a report released on March 8 by the Crypto Integrity project, which alleges that 88 percent of the trading reported in February was fraudulent.
Among the issues Bitwise cited were evidence of wash trades, in which identical buy and sell orders essentially cancel each other out. Other indications are virtually all trades being executed between the bid and ask price; massive trade volume compared to legitimate exchanges; very wide spreads between the buy and sell prices; very few small-value trades of the type seen on what Bitwise considers more reputable exchanges; stretches of hours and even days with no trade volume at all; and trade volume that remains consistent across the day, rather than rising and falling in accordance with human activity rhythms.
Bitwise proposes basing its Bitcoin valuation on the price and volume reported by the 10 exchanges its research found were reporting honest trading volumes out of 81 studied from March 4 – 8. These are: Binance, Bitfinex, Kraken, Bitstamp, Coinbase, bitFlyer, Gemini, itBit, Bittrex, and Poloniex.
Of those, Binance accounted for just over 40 percent of the trading volume of those 10 exchanges, reporting $110 million in trades on those five days, out of $271.4 million total, Bitwise claims in its filing.
It’s worth noting that four of those exchanges—Coinbase, Genimi, itBit, and Bitflyer— have received very hard-to-get BitLicenses to operate in New York from the state’s Department of Finance, which regulates cryptocurrency exchanges. Poloniex’s owner, Circle, has one but it does not. Poloniex, along with Bitstamp, Bittrex, and Bitfinex cooperated with the New York Attorney General’s office on a September 2018 report on the practices of 13 of the largest exchanges. That report also accused Kraken and Binance of operating illegally in New York.
In response to the Bitwise filing, CoinMarketCap.com Global Head of Marketing Carylyne Chan told Modern Consensus, “Even though we try our best to verify the data with the projects on our site, we are not in the practice of censoring or policing others. In an open ecosystem like the one we are in, we believe that the best policy—that we follow closely—is to over-provide on data and let users make their own informed choices about what to do with that data.”
A key philosophy at CoinMarketCap.com is “not introduce our own bias” into the information provided to users, Chan noted.
That said, she acknowledged that the concerns about false volume are valid and have an impact on the cryptocurrency trading community and the public’s impression of the crypto space in general.
As a result, Chan said that CoinMarketCap.com is planning to roll out, “more tools to create custom views and filter through data in a way that is most relevant.” This will provide users the “power to experience and use the data in a way that fits their needs most,” she noted.
Among the tools users can expect are “metrics to evaluate exchanges that would include liquidity measures, hot/cold wallet balances, and traffic data,” Chan said. “For instance, if an exchange with low traffic has $300 million volume and just 5 BTC in its wallet, users will be able to draw their own conclusions without the need for us to make arbitrary judgment calls on what is ‘good’ or ‘bad.’”
*Friday, March 22, 2018, 5:57 p.m.: Paragraph added regarding New York State Department of Financial Services.