Hacker News Re-Imagined

Crypto Wash Trading

  • 536 points
  • 7 hours ago

  • @paulpauper
  • Created a post
  • • 282 comments

Crypto Wash Trading


@rscnt 7 hours

Replying to @paulpauper 🎙

anyone else having problems reaching arxiv.org?

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@hendryau 6 hours

Replying to @paulpauper 🎙

Now look at the volume on the NASDAQ :D

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@phillnom 7 hours

Replying to @paulpauper 🎙

Title should be "70% of unregulated crypto exchanges..."

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@tyrfing 6 hours

Replying to @paulpauper 🎙

Spoofing, wash trading, etc have always been common in crypto. Market microstructure is much more adversarial than most markets. If you have an automated strategy that uses and assumes orderbook data and execution data accurately represents market conditions, you will lose your money.

Most exchanges will have "liquidity partners" who have better fee structures, possibly even zero fees. Most of these arrangements are not publicly disclosed. It's also commonly possible to open an order and then trade into your order yourself, although I haven't checked in quite a while and controls may be better now. (Doubt it.)

On a macro level, all this is mostly meaningless, and just a reason everyone ignores volume numbers for these exchanges. There's no reason for this net-neutral trading to affect market prices outside a second/minute time scale.

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@whoisjohnkid 6 hours

Replying to @paulpauper 🎙

title is misleading. 70% of unregulated exchanges.

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@bobobob420 7 hours

Replying to @paulpauper 🎙

Now for the paper on NFT’s being used ONLY for money laundering. Then hopefully I won’t have to listen to someone talk about how much money other people are making. With NFT you can get any illegal income into the country. Keep your illegal funds outside. Go to your country and make an NFT thats “worth” 1 million dollars. Go out of your country and buy it. Congrats u just made art and washed 1 million. Yes a very simple example but still… No jpegs are not being sold for thousands of dollars for legitimate speculation.

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@psychlops 6 hours

Replying to @paulpauper 🎙

Now do high-frequency trading.

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@gitfan86 7 hours

Replying to @paulpauper 🎙

With so many 'technical traders' out there on youtube, you could easily know what the rubes are looking for before they buy and then make that happen.

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@Vespasian 7 hours

Replying to @paulpauper 🎙

I'm not surprised at all

Many actors (including core devs) in the Ethereum (and other crypto) ecosphere see front running (known as MEV) and the payment for protection thereof (known as flashbots) as a "feature" so it's no wonder that other "creative trading techniques" run rampant.

It seems like the reason for every financial regulation in traditional banking is rediscovered in the crypto space just much faster.

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@jokoon 5 hours

Replying to @paulpauper 🎙

Money is such a poor tool, it's funny when some nerds pretend they're smarter because they use new techs, while they just forgot to implement all the plumbings that makes older concept work just well.

The intersection between tech enthusiasts and libertarians is way too large.

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@arberx 7 hours

Replying to @paulpauper 🎙

We also did extensive analysis on this in 2018/2019 and presented it to the SEC: https://static.bitwiseinvestments.com/Research/Bitwise-Asset...

Good news: it's getting better. Bad news: still very high.

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@EGreg 6 hours

Replying to @paulpauper 🎙

How exactly would someone distinguish wash trading from legitimate trading? Someone could just be generating volume from one account, or legitimately swing trading.

The only way I can see to distinguish it is if there are fees to making too many transactions per week. Like a "free tier" of transactions and then you pay if you want to transact a lot. That's the proper way to charge fees for mainstream payment networks, btw, rather than how they do it now. Anyway, then the problem becomes how do you mitigate sybil attacks.

Wash trading is a bug in the SYSTEM, and it should be the designer's responsibility to prevent it, not the government's. But the SYSTEM designers don't necessarily WANT to fix it, anymore than they want to fix sybil attacks when they're growing (Twitter or YouTube in startup phase being able to detect and deplatform oodles of new active accounts or content, is against their incentives to attract more money by reporting higher numbers, even if they are bots and illegally uploaded content). Same here.

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@nabla9 6 hours

Replying to @paulpauper 🎙

Unregulated markets have maximum amount of fraudulence. There is no reason to assume anything else.

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@DebtDeflation 6 hours

Replying to @paulpauper 🎙

I'm surprised it's only 70%, are they sure they didn't miss some?

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@Trias11 6 hours

Replying to @paulpauper 🎙

Reads more like a self-opinionated click bait.

