Problems with the Bitwise Fake Volume Report

It’s getting harder to decipher what is truth and what is fake when it comes to online content. In the crypto community, this is probably 10x’d. Just recently, an article in the Wall Street Journal reported that Bitwise’s ETF application to the SEC happened to include a lengthy comment section. In it, they stated that 95% of bitcoin trading volume is fake via ‘wash trades’.

They also clearly spelled out which cryptocurrency exchanges they thought were good and which were bad. In doing so, they carved out which exchanges they claim are manipulation-free. But there’s a lot within this report to give people pause. Especially to those who have worked in this unfledged industry for any amount of time.

Before we go further into this discussion, lets first define the key topics involved: (If you’re already familiar with them, just skip down to Question #1)

  • Wash trading
  • Bitwise Asset Management
  • ETF
  • Bitwise’s ETF application to the SEC

Definition of wash trading

Wash trading is when traders, investors, brokers (or even exchanges) make buys and sells that wash each other out. They essentially create fake activity to mislead others into believing the trading volume of a security is higher than it actually is.

Bitwise reported to the SEC that 95% of all bitcoin transactions are wash trades. Moreover, they say these wash trades happen on all other exchanges except the golden ten, which included Coinbase and the nine other regulated exchanges that Bitwise plans to use in their ETF (upon approval).

Read more about wash trading in our article here.

Bitwise Asset Management

A San Francisco-based company, Bitwise Asset Management dates back 2017. First on the scene to create a cryptocurrency index fund, the Bitwise team includes former software experts and asset managers from Facebook, Blackrock, Goldman Sachs and JP Morgan.

You can check them out on their website here.

What’s an ETF?

An ETF stands for Exchange Traded Fund. It’s basically a security that tracks a particular kind of asset, such as gold or foreign currencies. The ETF can be traded on traditional exchanges, just like a stock. With an ETF, you have two main players. The custodian who holds and manages the fund on behalf of investors, and then the investors who purchase shares in the ETF. As far as a bitcoin ETF, the SEC has yet to approve one citing market volatility and the presence of manipulation.

Learn more about ETFs in our article: What’s an ETF and What Are the Pros and Cons?

Find out why not everyone wants a bitcoin ETF:

About the ETF application

The application was sent to the SEC by Bitwise who was hoping for approval for their bitcoin ETF. It would be the first one in the US to be approved, if the SEC does end up letting it through. Along with the application, Bitwise sent comments which included a report with two main focuses:

1 – They used data to show that 95% of bitcoin exchange volume as reported on under-regulated exchanges was faked. The reasoning, they theorize, was so exchanges could appear to have far more volume than in reality. So they could pump up traffic and garner higher exchange listing fees from crypto projects seeking to list their coin.


Source: Page 30

2 – Bitwise also identified ten regulated exchanges, including Kraken and Coinbase, where data on exchange volume for BTC trades showed negligible manipulation. Their argument here was that bitcoin is robust and can be traded securely on non-manipulated, fully regulated markets.

bitwise describes what real exchanges should look like

Source: Page 27

Now that we’ve covered the basics, let’s delve into some of the questions raised when reading this report.

Question #1 – Is this really news?

Wash trades are certainly nothing new to exchanges of any kind. However, since 1936, federal regulations have helped to clamp down on them. But there probably isn’t one Wall Street trader who will tell you it doesn’t happen today.

Before this report was made public, many crypto enthusiasts had a pretty good idea that exchange volume numbers were not as accurate and free from manipulation as we’d all like them to be.

  • This Medium article from December 2018 hints that we were already coming to this conclusion. Still, the sheer number of wash trades on exchanges as divulged in Bitwise’s report may have surprised us all.
  • published an exchange ranking report in August 2018. From that you could see which exchanges were reporting as far as volume and what the Blockchain Transparency Institute calculated as the ‘real’ adjusted volume.
Report on regulated exchange reported vs actual volume

Setting up in-house monitoring

What may actually be news to many is that Coinbase and some of the other crypto exchanges have implemented or at least begun to integrate in-house monitorization of suspicious activities, including wash trading. Last July, it was reported that CoinBase hired a former NYSE executive to help create their policing program. But all of this is steeped in concerns over conflicts of interest, which are discussed in Question #3.

