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Crypto currency platforms' staggering volumes being questioned
FOUR months ago, BitForex was just one of many obscure exchanges offering users the ability to trade cryptocurrencies like Bitcoin.
Today, the Singapore-based platform is regularly reporting daily transactions that exceed US$5 billion - nearly matching turnover on London's 217-year-old stock exchange.
How did BitForex - and other startups like it - expand so quickly despite tumbling digital-asset prices and slowing activity on more established venues?
Many market participants say they suspect these fast-growing exchanges are either offering incentives that encourage users to inflate volumes, or not doing enough to stop abuse on their platforms.
One red flag at BitForex: its reported volume is by far the biggest among 219 platforms tracked by CoinMarketCap.com, despite traffic on its website amounting to a tiny fraction of most peers.
For individual investors lured to exchanges with inflated volumes, the risk is that cashing out at prevailing market rates may prove much harder than the reported figures suggest. Doubts about the integrity of crypto markets have deterred some professional money managers from investing in virtual currencies and prompted regulators to take a closer look at exchanges, even as some venues go to great lengths to avoid manipulation.
"Some exchanges will say 'everyone's doing it, so I'm doing it,'" said Neil Woodfine, a former crypto exchange executive who now runs Clavestone, a Bitcoin key management service. "New traders will get feedback very quickly from engaging with the market on trades not executing at the price they want."
Trading has surged on BitForex because of the exchange's so-called transaction mining system, Garrett Jin, vice president at BitForex, said in response to questions.
Transaction mining, also known as trade mining, is a controversial practice.
On BitForex, users earn the equivalent of US$1.20 in digital tokens issued by the exchange for every US$1 they pay in transaction fees. It's a system that critics say is tailor-made to encourage wash trading - in which a trader, or a team of traders, buy and sell the same asset repeatedly to inflate market activity.
If the coins distributed by BitForex retain their value, customers can effectively earn free money by using automated programs, known as "bots", to swap cryptocurrencies back and forth between accounts under their control. (Not all trade-mining exchanges offer rebates that exceed the value of trading fees paid by customers.)
"All users are contributors to this exchange" and should be rewarded, Mr Jin said, adding that BitForex "opposes" all kinds of manipulation and that the incentive programme is set to end soon. He didn't elaborate when asked whether the venue has tools to monitor and prevent abusive trading.
Mr Jin said it's "technically possible" for users to trade with themselves using two accounts, and that the exchange is working to address the issue.
Exchanges including DOBI Trade, FCoin, CoinSuper and CoinBene, which offer or have offered similar transaction mining incentives, didn't reply to requests for comment.
CoinMarketCap.com, which compiles its data from the exchanges, publishes an "adjusted" ranking that excludes volume from trade-mining venues and some other platforms. "We have multiple automated alerts detecting anomalies in the data," CoinMarketCap.com spokeswoman Carylyne Chan said.
Like other crypto exchanges in Singapore, BitForex isn't directly regulated by the Monetary Authority of Singapore (MAS). "Digital tokens are mainly traded on opaque markets, with no regulatory protection for investors," MAS said in response to questions. "There may not be enough active buyers or sellers and consumers may not be able to exit their token investments easily."
US authorities have expressed similar concerns. Bloomberg reported in May that the US Justice Department has opened a criminal probe into suspected illegal practices in crypto markets, including wash trades.
In a report last week, New York's attorney general said the industry has generally failed to adopt serious market surveillance measures to detect and punish suspicious trading, though it didn't single out any venues for wrongdoing.
Market participants say quantifying the scale of suspected volume exaggeration is difficult. But Calvin Cheng, a Singaporean entrepreneur who bought a stake in China's first Bitcoin exchange in January and founded another venue in April, estimated in an interview that most of the trades recorded by crypto platforms globally are bogus. Combined volumes at all exchanges tracked by CoinMarketCap.com totalled about US$15 billion over the past 24 hours.
Even the largest exchange operators can't be trusted, warned Asim Ahmad, who recently left BlackRock to start Eterna Capital, a blockchain investment firm. He based the assessment on his own trading experience and time spent watching exchanges' order books.
Both Mr Ahmad and Clavestone's Mr Woodfine said automated, high-frequency trading strategies are likely fuelling inflated volumes.
Automated trading is widely used in traditional markets under regulatory oversight, though it can facilitate manipulation when unmonitored.
The report from New York's attorney general said it's "of particular concern" that many platforms have no formal policies governing automated trading.
BitForex may just be "one of the worst offenders in this parade of inflated volume", said Dmitriy Budorin, chief executive officer of cybersecurity firm Hacken and founder of Crypto Exchange Ranks, which scores venues on metrics including liquidity and security. BLOOMBERG