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@gillesjacobs 6 hours

Replying to @paulpauper 🎙

This paper jumps the gun. Detecting wash trading by examining distributions over rounded order prices is a strong and dubious claim for which they provide little evidence. The author's equate wash trading to non-rounded, clustered prices which really just indicates automated trading. Now automated ("bot") trading is a technology needed for exchanges wash trading sure, but not exclusive evidence of it.

Automated trading strategies (e.g., "grid trading") are really popular and there are many third party bot providers that integrate in multiple exchange APIs. Maybe the unregulated class of exchanges here just has more permissive APIs/automation than the regulated ones. Automated trading is still legitimate trading where a party puts their capital on the line.

I agree that the lack of rounding and trade size clusters is a likely approximate indicator of non-human orders. The presence of automated orders does not automatically mean there is fraudulent wash trading by the exchange.

The authors also do not cite previous research or evidence of their methodology working for traditional finance. It all makes for weak evidence of actual wash trading.

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@mediocregopher 5 hours

Replying to @paulpauper 🎙

What's the actual harm done by fraudulent volumes? I've been around crypto for a long time; I basically just ignore trading volumes on most exchanges, and go off other signals. I see this kind of thing come up now and then, with lots of hand wringing about the fraudulent nature of crypto and whatever... and I just don't get it. You can't trust the volumes, just move on.

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@biddit 7 hours

Replying to @paulpauper 🎙

So this implies that the crypto markets are actually far less liquid than the trade volume implies. Suddenly those massive 10% +/- fluctuations in a day make a lot more sense.

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@greatjack613 6 hours

Replying to @paulpauper 🎙

I have used sniper software such as https://cmcsnipe.com/ and the ease of use of web3 has allowed automated trading to be taken to the next level. Not surprised that so much fake volume exists when it is so easy to create.

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@cblconfederate 7 hours

Replying to @paulpauper 🎙

This is great knowledge. People should not be investing based on what's popular or what is being traded. Better hold than gamble. Monetary speculation should be dumb in a sound money system

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@CSSer 6 hours

Replying to @paulpauper 🎙

> According to CoinMarketCap, the distribution of institutional investors is primarily correlated with the exchange volume than its regulatory status. We also find no significant difference regarding the volume and distribution of transactions on regulated exchanges compared to unregulated exchanges around the time they became regulated. For example, Coinbase received Bitlicense in 2017. But there is no exodus of traders. If anything, its volume grew significantly.

Does anyone have any thoughts on why or how this is the case? I'm having trouble wrapping my head around how there is no departure if fraudulent trading is so rampant pre-regulation. I suppose it's worth noting that this largely seems to be speculation on their part anyway. Their data sample is comprised of only roughly one quarter of 2019. Meanwhile, Coinbase received their bitlicense in 2017. It's unclear to me how they can even be sure of the claim they're making at all. I wish they had included a citation here.

The paragraphs following appeal to Benford's law and Power law to explain away any concerns, but it's also unclear to me how it's directly applicable. The premises seem sound, but the conclusion doesn't seem all that cogent to me.

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@dw-im-here 5 hours

Replying to @paulpauper 🎙

I refuse to believe that as much as 30% of the volume is legitimate

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@capableweb 7 hours

Replying to @paulpauper 🎙

I recently had to go through extensive KYC/AML email conversations and phone calls with bunch of exchanges like Coinbase and others. Got me interested how wash trading could happen, when they were so strict with me, and which exchanges were investigated.

These seems to be the exchanges they investigated. Would be interesting to see a breakdown of percentage per exchange, as I still don't understand how wash trading can happen at Coinbase since they seem to be very strict.

    Exchange Code Exchange Name

    Panel A Regulated exchanges
    R1 Bitstamp
    R2 Coinbase
    R3 Gemini

    Panel B Unregulated Tier-1 exchanges
    UT1 Binance
    UT2 Bittrex
    UT3 Bitfinex
    UT4 HitBTC
    UT5 Huobi
    UT6 KuCoin
    UT7 Liquid
    UT8 Okex
    UT9 Poloniex
    UT10 Zb

    Panel C Unregulated Tier-2 exchanges
    U1 Bgogo
    U2 Biki
    U3 Bitz
    U4 Coinbene
    U5 DragonEX
    U6 Lbank
    U7 Mxc
    U8 Fcoin
    U9 Exmo
    U10 Coinmex
    U11 Bibox
    U12 Bitmart
    U13 Bitmax
    U14 Coinegg
    U15 Digifinex
    U16 Gateio

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@sonthonax 7 hours

Replying to @paulpauper 🎙

Basically the lesson here is: don't underestimate how stupid HFT algorithms can be, especially when there isn't really a penalty for doing this.

