crypto exchange manipulation

Major cryptocurrency exchanges are manipulating their own volume figures. That’s according to a new report by the Blockchain Transparency Institute (BTI). 

The BTI report claims as much as 80% of the volume on the top 25 bitcoin pairs are subject to wash trading and manipulative bot trading.

Exchanges are inflating their own volume numbers in an attempt to draw huge listing fees from new coin projects.

What is wash trading?

Wash trading is a practice by which an investor or company buys and sells an asset simultaneously. They are essentially buying and selling from themselves. Do this with enough frequency, and it gives the impression of huge volume.

The BTI claims that major exchanges use wash trading techniques to fake the volume on their exchanges.

By doing this, crypto exchanges appear larger and more active than they truly are.

In some cases, true volume is under 1% of reported volume

To find out how deep the problem goes, BTI calculated the true volume of CoinMarketCap’s top 25 BTC pairs. The research firm discovered that actual volume on most of the pairs is less than 1% of the reported figures.

The worst offenders: OKEx, Bithumb, Huobi

Among the worst offenders are some of the biggest crypto exchanges on the planet.

OKEx, the fourth-largest exchange by reported volume, was singled out for evidence of wash trading on all 30 of its traded tokens. Huobi, the fifth-largest by reported volume, appears to be wash trading most of its top pairs, according to the report. And Bithumb, the second-largest by reported volume, is accused of wash trading its Monero, Dash, Bitcoin Gold, and ZCash pairs.

Bithumb now tops the BTI’s Exchange Advisory List, which highlights risky or opaque exchange practices.

BTI Advisory List: use with caution

Binance, Bitfinex, Coinbase Pro get the green light

Not all exchanges are engaging in nefarious wash trading. The BTI found no evidence of manipulation at Binance or Bitfinex. Binance is currently the largest exchange by adjusted volume on CoinMarketCap.

Bitfinex has been accused of market manipulation in the past due to its close ties with stablecoin Tether. However, the BTI report confirms that 100% of trading volume is real.

Coinbase Pro, Kraken, and Gemini also appear to have 100% true volume.

Crypto exchanges reporting true volume, according to BTI

Why are crypto exchanges manipulating their volume?

By faking their volume, crypto exchanges appear bigger and more liquid than they truly are. A high “reported volume” also puts them near the top of CoinMarketCap rankings, which drives more traffic to the exchange.

With a bigger profile, the exchange can charge huge fees for projects looking to list their coins on the platform.

The BTI estimates that coin project teams spend an average of $50,000 on listing fees just for the exchanges on its advisory list. It amounts to $100 million stolen by shady exchanges.

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what is tether logo
  • Tether is a “stable coin” designed to mirror the price of one dollar
  • 20% of all cryptocurrency trades use tether as a proxy for the dollar.
  • Tether claims its coins are 100% backed by real US dollar reserves, but this has never been independently proven.
  • Tether is linked to controversy over close links to the Bitfinex exchange and market manipulation.

Tether is wreaking havoc on the markets this week as traders move money out of the stable coin and into other cryptocurrencies.

Tether (USDT) is known as a “stablecoin” as its value is pegged to the price of a dollar.

When it was first introduced, it brought a degree of stability to the volatile cryptocurrency market. It allowed investors to easily trade bitcoin against the dollar and was even used by Taiwanese banks to execute international transfers.

But this week tether slipped off its “peg,” falling as low as $0.85 on the Kraken exchange.

tether price chart

It was triggered by claims that tether is not fully backed by real dollars. To add fuel to the fire, tether is closely linked to Bitfinex – a cryptocurrency exchange rumored to be on thin ice financially.

All this combined on Monday, resulting in a mass exodus from tether. 

But what is tether, exactly? How does it work? Why do cryptocurrency traders use it, and why is it so controversial?

What is Tether?

Tether first emerged in 2015. It’s a coin designed to bring stability to a volatile cryptocurrency market.

The price of tether is pegged to the US dollar so, theoretically, one tether token should always be the same as a dollar.

