One of the most important issues for an investor into crypto assets is whether the markets for the assets she invests in are liquid enough to ensure that she be able to sell those assets smoothly whenever she chooses to do so. However, this task has long been complicated by the fact that many crypto exchanges have been vastly exaggerating their trading volumes in order to attract customers.

This regrettable situation started to change with the groundbreaking recent efforts of important players in the cryptocurrency community. 

The March Bitwise study as catalyst

On March 19, in support of its exchange-traded fund (ETF) proposal, Bitwise Asset Management has submitted to the U. S. Securities and Exchange Commission a report with a stunning claim that up to 95% of trading volumes reported by Bitcoin exchanges were actually fake.

Bitwise’s main finding was that only ten BTC exchanges of those it analyzed have verifiable volumes. Those include Coinbase, Binance, Kraken, Bitstamp, Bittrex and Poloniex. In contrast, the other exchanges Bitwise studied report an extent of activity that cannot be considered genuine. From this, Bitwise concludes that only the volumes reported by the good actors should be counted and that they represent only 5% of what Coinmarketcap claims.

Bitwise put forward an impressive array of converging lines of evidence in support of this conclusion. One is the number of round trade sizes that should be higher than its expected value because of human psychology. Another involves the bid-ask spread that should decrease with the rising volume. And the legit exchanges do show these features, while the suspect ones do not. Especially striking is the difference in spreads between Coinbase Pro and Coinbene. The latter purports to have more than 30 times more volume than the former, yet the spread is enormously larger.  Probably the most convincing piece of evidence is the fact that trading patterns on all the ‘legit’ exchanges can be seen to be very similar in three important respects, whereas the suspicious ones were exhibiting idiosyncratic dynamics.  

The reaction to Bitwise’s report has been mostly positive, with reputed crypto information resource and data aggregator Messari even rolling out the so-called “Real 10 Volume” metric.

This approach is not without its drawbacks, however. First, it is unlikely that exchanges that exaggerate their trading volumes have no actual trading taking place on them whatsoever. Secondly, and more importantly for our subject, many of the less widely-held coins are not traded at the ten Bitwise-cleared exchanges at all but they are probably still traded to some extent. Is there any way for someone to look into such coins’ trading patterns to gauge whether the project behind them are suspicious or legitimate. 

Coinmarketcap’s liquidity metric

Enter Coinmarketcap. Coinmarketcap is probably still the go-to crypto data aggregator for most people in the space, and the site has long been criticized for its failure to deal adequately with the probably trading volume manipulation 

This finally prompted the data aggregator to come up with a metric called Liquidity for each currency trading pair on each exchange, where the available data allow it. As we understand it, the indicator is not exactly synonymous with the genuine trading volume for each pair but is, rather, supposed to reflect the monetary value available at a given moment for those wishing to sell the given coin at a given exchange for a given asset. In fact, its values are in most cases probably lower than the genuine trading volumes. What interests us here, however, is that large discrepancies between the liquidity metric and the reported volumes are indicative of volume manipulation.

If one looks at the ranking of cryptocurrency exchanges by liquidity, one finds results broadly comparable with the aforementioned conclusions made by Bitwise, although not perfectly identical. Still, the discrepancies shown by the Bitwise-approved exchanges tend to be a lot lower than those of the other ones, especially the suspicious little-known exchanges reporting enormous trading volumes, such as IDAX, CoinEX, CoinBene, etc.  

How can one use it to screen for suspicious projects?

The question you may be asking now is how the liquidity metric can actually be used to help distinguish the probably legitimate projects from the suspicious ones. If the coins of both are traded at dubious exchanges, how does it make a difference?

The key point to bear in mind here is that many small-sized legitimate projects with no access to several or any highly-reputed exchanges will probably not want their coins’ trading volumes to be massively manipulated. The first reason for this is that unlike with Bitcoin, Ethereum and a few other large crypto assets, their crypto assets have a much lower staying power. If a new investor into their coin gets burned on a nefarious exchange relying on high advertized trading volumes, she is likely to decide to stay away from the coin in question in the future, unless she can easily trade it on a reputable exchange. As legitimate projects are long-term-oriented, their teams would try to avoid turning investors off in this way.

Nefarious exchanges generally do not need active cooperation of project teams or additional incentives to manipulate trading volumes of the coins. They control the figures they report and their order books, and they are interested in boosting their volumes as much as possible to attract unsuspecting traders. However, crucially, they would usually need at least the silence of the project’s team to be able to continuously engage in volume manipulation. If the project team publicly issues warnings to its coinholders about vastly exaggerated trading volumes, the practice becomes hard to continue.

Let us dive into some examples to better illustrate the point. First, Algorand’s ALGO coin is listed on two major reputed exchanges: Binance and Coinbase Pro. Algorand also has relatively high name recognition, even if not at the level of Bitcoin or Ethereum. Not surprisingly, we observe significant divergence between the reported volumes and liquidity on suspicious exchanges such as CoinEx and BitZ, for example.

Meanwhile, Zilliqa’s coin ZIL is listed only on one reputed exchange Binance, and Synthetix’s coin is traded on no such exchange. And all of a sudden, we observe almost no trading pairs with millions of dollars of reported volume compared to meager liquidity figures two or three orders of magnitude lower.

Finally, consider ABBC Coin, the token of a suspicious crypto project which is covered in more detail in [one of our first potential scam alerts]. Here we can see massive discrepancies between the reported volumes and the liquidity figures.


Needless to say, no analysis tool is perfect, and the use of the liquidity metric is no exception. For instance, little-hyped legitimate projects’ teams may sometimes fail to curb trading volume manipulation with regard to their coins. They may have other pressing issues to address and not enough manpower to monitor markets, or they may decide not to comment on the token price at all. Conversely, some crypto scams that have their tokens traded on exchanges may attempt to avoid volume manipulation to appear legitimate.

Hence, we advise you to make reported trading volumes vs. liquidity analysis one of the tricks in your analytical toolbox. 

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