Probably no one was shocked to learn that Coinbene’s exchange dominance over Coinbase was mostly fabricated. By looking at the image below, what do you think? Did CoinBene really have that much volume in BTC transactions since yesterday?

Coinbene's purported 24 hour bitcoin trading volume from CMC


Question #2 – Is wash trading confined to unregulated exchanges?  

Just a few short months ago, Kraken and some of the other regulated exchanges were under investigation by the New York Attorney General regarding their practices. This was largely in response to stories that wash trades of the stablecoin Tether were running rampant on Kraken.   

That’s just one example on crypto exchanges. As far as traditional, regulated exchanges, wash trading is still a problem despite federal regulations prohibiting it.

Question #3 – Did Bitwise have a conflict of interest?

Bitwise Asset Management states on their About Page that they have advisors and backers who are investors, executives and board members of companies including Blackrock, PayPal, Royal Bank of Scotland, Kraken and Coinbase.

Not only that, of the top centralized exchanges mentioned in the Bitwise comments, three of them were reported to have conflicts of interest because they trade on their own platform, according to the NY Attorney General (this may or may not have been rectified since the AG report).

But what seems even more unsettling is the fact that the 10 top “good” exchanges, as they described in their comments to the SEC, are the same exact 10 exchanges they plan to feature in their ETF, if it gets approved.

With several potential conflicts of interest already revealed, it begs the question: What else is there that we don’t know about?

Question #4 – Why did Bitwise offer the data only when applying for the ETF?

Did Bitwise, following the submission of their ETF application, make the bitcoin report public to help educate other investors? Or was it merely to demonstrate how their ETF should be approved. It gets a little muddy. How long did they hold onto this information? Could sudden media attention to those ten exchanges by way of an SEC application raise the value of an ETF upon approval? These are the thoughts that come to mind.

On another note, while they are exposing (not exposing) this earth-shattering data as part as their ETF application, as though they dug and dug to satisfy the SEC, it’s more likely they were mainly scoping out the most successful exchanges for their upcoming fund.

Question #5 – Is Bitwise missing the point about decentralization?

You’ll find many crypto followers who believe that Bitcoin ETFs go against the major tenets of blockchain technology, namely because:

  • If you don’t hold our own crypto assets, and you have a centralized 3rd party holding your bitcoin, then you miss out on the robust security that bitcoin offers via decentralization.

The designer(s) of bitcoin did not expect that market manipulation could just hitch up its pants and move from Wall Street over to crypto. Nonetheless, it will surely be interesting to see how ETF’s play out in the burgeoning digital asset space.

Question #6 – Is this the whole story?

Unregulated exchanges, or decentralized exchanges, like Waves, BX Thailand, Luno, OTCBTC, Cobinhood, and Kucoin, did not show the wash trading activities of the unregulated exchanges highlighted by Bitwise. So is it really fair to lump all unregulated exchanges in with those that are obviously involved with mass wash trading activities? Implying that all unregulated exchanges are the cause of the faked transaction problem is simply inaccurate.

Question #7 – Did we need Bitwise to tell us that bitcoin is robust?

Thank you, but we didn’t really need this report to tell the world that bitcoin is robust and “resolute against manipulation”. It’s what many people have been saying for years. As though all it took was an official welcome mat from the banking industry to make it all legit. While the industry could certainly use some positive press, those of us who are diehard believers in decentralization already knew the strengths of bitcoin.

What questions remain?

Over all, reading this report and unraveling all the details felt a little like buying a used car. There’s been blatant and not so blatant manipulations going on. And you often feel distracted towards the shiny new thing. The whole process feels like going through the ringer. The best (and most believable) news to come out of the report is not really even news. Bitcoin is robust. It’s great to hear, but it’s been pretty obvious.

On one side you don’t want to believe that 95% of exchange volume is fake. Yet Bitwise’s data is compelling. The other side points to a narrow segment of cryptocurrency exchanges that they deem regulated, compliant and not fake. The hitch is that Bitwise includes these same exchanges in their fund. Additionally, the timing of the news release with the SEC application may seem a bit suspect.

Further research

But you can and certainly should make your own determinations in the crypto industry. It’s important to use whatever resources are available when analyzing industry news. In this instance, you can check out these two additional resources if you still have questions:

  • Read the report from the Bitwise application. Check out their sources and data, and see what you think. Don’t let the “227 pages” overwhelm you, they’re not text pages, just slides.

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bitwise report