Bitcenter Research: How to Estimate Fake Trading Volume on Cryptocurrency Exchanges?
Since 2023, trading volumes on cryptocurrency exchanges have significantly increased. In January of this year, the derivatives trading volume on mainstream exchanges saw a growth of 47.6% compared to the previous month. However, this surge in trading volume may potentially include fake or artificial trades, as discussed in the article.
Fake trading volume on cryptocurrency exchanges is not a new topic. Due to the lack of regulation in centralized exchanges, some exchanges tend to engage in fake volume practices to boost their ranking and reported trading volume. Therefore, we have developed a methodology for analyzing trading volume to identify and explain fake trading volume.
We obtained historical candlestick data, real-time order book data, and real-time trade data through open APIs from several mainstream exchanges, including Binance, Bybit, OKX, Bitget, Phemex, Kucoin, and dYdX.
1.Overview of Exchange Trading Volumes
From the chart below, we can observe a significant increase in trading volumes on cryptocurrency exchanges since 2023. However, the trading volume pattern of Phemex exchange appears to be anomalous.
The chart displays the price and trading volume of the uBTCUSD trading pair on Phemex. It is evident that starting from August 19, 2022, the trading volume rapidly increased, followed by another surge from September 16, 2022, to November 19, 2022. Subsequently, without any apparent signs, the trading volume sharply dropped and returned to the levels before August 19, 2022. From January 2023 onwards, the trading volume seems to rebound and consistently maintain a higher level.
- Volume-Price Relationship Study
Normally, market price fluctuations lead to an increase in trading volume as investors close existing trades or open new ones. Based on our experience, significant spikes in trading volume often occur after substantial price declines or increases, especially in the futures/derivatives market.
Considering the leverage trading characteristic of cryptocurrencies, any major market movement can be amplified and result in profit-taking or stop-loss orders, leading to a surge in trading volume. Therefore, we investigated the relationship between price volatility and trading volume changes on Phemex as one of our focal points.
Our analysis of the (Pearson) correlation coefficients among the mainstream exchanges indicates that dYdX exhibits periodicity associated with trading mining activities. Binance, Bitget, OKX, and Bybit show strong linear relationships, while Kucoin displays a weaker linear relationship, and Phemex ranks last.
Hence, we can infer that Phemex engages in fake volume practices, and these practices likely occur during periods of price stability, with abnormally inflated trading volumes.
- Trading Order Flow
We also analyzed recent trades on several exchanges. Large market fluctuations often result in increased trading volumes, typically due to a sudden influx of trading activity and larger trades.
In the case of Phemex, we did not find any significant correlation between raw trading order flow and candlestick trading volumes. The trade order sizes did not exhibit randomness. In comparison to Binance, the trading scale on Phemex remained relatively stagnant. The difference lies in the density of trades rather than individual trade sizes.
- Order Book Depth vs. Trading Volume
Depth is considered an important criterion for measuring exchange liquidity. Traders prefer markets with good depth as it leads to lower transaction costs. We examined the order book depth of various exchanges to identify any observable patterns or trends.
Binance and dYdX appear to have very good depth and pricing. Kucoin and OKX follow closely, while Phemex shows the highest slippage.
- Estimating Fake Trading Volume
We developed a model to estimate the true proportion of reported trading volume. Observing the weak correlation between price volatility and trading volume on Phemex, we assume that fake trading mainly occurs during periods of minor price fluctuations. In other words, trading volume during significant price movements is considered genuine. This is a conservative assumption used to estimate the proportion of fake trading volume.
As seen in the graph, there are noticeable differences, with the estimated trading volume significantly lower than the reported trading volume. The estimated true trading volume is expected to range between 5% and 25% of the reported volume. Using the same method to estimate the true trading volume ratio for Binance and Bybit yields results that closely align with the reported trading volume.
Summary:
We utilized various publicly available data from mainstream centralized exchanges:
Phemex's trading volume exhibits different patterns compared to other exchanges. The sudden increase in trading volume on the Phemex platform is intriguing and not considered normal.
In contrast to any other exchange, the correlation between Phemex's trading volume and price movements is notably weaker. This indicates that Phemex's trading volume is not solely dependent on market trends and may be influenced by other factors.
Among most exchanges, Phemex appears to have the highest spread and slippage. This may discourage some traders from engaging in transactions.
By analyzing the ratio of surging trading volumes, the estimated trading volume is significantly lower than the reported volume, with the true trading volume expected to be between 5% and 25% of the reported volume.
Through in-depth analysis of individual trading data, Phemex's trading scale remains relatively stable even during significant market volatility. Compared to Binance, which experiences substantial trading volume during periods of large candlestick movements, Phemex has a different pattern characterized by higher-density trading.
About us:
Bitcenter is a company focused on building a crypto economy. We pursue the goal of creating a fairer, more accessible, efficient and transparent financial system that makes it easier for people to participate in the world of cryptocurrency.
Since 2012, we have had a radical philosophy: anyone, anywhere should be able to send and receive bitcoins easily and securely. We see cryptocurrencies as an important part of the future of finance, with great potential and innovation.
Today, we have built a trusted and easy-to-use platform that provides users with access to the broader crypto economy. Trade, store and manage cryptocurrencies through our platform and experience a more convenient way to manage digital assets.
We are committed to providing users with a secure, efficient and transparent trading environment that ensures the security and privacy protection of their assets. We are constantly driving innovation and exploring new technologies and solutions to meet the needs of the evolving crypto economy.
As advocates of the crypto economy, we believe that this space will bring great change and opportunity to the global financial system. Through our efforts and the development of our platform, we hope to create opportunities for more people to participate in and benefit from the crypto economy, and to drive the development and progress of the entire industry.
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