I've worked at an above board HFT with a big crypto desk, and this happened constantly.

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@outside1234 6 hours

Replying to @paulpauper 🎙

How is it possible that there are unregulated exchanges still?

This seems like a regulation failure.

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@jollybean 6 hours

Replying to @paulpauper 🎙

Wash trading would be less of a problem if there was an independent way of valuing the asset, and we didn't derive our 'value' of the asset from what 'the last guy traded at'.

It's an inherent, infallible weakness of the type of asset.

I can't fathom how we haven't arrived at the general consensus that it's just a big scam.

I suggest that large portions of our economy depend on hype.

People Magazine generally won't say hugely negative things about celebrities, because celebrities are their currency, it's what they are selling. They're selling the illusion of celebrity, and they work with press agents etc. to concoct all of it. Talking any kind of 'reality' would be detrimental to their core business.

In much the same way, the press, including the Tech Press relies on a kind of naive, hopeful, optimism, blended with the dream of riches, or at least for others. The 'drama' of Musk, Zuck etc. keeps the clicks moving.

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@xtat 3 hours

Replying to @paulpauper 🎙

FWIW this is old data (and very old news) in crypto terms and there have been positive audits of the big players since.

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@willcipriano 7 hours

Replying to @paulpauper 🎙

Tumblers[0] contribute to this to some extent I presume. I wonder how much of the effect they are seeing is related to tumbling.

[0]https://en.wikipedia.org/wiki/Cryptocurrency_tumbler

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@citizenpaul 5 hours

Replying to @paulpauper 🎙

Doubt it.

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@nailk 6 hours

Replying to @paulpauper 🎙

Oh look, another weekly crypto hating thread on HN

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@Zamicol 7 hours

Replying to @paulpauper 🎙

This is why Uniswap's data is much more valuable than centralized exchanges. On-chain trading permits a degree of transparency and trustworthiness not readily feasible with centralized exchanges.

Centralized exchanges are incentivized to doctor their data and lie about their volumes. The larger the volumes an exchange publishes, even if fake or gamed, the more relevant an exchange appears. Users must blindly trust whatever data exchanges can manufacture.

Uniswap charges a flat fee to every trade for all user. It's objective. There's no special back room trading rates, there's no ability to lie about volumes, there's no bonus for having high frequency bots trading. If you want objective data, Uniswap (and other on-chain exchanges) are truthful.

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@rossdavidh 7 hours

Replying to @paulpauper 🎙

Can somebody explain to a crypto-naif what "wash trading" means here?

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@sabujp 5 hours

Replying to @paulpauper 🎙

There's also "legal" wash trading, e.g. the same institution/person putting in large BTC spot buy orders and then shorting the BTC future. This is how companies like crypto.com, celsius, blockfi, etc are now able to give investors 8%+ on their USDC because the investors need the cash for expensive futures contracts. The companies loan the cash out to hedge funds at high interest rates, take a cut, and give the rest to you.

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@Cypher 5 hours

Replying to @paulpauper 🎙

70% seems a tad bit high.

I think their expectation that real traders would use rounded numbers overlooks that crypto is hyper fractionalized. If someone is exiting their Doge position they're not going to use a rounded number as fee's are paid in a % of that crypto.

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@coding123 5 hours

Replying to @paulpauper 🎙

I wonder how much is just automatic arbitrage bots trying to squeeze out pennies.

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@young_unixer 6 hours

Replying to @paulpauper 🎙

If you think this is a problem, then cryptocurrency speculation is just not for you. When you get into cryptocurrency speculation, you know there's not a lot of regulation, and that's the beauty of it. You get what you're paying for.

We are seeing a market evolve naturally, without too much government distortion, which is pretty cool.

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@kranke155 6 hours

Replying to @paulpauper 🎙

The obsession with trading and how much fraud there is in the crypto space (enormous amounts) is distracting from the people building useful things - for both the common folk and us technical.

Look for the builders. You’ll see something special.

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@csee 7 hours

Replying to @paulpauper 🎙

Extremely sceptical that the volume is fake in the largest exchanges. You can see it's real for yourself by putting an order in the book and simulating when it should be filled and compare that to the actual fill. You'll see that they line up closely for the large exchanges which is strong evidence that the volume is real.

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@tfang17 5 hours

Replying to @paulpauper 🎙

Wash trading much more common on international exchanges.

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@woah 7 hours

Replying to @paulpauper 🎙

70% of the titles of top crypto articles on HN are fraudulently paraphrased

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