The Butterfly Effect or how to counter fake volumes and make the crypto industry mature

in #hacken5 years ago (edited)

In chaos theory, the butterfly effect is the sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state.

The problem of fake volumes has attracted much attention since March 10, when Sylvain Ribes presented his investigation on OKex and Huobi. Wash trading, one of the numerous methods of concocting fake volumes, is a testament to the weakening of the decentralized nature that the crypto market should have. This is one of the reasons why Crypto Exchange Ranks was created — to become the voice of the industry, to set the standard to which all crypto players will aspire to, and correspondingly uncover manipulations behind the scenes of the world’s crypto exchanges.

Bitforex Case 

After several months, since its inception, a little-known cryptocurrency exchange called BitForex has become one of the highest volume exchanges in the world. A controversial business model — listing tokens for only 30 BTC and ambiguously high volumes — drew the attention of our CER team, so we dug deeper to reveal the fraud behind the 7th crypto exchange

Disclaimer: at the moment of writing BitForex is already 17th.

We compared the social media and community activity of well-known exchanges such as Kraken and KuCoin to that of BitForex while using our own Hacken community as an additional benchmark. The analysis of the correspondence between the volume of active traders and the total number of users gave us meaningful insights.  

The Hacken marketing team noticed that BitForex has the lower amount of active users on its Twitter account –– less than 2k followers –– and its 85k Telegram account has the same amount of activity as Hacken’s 5.2k TG group. Moreover, in June, the number of BitForex’s unique visitors (UV) was 68K with a bounce rate of 57,5%. In turn, Kucoin’s UV was 1.93M with a bounce rate of 54,1%. Kraken’s UV was 1.02M with a 36,7% bounce rate. Direct Visits, Referral Traffic from CMC, and Organic Search (92% in total) were the main traffic sources for BitForex (not surprising, as BitForex had become a top-10 exchange). BitForex’s community and traffic were ten times lower than that of Kucoin and Kraken. As a result, it’s evident that such a high trading volume, as BitForex’s platform allegedly produced, couldn’t be ensured by their community in social networks. 

Disclaimer: you can review all figures and proofs in the research

What is fake volume

The technique that we suspect BitForex has used is called wash trading, akin to spoofing. This is the act of creating a large number of sell orders and then buying them out themselves. The term comes from an unknown group of traders who called themselves “Spoofy”. In such a way, the illusion of market demand is created aiming to attract more users. These and a number of other issues, including high listing fees and the listing of scam tokens, slow the development of the crypto industry, even though blockchain was created to change the world for better.
Here we can enumerate 3 ‘WHY’s:

  • fake volumes make traders overvalue some currencies, as the higher the volume, the lower volatility;
  • fake volumes delude users that they will trade faster, paying for less slippage;
  • fake volumes can potentially be a preamble to future hacking attacks, as black hats target the largest players. 

Media Response

After the study was published, Zhao Changpeng (CEO of Binance) said the CER study was an “Interesting analysis for fake volumes and inaccurate rankings for crypto exchanges.” In short order,,, CoinDesk, and other media platforms have taken the fake volume issue to a new level. 

The Butterfly Effect

The most surprising outcome of our study was the response from Coin Market Cap (CMC). The analytical portal undertook the first step to the objective and transparent crypto exchange evaluation. The portal stated that recent weeks showed growing concerns about the volumes of exchanges and their corresponding ratings. It now appears that the CMC administration is taking into account the community's opinion and trying to avoid negative repercussions that such unreliable data may have for the industry at large.

CMC previously demanded crypto exchanges to demonstrate minimum qualifying trade volumes in order to be listed; however, shortly after our BitForex study, these requirements were abolished. We hope that these measures will incentivize crypto exchanges to abandon the artificial volume practices. 

Wrapping up: Some newly emerging crypto exchanges, along with several well-established ones, equipped with billions of dollars in fraudulent daily trading volume, are thriving. A growing concern is this may have a significantly negative impact on the financial well-being of crypto investors, as well as on the long-term growth of the crypto market overall.

It’s a great pleasure that our approach not only works but is helping to produce positive results in the global cryptocurrency market. We will continue to do our best to help the crypto industry mature, grow sustainable, and become more secure than ever before. With that in mind, we will be releasing our second investigation soon. Stay tuned!  

PS: We respect an opinion of our community. If you have insights on fraudulent activities of exchanges, please, inform us via [email protected] or on our Twitter. Together, we will secure the crypto industry!

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