A long time ago I wrote about Chinese exchanges faking volume, but since the government crackdown and a whole slew of new exchanges propping up in countries like South Korea, it is time to revisit this topic and remind everyone about fake volume. Right now the biggest fake volume we are seeing is on exchanges coming from South Korea, Japan and still China. Why do exchanges fake trading volume and how does this affect the market?
The benefits to faking volume are many, most notably you can gain venture capital interest and bring more users to your site. If you offer an exchange with no fee and a decent layout, compared to exchanges that charge a decent amount, most will choose to use the free one. We are seeing this happen with a couple of Chinese exchanges that propped up after the government crackdown. The exchanges that were shut down and reopened a month later, reopened with fees and their volume dropped significantly. New exchanges propped up in an attempt to replace them. Their plan is semi working because many of the new exchanges are bringing users just because they are listed higher up on % of volume sites.
Why would an exchange run a business with no fees when they can make money instead? I think for the most part exchanges are either looking to get bought out or establish enough of a user base to where if they charged in the future, they could make money. They aren’t 100% free, they usually take out a bit on withdrawals, margin, ect, but that is really only enough to sustain themselves. Long term without faking volume, it becomes very hard for exchanges to get real legitimate customers. Even gemeni which has spent millions making a nice user friendly system, has a hard time getting users. People try to avoid paying at exchanges, but sometimes this actually can be a bad idea in the long run.
There is actually no way to know how much volume is actually fake and illegitimate, without causing a site to charge fees. Without fees, bots will trade back with each other all day long pushing up the volume, but not really losing or gaining much. It might not even be the site operators that are pushing the volume up, it might just be traders looking to eek out a profit. The second they start charging fees, even if very minimal , we will see volume drop dramatically, which actually shows how much people are using the website and how much they are really earning.
How much a website earns and how many users they really have is very important because smaller websites with weaker security are going to get hacked and then they will disappear with your money. I never recommend leaving money on an exchange, but if you are a trader, you want to use the exchange that is the most secure and has the best track record possible. Faking volume skews this metric and leads people to exchanges that simply can’t handle the traffic. Even yesterday, Bitthumb, a Korean exchange was hacked for about 800k USD. They are paying their customers back, but only a fraction. This isn’t how we want to represent the community and the exchanges that exist. Overall if we are looking for the best plan for good exchanges to grow and increase their security, we want them to charge a reasonable amount and grow into a company that can either survive a hack and pay everyone back, or not get hacked in the first place. Faking volume hurts our industry in the long run.
Thanks to @Elyaque for the badges