In reality, the price of tether fluctuates against the dollar slightly. Generally speaking, however, it’s as stable as cryptocurrency gets.

There are currently 2.3 billion tether tokens in circulation.

According to Tether, each token is 100% backed by a real US dollar in a reserve bank.

“Every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USD₮ is always equivalent to 1 USD.”

what is tether website screenshot

This claim, however, is a huge source of controversy (we’ll get into that shortly).

How is Tether Used?

According to Bloomberg, tether is used in 20% of all cryptocurrency trades. And as you can see in the chart below, tether is the second-most traded cryptocurrency by volume, according to CoinMarketCap.

tether trade volume coinmarketcap

There are many good reasons for this:

1. Easily trade against the dollar

Because tether mirrors the price of a dollar, we can use it to trade against bitcoin and ethereum as it moves against the dollar without actually using fiat currency itself. It’s faster and more efficient.

2. Keep money on the sidelines

Traders often keep their money in tether while waiting for the perfect moment to enter a position or investment.

In the ongoing bear market, for example, traders can keep their money stable in tether while the rest of the cryptocurrency market declines.

Why don’t they just withdraw their money to real dollars? Well, some cryptocurrency exchanges don’t even support dollars. And by the time traders have moved their dollars onto an exchange, they may have missed an opportunity.

By keeping money in tether, they can execute a trade quickly.

3. Exchanges don’t always support dollars

Many cryptocurrency exchanges don’t support dollars. On Binance, the world’s largest crypto-crypto exchange, for example, you can’t deposit, withdraw, or trade fiat dollars.

Supporting fiat currency means complying to complex regulation and setting up bank partnerships. Some exchanges don’t have the means or inclination to do this.

Instead, they rely on tether to provide dollar liquidity. Tether is simply used as a proxy for the real dollar.

Who Created Tether?

Tether’s CEO is Jan Ludovicus van der Velde. He’s also the CEO of Bitfinex, a controversial Hong Kong cryptocurrency exchange.

Both tether and Bitfinex also share a chief strategy officer, Phillip Potter.

This close relationship with Bitfinex has fueled rampant speculation about tether and its legitimacy.

bitfinex logo

Is Tether Really Backed by $2 Billion Dollar Reserves?

The speculation ultimately comes down to this question: is every tether token backed by a real dollar?

Tether certainly claims so. Its website says every tether is 100% backed.

Tether’s white paper also promised that:

“Professional auditors will regularly verify, sign, and publish our underlying bank balance and financial transfer statement.”

However, no independent audit has ever been able to prove the underlying funds.

A report by researchers at Texas University concluded that tether backing is “incomplete.” In other words, there aren’t enough real dollars to back every tether.

Tether has always disputed this claim. They even hired a law firm to provide documentation. Freeh, Sporkin & Sullivan LLP (FSS) produced a report that concluded that Tether’s two banks held $2,545,067,236 USD. That’s enough to cover the tether tokens.

It’s worth pointing out, however, that FSS later confirmed this was not an official audit.

Why Does it Matter?

If tether doesn’t have a fully backed dollar reserve, there’s a risk of cryptocurrency “bank run.”

To explain, let’s start with your normal bank account for a moment.

Let’s say you’ve got $1,000 in your account. Your bank doesn’t actually have that $1,000 cash sitting in a vault.

The bank only keeps a small amount in reserve for people to withdraw (the rest is loaned out or invested in other assets).

This is called “fractional reserve” banking. Banks only need a “fraction” of the total reserves on hand.

Usually, that’s not a problem because most people have savings accounts they don’t touch very often. No-one needs all their money at one moment.

But let’s say there’s an economic crisis. Everyone might flood to the banks to get their money out. If there’s not enough money in the bank for everyone to withdraw, it’s called a “bank run.”

The same thing could happen to tether.

If everyone holding tether simultaneously decides to sell their tokens, tether needs to be able to give them back their dollar equivalent.

And if tether doesn’t have those dollars available in reserve, it could crash the system.

