May 15, 2019 Article

Is Dwindling Crypto Data Integrity Behind the Recent Drop in Virtual Exchange
Trading Volumes?

The first two months of 2019 saw cryptocurrency exchanges register less trading volumes compared to what had been recorded in the same period last year. In fact, a report released by Diar, a research firm that focuses on blockchain and cryptocurrencies, states that trading volumes at the beginning of this year are at their lowest since 2017.

The report singles out January 2019 as the month when the world's leading crypto exchange by trading volume, Binance, was worst hit. During that time, this digital currency platform recorded a 40% dip in its BTC/USD market from what it recorded in December 2018. But Binance isn't the only exchange that registered a decline in trading volumes. In the US, leading crypto exchange, Coinbase, has been experiencing dropping volumes in its BTC/USD since mid 2017.

Bitcoin Influence
Throughout 2018, the price of bitcoin went on a downhill spiral. However, over the last two months, the drop in bitcoin prices has had a corresponding effect on the trading volumes registered in cryptocurrency exchanges. The trading volume of bitcoin dropped by 55% in the months of January and February, compared to the volumes registered during a similar period last year.

Despite this, research firm, Diar, reported that the total trading volume of bitcoin in 2018 remained higher than that recorded in 2017. In 2018, the demand for this cryptocurrency increased by 45% compared to 2017, when the value of this leading cryptocurrency rose to almost $20,000.

Several factors may have contributed to the dropping cryptocurrency trading volumes in virtual currency exchanges. One of them is the reducing cryptocurrency speculation witnessed in 2018 after leading cryptocurrencies, such as bitcoin, ethereum and ripple, recorded significant increments in value in 2017.

But beyond speculation is the issue of security for investors. Globally, most governments are yet to put in place proper regulation for cryptocurrencies. This leaves investors vulnerable to unscrupulous issuers whose key interest is to defraud unsuspecting investors. In fact, Satis Group reported that up to 78% of initial coin offerings (ICOs) launched in 2017 were scams. This means that their issuers had no intention of implementing project ideas they had proposed as the funds were being raised.

Data Manipulation
A report released recently by The Tie, a trading analytics firm shows that a significant number of cryptocurrency exchanges report higher trading volumes than actually exist. Based on data collected from 97 exchanges, the Tie reported that almost 87% of trading volumes reported by virtual currency exchanges was suspicious.

"Increasingly, fake trading volumes is becoming a huge challenge because it misrepresents the industry to investors. They make investment decisions based on this data and when their expectations are not met, they lose trust. For me, this means reduced participation in crypto trading hence the drop in trading volumes," notes Michael Hull, Chief Editor at FamilyOffices.Today.

Data integrity is such a huge issue in the cryptocurrency industry that it has sucked in the biggest market data aggregator, CoinMarketCap. A few days ago, Bitwise Asset Management reported that at least 95% of bitcoin's exchange trading volume listing on the site is non-economic or fake in nature.

I think these issues can be addressed amicably if the management of cryptocurrency exchanges embrace active governance. There is a critical need for exchanges to establish mechanisms for enhancing internal and industry accountability so that stakeholders get accurate information that inspires trust.


 
 Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.