A 20-year-old college student explains how he made a business of faking trade volumes at crypto exchanges.
Huobi said it has taken steps to discourage wash trading in the wake of a report that implied the exchange inflated trading volume.
A study from Statis Group
an ICO advisory company reveals that 80 percent of all 2017 initial coin
offering were scams. Of the over $11.9 billion floated in that year in tokens
and coins, a massive $1.34 billion of it, was lost.
The scam of the year was Pincoin’s, getting away with $660
million digital assets, followed by Arisebank with $600 million. The comfort here
though is that this massive number of scams received only 11 percent of the
funds directed to ICOs.
As the cryptocurrency market thrives, so have the con
artists, feeding off the lack of education on cryptocurrencies or taking
advantage of good old trader’s greed.
There is still no silver bullet for this fraud, but there are red flags investors
can watch out for, that show that things are bound to go south.
Red Flag #1: Faking Volumes of Trade
The Blockchain Transparency Institute is questioning up-to 87 percent transactions done on 25 top global crypto exchanges. Known as ‘wash trading’ trading platforms are embellishing their trading volumes to market their selling power. CoVenture, in a report, says wash trading is “when a trader/s places a buy and sell order at an identical price without changing ownership of the underlying asset. They use bots to automate these orders leading to an artificially increased volume. This gives unsuspecting traders the illusion of liquidity.”
They use this false image to charge $50,000 or more to coin
networks who are falling over themselves to list their assets on these faked
volume platforms. The other advantage that they seek by presenting this fake persona
is getting fantastic listings on good sites like CoinMarketCap.
intelligence shows that it is only 2 out of the 25 crypto exchanges listed on
their site are free of ‘wash trading.’ Some have embellished their volumes by
up to 70 percent. Upbit,
the largest trading platform in South Korea for example, has executives accused
of embellishing orders and records worth $226.2 billion. Others accused of wash
trading is BitFinex. Investors who trade with these platforms often face a lack
of liquidity when they want to withdraw their assets.
Red Flag #2: Stranger Than Fiction Hack
An exit scam can be defined as a thievery plot where
blockchain startups collect money through ICOs, then vanish into thin air with
it. Some of these exit scam thieves shut down their exchanges unceremoniously
and use hack attacks as a cover up their nefarious activities.
MapleChange for example, one Sunday Morning in October 2018, took to Twitter making claims that “Due to a bug, some people have managed to withdraw all the funds from our exchange. We are extremely sorry that it has to come to an end like this. Until the investigation is over, we cannot refund anything”. The loss in question was investor’s 913 BTC worth of assets.
The exchange aggravated the situation further by shutting
its social media accounts and website “for investigative purposes.” However,
with hindsight, the exchange owners always had poor communication strategies
and paid little attention to the platform’s security. These are warning for any
investor to get out!
Red Flag #3: A High Concentration of Digital
Assets in One Wallet
The core idea behind cryptocurrencies is the promotion of decentralization. If an exchange has a massive amount of assets packed in a portfolio there is need to worry. This kind of grouping of assets allows for price manipulation and often is an invitation for hackers looking for a challenge.
Worse still, if there is no multi-sign capacity and exchange’s
asset is under the control of one person, and then it’s time to take off.
Red Flag #4: Too Good To Be True Promises
There exist too many Ponzi schemes set up to defraud
investors with promises of huge yields. They also scam investors by pushing
high commission for every new investor they bring in. Scam artists in the
cryptosphere use tricks like giveaways, bounties and airdrops to access funds
and accounts belonging to investors.
In the words of Ouriel Ohayon, an expert in cryptocurrencies
“”Yes, you are in control of your own assets, but the price to pay is
that you are in charge of your own security.” When the deal is too good,
withdraw your funds.
The popular crypto data tracker CoinMarketCap is instituting changes in light of what it called “concerns” over fake volume figures.
In a blog post, published on July 19, the site said that it had already dropped a minimum volume requirement for exchanges listed on the site, a policy it said was originally pursued “in order to filter for more popular exchanges that could be listed on CoinMarketCap.”
The site also plans to introduce new filters and ranking metrics in a bid to give users “the power to experience and use the data in a way that fits their needs most.”
The announcement followed a post on CryptoExchangeRankings, which tackled the question of how relatively new exchanges were able to move up CMC’s volume rankings. “The issue of fake volumes on crypto exchanges is like a UFO: some people claim to witness it but there is no evidence and metrics to prove its existence,” the blog wrote.
CMC’s vice president of marketing Carylyne Chan wrote in the site’s post that it may show high trading volumes due to the way it gathers data from exchanges.
In particular, transaction mining, low fees and wash trading on the part of crypto projects might result in artificially high trade volumes appearing on the site.
“While we have a relationship with most of the exchanges listed on our site, there is no guarantee that any of them will respond or comply to any specific guidelines, but we have to continue showing users the best approximation of price and volume based on all the data we have available. The evolution of new models such as transaction mining also means that there needs to be new ways to account for volume. Compounding it is the fact that they are, in fact, enabling greater liquidity in the way that users are trading more readily on the platforms.”
CMC is designed around aggregating data sent to it by exchanges, and so the numbers on the site reflect “the best approximation of price and volume based on all the data we have available,” she said, explaining that “even though we try our best to verify the data with the exchanges on our site, we are not in the practice of censoring or policing others.”
That being said, she wrote, “we understand that these concerns are valid and have implications on the community and the impressions that people have about exchanges, even more than we are traditionally used to.”
Bitcoin price chart image via Shutterstock
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