Controversy Around Tether and Bitfinex

This week’s controversy around tether isn’t new.

Tether has been accused of market manipulation in the past. One research paper earlier this year claimed that tether manipulation was responsible for bitcoin’s phenomenal all-time-highs in December 2017.

How?

In simple terms, the researchers claim that Bitfinex (which we know is closely linked to tether) was creating tether tokens out of thin air when traders bought USDT.

These “magic” tethers were then used to purchase bitcoin – artificially inflating the price.

Of course, if this is true, those tether tokens were not backed by real dollar reserves.

Conclusion

Tether is a fantastically useful cryptocurrency. It brings an element of stability to the cryptocurrency market and provides an easy way to trade against the dollar.

However, tether and the team behind it are unable to shake the claims of controversy. Until tether releases a full independent audit, critics will continue to question their dollar backing.

Similar stable coins like the Gemini dollar and Paxos Standard gain momentum every time tether stumbles. For now, however, tether remains the largest stable coin by far, and the eighth largest cryptocurrency by market cap.

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bitcoin price rise

The price of bitcoin spiked more than 10% on Monday morning. Ethereum, XRP and bitcoin cash also exploded to double-digit gains before settling later in the day.

Bitcoin Price Teases $7,000

According to CoinMarketCap, bitcoin’s price spike hit $6,965 before dropping back to $6,660. However, Bitfinex – a cryptocurrency exchange in Hong Kong – charted bitcoin at $7,788 at its highest point.

So, what accounted for this rapid price rise?

Huge Sell-off in Tether

Bitcoin’s surge was triggered by traders selling tether – a “stablecoin” which is pegged to the US dollar.

Tether is typically used to trade cryptocurrencies against the dollar without having to use fiat currency itself. Tether is also used to keep money “on the sidelines” before entering a particular trade. Since it’s pegged to the US dollar, it is a relatively stable asset.

A reported 20% of all crypto trades are made using tether.

What Caused the Tether Sell-off?

According to Bloomberg, the implosion appears to have been caused by renewed rumors of insolvency at crypto exchange Bitfinex. Bitfinex has been plagued by speculation over its financial health and banking relationships.

That’s a problem for tether because Bitfinex and tether share a CEO.

The nerves about Bitfinex’s financial health appear to have spilled over into concerns over tether.

In an attempt to downplay concerns, Bitfinex was quick to point out that “all cryptocurrency and fiat withdrawals are, and have been, processing as usual without the slightest interference.”

FALSE RUMOR: Binance is Delisting Tether

One rumor circulating Twitter on Monday morning hinted that Binance – the world’s largest crypto-to-crypto exchange – was set to delist tether. It was fueled by an image that reportedly showed an email from Binance announcing the forthcoming delisting.

Binance CEO, however, confirmed it was a faked Photoshop image. While this may have initially caused a panic sell-off in tether, it should have no further impact on the price.

For now, the price of bitcoin has dropped from its spike to a stable $6,640.

Bitfinex was founded in 2012, is based in Hong Kong, and is owned by iFinex inc. It is one of the largest Bitcoin trading platforms by trading volume, and It provides regular and margin trading against 105 trading pairs. Bitfinex has trading, deposit, and withdrawal fees, though the deposit fees are waived on deposits over $1000 USD or equivalent.

Bitfinex’s high trading volume makes it good for any investors, while the simplicity of its interface will make new traders feel comfortable, without hiding information from more experienced investors. There is also an API available for programmatic trading.

Bitfinex

bitfinex logo

URL: bitfinex.com
Total Trading Pairs: 105
Deposit Fees: Yes for small deposits
Withdrawal Fees: Yes
Trading Fees: 0.00%-0.20%
Margin Trading: Yes
Verification: Only for fiat withdrawal

Fees

Bitfinex breaks its trading fees down into the usual maker/taker system. With fees going down as the amounts go up based on your total trading over the last 30 days. Starting at 0.1% for makers and 0.2% for takers for orders between $0 and $499,999.99 USD. And 0.0% for makers and 0.1% for takers at $30,000,000.00+ USD. Aside from standard trading, Bitfinex offers an OTC desk with no fees, so long as you allow Bitfinex to broker the transaction.

