Wash Trading

How Some Crypto Exchanges Encourage Wash Trading?

Exchanges are inquisitive about incentivizing their trading volume. Higher volume results in enhanced liquidity, which attracts more traders resulting in higher revenue in the long run.

Though many industry veterans have pointed out the shortcomings in these metrics, yet there’s proof that some exchanges are structured to incentivize wash trading.

Attracting New Traders

A few trading platforms have attracted new customers via several schemes. For example, Binance launched Binance Coin (BNB) to pay for trading fees and serving as a reward for testing their nascent DEX platform.

The rise of IEOs (Initial Exchange Offerings) on Binance offered utility for the native token.

No Fees, But Rewards

Another technique is called transaction fee mining. On most of the crypto exchanges, users need to pay fees ranging from 0.25 to 0.75 for conducting traders.

However, cryptocurrency exchanges which use such trans-fee mining operate on a different kind of model. Besides, in this model, traders are reimbursed fees in an exchange’s native token.

Crypto Exchange Ranks explained how FCoin, a Chinese cryptocurrency exchange, used transaction fee mining to reach 3rd place for 24-hour trade volume in August last year after only five months of operation –

“On Aug 8, noticing the trend of rivals offering more than 100% trade fees reimbursement, FCoin decided to implement their own 10% bonus. That move resulted in nearly [a] 7,000% volume jump to over $2 billion primarily due to the rise in FT/USDT volume.”

Even the reward scheme earned some criticism of the Binance CEO, Changpang Zhao, who wrote on his Weibo account on June 2018 –

“If an exchange doesn’t get revenue from transaction fees and solely profits from the price of its token, how would it survive without manipulating the token price? Are you sure you want to play against a price manipulator? The same price manipulator who controls the trading platform?”

Enter Stablecoin Trading

In a LinkedIn article posted on April 8th, Nick Chong of the Quoine-owned Liquid exchange pointed out another way of trading platforms use to inflate volumes. Less-known Chinese exchange BitMax was posting suspiciously high trading volumes as Chong investigated.

Chong asked –

“Why would anyone trade these stablecoins at such high volumes when all are pegged at 1 USD? What is there to gain with little price appreciation or depreciation on buying and selling?”

It is worth noting, unlike FCoin, Bitmax uses its native BitMax token (BTMX) to incentivize trading. At press time, the coin is the 6th most traded asset on the exchange. Also, it is the #1 coin for exchange volume on the exchange in the past 24-hours, 7-days, and 1-month intervals.

Chong cautioned –

“No precaution is too great when dealing with coins that are actually designed to replace our fiat currencies on a one-to-one basis, and essentially guarantee stability to 1 USD or 1 Euro.”

What was once a reply to price volatility has now discovered a unique niche in boosting exchange volumes. These perverse incentivizes might explain the outlandish trading volumes for stablecoins like Tether and could offer further insight into the widespread practice of wash trading in the crypto industry.