One of the most common errors traders make when analyzing the cryptocurrency markets is taking the exchange’s bid and ask data and trading volume at face value. When performing this type of analysis, the trader must exclude trading venues mentioned on several ‘Fake Trading Volume’ reports, such as the one published in March 2019 by Bitwise.
There is really no way to know whether top exchanges increase their volume by offering exclusive access and zero fees to market makers.
Even the exchanges themselves have no way of knowing whether a group of users are related or are making multiple transactions among themselves to drive up prices or volume. There are hundreds if not thousands of influencers, pump and dump chat rooms, trading apps, and the like.
Therefore, not every wash trade or transaction is brainstormed by exchanges or crypto projects with the foundation or marketing team as well as between related entities.
As Philip Gradwell, Chief Economist at Chainalysis explained:
“If you want to get serious money in crypto, you have to build their trust that there are really good trading places. […] If you’re an exchange and you have good incentives to report actual volume, you can actually get institutional money in, but if you don’t have those incentives, they’ll stay away.”
Investors usually speculate that these unethical practices occur only on exchanges located on remote islands. However, the US Commodity Futures Trading Commission fined Coinbase after an employee “self-traded” for creating the illusion of volume and demand for Litecoin (LTC) prior to September 2018.
In case you are wondering, decentralized exchanges (DEXs) have also been used for ‘wash trading’ activity as there are hardly any barriers other than network gas fees.
Notice how the 22,000 bitcoin margin on Bitfinex began to drop as the price dropped below $34,000 and held a steady pace, while bitcoin continued to decline.
The hourly price candle on Coinbase is showing a descending pattern that perfectly matches the margin short activity on Bitfinex. However, it’s worth noting that bitcoin’s $2.5 billion monthly options expire at 8 a.m. UTC, about an hour before the price action mentioned above.
Furthermore, the CME futures expiry occurred at 3PM UTC, with 12.6k bitcoin contracts potentially worth $412 million. However, there is no reason to believe that derivatives expiry is directly related to Bitfinex margin short growth.
One must analyze the volumes of spot exchanges to understand whether Bitfinex played a significant role in the bitcoin price correction that began in the early hours of June 25.
The hourly volume candles for the past four days clearly show a significant increase in Bitfinex’s market share starting at 9 a.m. UTC on June 25th. The agitation lasted for seven hours but mostly ended later.
Traders may have been intimidated by a similar move earlier this month, when Bitfinex margin shorts surged to 25,000 BTC just before the price dropped to a week low of $28,800 on June 22.
Such events may or may not result in profitable trading for bears, usually having a huge impact on traders. After all, not everyone has the margin needed to short 22,000 bitcoins worth $726 million.
In short, there is a clear indication that the market decline had little to do with derivatives expiry, as the Bitfinex spot volume spike coincided with an increase in margin shorts. However, once the pressure dissipates, bitcoin may find support at $32,000, which could be enough to motivate buyers.
Weekends typically display low volume, so it will be interesting to see how cautious investors are in the face of this huge short seller.
The views and opinions expressed here are those of only those Author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should do your own research when making a decision.