A new research paper published by the National Bureau of Economic Research (NBER) suggests that nearly three-quarters of transactions on unregulated cryptocurrency exchanges are fake.

Fake Trading Volume on Crypto Exchanges

The paper, titled “Crypto Wash Trading,” used statistical and behavioural patterns to analyse 29 unregulated exchanges and found that, on average, more than 70% of the volume on these platforms was made up of wash trades.

The researchers define wash trading as the practice of investors simultaneously selling and buying the same financial assets to create artificial activity in the marketplace, which is known to distort price, volume, and volatility and reduce investors’ confidence and participation in financial markets.”

This type of activity is often used to manipulate the appearance of market activity and can be difficult to detect. The report suggests that the high number of fake volumes in the crypto industry may contribute to distorted market conditions.

The exchanges in the study were selected based on their ranking on third-parties websites, representativeness, and API compatibility. The platforms were divided into two tiers: Tier-1 (ranked in the top 700 in the finance/investment section of SimilarWeb.com) and Tier-2 (all ranked outside the top 960).

The study, which focused on the four most heavily traded cryptocurrencies (BTC, ETH, LTC, and XRP) against the US dollar, found that wash trading is prevalent on unregulated exchanges but not on regulated platforms.

Tier-1 Exchanges Failed 20% of Wash Trading Tests

The researchers observed “anomalous trading patterns only on unregulated exchanges,” with Tier-1 exchanges failing more than 20% of tests and Tier-2 exchanges failing more than 60%.

“We find that the wash trading volume, on average, is as high as 77.5% of the total trading volume on unregulated exchanges, with a median of 79.1%. In particular, wash trades on the twelve Tier-2 exchanges are estimated to be more than 80% of the total trade volume, which is still over 70% after accounting for observable exchange heterogeneity,” the researchers wrote.

Meanwhile, another report in September claimed that more than half of Bitcoin transactions on exchanges are either fake or non-economic.

~ By William A. Frederick ~