For deposits, there is no fee so long as your deposit is larger than $1000 USD or equivalent, for withdrawals there is a flat fee for all currencies.
You can find the exact numbers for both withdrawals and deposits here

Interface

Bitfinex’s trading interface is a nice dark blue-green background with light off-white text. Which makes it awesome for late-night trading without eye strain.Bitfinex's default trading interface

There is a large amount of information presented on the main screen which all updates in real time:

  • Your current balance on all wallets
  • An interactive chart of the currently selected trading pair
  • Your current regular and margin orders
  • The current order book (which can be filtered to show only your orders)
  • A list of all Bitfinex’s trading pairs and their current price, with the ability to switch  to them
  • The most recent trades on the current trading pair

The chart is extremely configurable, you can change every colour and the style of the candlesticks. It also has a screenshot button to grab an image of the chart as it stands. There is also a fully interactive tour of the interface, which even provides a small amount of basic trading information. Overall the interface feels comfortable and easy to use.

Verification

Bitfinex requires verification only if you intend to withdraw fiat currencies, you are free to trade and withdraw crypto at any time. Verification requires you to be at least 18, your phone number, your address, two forms of government photo ID, a bank statement indicating you as the account holder, and proof of address no more than three months old.

Security

Bitfinex offers various account and email security features. For email security, you can request that all communication is encrypted with PGP. And on the account side, you can enable 2FA with optional hardware key support, monitor the IP addresses that use your account, any unknown IP addresses attempting to withdraw from your account will be blocked until the withdrawal is confirmed by an administrator.

The U.S. Commodity Futures Trading Commission (CFTC) proposed regulations that will curb unlicensed bitcoin futures trading within the country.

The proposed regulations, announced by the CFTC on Friday, explicitly place bitcoin and other cryptocurrencies under the framework for “actual delivery” that currently governs the purchase of physical commodities such as gold and oil.

Under this framework, exchanges and traders must demonstrate an ability to physically deliver the commodities to their owners within 28 days of purchase. Otherwise, the purchase constitutes a futures contract and is subject to a litany of other regulations governing futures trading.

The full text of the proposed regulatory language has been reproduced below

(1) a customer having the ability to: (i) take possession and control of the entire quantity of the commodity, whether it was purchased on margin, or using leverage, or any other financing arrangement, and (ii) use it freely in commerce (both within and away from any particular platform) no later than 28 days from the date of the transaction; and

(2) the offeror and counterparty seller (including any of their respective affiliates or other persons acting in concert with the offeror or counterparty seller on a similar basis) not retaining any interest in or control over any of the commodity purchased on margin, leverage, or other financing arrangement at the expiration of 28 days from the date of the transaction.

The key point in the proposed language is that the seller may not retain “any interest in or control over any of the commodity” for more than 28 days following the date of the transactions. According to a 23-page document (PDF) accompanying the proposed regulations, this includes exchange-controlled deposit wallets where the trading platform operators — not the traders — retain control of the private keys.

Although the CFTC has long classified bitcoin as a commodity, the physical delivery provision was a thorny issue for cryptocurrency market participants because bitcoin does not exist as a physical entity.

Last year, the CFTC reached a $75,000 settlement with overseas exchange Bitfinex after the commission found that the exchange continued to hold the purchased bitcoins in exchange-controlled wallets after the actual delivery exception expiration date.

The Bitfinex case highlights an important point regarding the extent of the commission’s jurisdiction. The regulations would not just apply to U.S.-based exchanges, but also foreign trading platforms that provide services to Americans. Consequently, this regulatory guidance could lead overseas exchanges that offer margin trading to further restrict access to U.S. residents.

The CFTC will accept public comments on the proposed bitcoin regulations for 90 days, a period that will commence following their publication in the Federal Register.