The lack of common standards for disclosure and regulation of the crypto industry leaves a lot of room for data manipulation. One of the most controversial metrics for determining the size of a market or platform is trading volume. For example, in May 2024, one of the clients of the Binance crypto exchange, the largest in the world by trading volume, was accused of fictitious trading of $300 million. This information was published by The Wall Street Journal, citing sources. Although the exchange denied the accusations, the problem of “drawn volumes” on crypto exchanges is very acute. In 2022, more than half of Bitcoin trading transactions on exchanges turned out to be fake. According to a study by Forbes, whose analysts examined 157 crypto exchanges in the summer of 2022, the global daily trading volume of Bitcoin was $128 billion, compared to $262 billion reported by resources such as CoinMarketCap, CoinGecko, Nomics, and Messari.
Wash trading can have several negative consequences for financial markets. First, it can distort market data by creating artificial trading volumes, making it difficult for traders and investors to accurately assess market conditions. Second, it can lead to false signals and, therefore, uninformed decisions, since traders can interpret inflated activity as genuine market interest. Such manipulation can undermine the fairness and efficiency of the market, undermining trust between participants. The situation can be complicated by the fact that most trades on global exchanges are carried out using algorithmic trading. This means that specialized programs (trading bots) automatically look for opportunities to make a profit, buy and sell in a split second. In most cases, it is the bots that trade with each other.
For these reasons, trading volumes on centralized exchanges (CEXs) are not a good indicator for evaluating an exchange. It is much more difficult to manipulate data on the balances of crypto assets held by exchanges. Although not all exchanges publish all the lists of addresses where customer funds are stored, on-chain analysis helps to reveal the balances of some exchanges, at least partially. So-called on-chain analytics is a type of research into information obtained from public blockchain networks such as Bitcoin and Ethereum. Blockchain technology is an open registry of information with the entire history of transactions, allowing any competent person from anywhere in the world and at any time to “look” at these transactions and draw their own conclusions.
After the bankruptcy of the crypto exchange FTX in 2022, trading platforms that hold client funds began to implement the practice of so-called “proof of reserves” (PoR). Exchanges also began to publicly disclose their blockchain addresses for public analysis and confirmation that all user assets are stored safely. Thus, it became possible to see any deposit or withdrawal of crypto assets by a client on the exchange balances online. For example, when a user deposits one bitcoin, Binance reserves increase by at least one bitcoin, and vice versa. It is also important to understand that PoP does not include corporate assets of the exchange, but only client ones. Although not all crypto exchanges have begun to follow the Proof of Reserves practice, most trading platforms have begun to disclose data on their crypto balances. The largest CEXs by available client assets (according to Defillama as of August 23): In first place, of course, is Binance. Holds $93.5 billion in customer assets. OKX is next. Holds $18.7 billion in assets. Bitfinex is next. The exchange holds $14.1 billion in cryptocurrencies. Bybit holds $8.45 billion in customer crypto assets, and Crypto.com holds $5.1 billion in assets.
