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On March 19th, Bitwise came out with a report back to the U.S. Securities and Exchange Commission (SEC) that made two claims of particular interest to us at Nomics.
These claims were:
Only 10 exchanges had actual volume
95 percent of reported exchange volume is fake
As a knowledge company, the primary thing we did was check out these exchanges to ascertain what the commonalities were:
What our examination of the Bitwise report has revealed
Eight of the ten cryptocurrency exchanges identified by Bitwise nearly as good actors provide historical trade level data (i.e. the foremost granular and audible sort of pricing data available). That is, the one thing we found in common among the great actors identified by Bitwise, is that they were very transparent about trading activity.
In contrast, we found that each single one among the exchanges explicitly called out by Bitwise as bad actors provides limited trading history and virtually no granularity around trading activity.
Transparency of Exchanges Identified As Trusted vs Suspect, consistent with Bitwise’s Report
In other words, the great actors from Bitwise’s report had highly transparent data practices, and therefore the bad actors were largely not transparent. (Source: Nomics)
It is sensible that opacity around exchange data would be correlated with fake volume, toxic activity, and wash trading. Indeed, a bit like an IRS audit, the more data history and granularity provided by an exchange engaging in nefarious activities, the more likely they’re to be caught.
We’re excited about the Bitwise report (and the prospect of a Bitwise ETF). But, we also believe the Bitwise report left some questions unanswered (which we assume are going to be addressed in due time, given the cadence and thoroughness of the regulatory process they’re undergoing).
Two things about the Bitwise report surprised us:
First, the shortage of scrutiny round the report, particularly by Crypto Twitter, which features a reputation for being an all-out combat zone .
Second, the degree to which the general public took a document meant to plug the approval of Bitwise’s ETF to the SEC, and overgeneralized the findings to use to all or any exchanges (even ones not analyzed by Bitwise) and every one cryptoassets. Indeed, Bitwise only demonstrated explorations of BTC/USD and BTC/USDT pairs.
I believe the crypto community’s response to the report lacked criticism and nuance. Don’t get me wrong, as a bitcoin hodler i would like this ETF to be approved. But i think the claims made by the report are just overlarge and global to require at face value, which a more nuanced conversation must be had.
Our six critiques of the Bitwise report and therefore the public’s response:
The report’s primary purpose is to influence the SEC to permit a Bitwise ETF. For this reason, it’s an inherent bias. That is, the document may be a marketing document first, and a search document second.
The report seems to possess a “base 10 bias.” the amount 10 seems very curious: why not 9 or 11?
Their conclusions aren’t falsifiable. Bitwise is watching the info and giving individual exchanges a thumbs up/down. there’s no stated independent test that stands aside from Bitwise that a 3rd party can independently apply. You either need to trust their conclusions or not. (Note: Bitwise has informed me that they’re going to be sharing a more falsifiable methodology within the near future).
The cryptosphere has skilled the report as if its conclusions are stuck in time; there’s far an excessive amount of over-extrapolation. Because Bitwise doesn’t state a proper methodology which will be wont to independently rate an exchange, a 3rd party cannot update the list. So today, a number of the exchanges identified by Bitwise as being good actors may need flipped and be engaging in wash trading. And exchanges that Bitwise didn’t indicate as having “actual volume” may have cleaned up their practices.
People have over-extrapolated the report back to apply to cryptoassets aside from bitcoin, to markets aside from BTC/USD & BTC/USDT, and to exchanges that don’t list bitcoin. This report, because it stands immediately , doesn’t apply to other cryptoassets, to pairs aside from with USD & USDT, and exchanges aside from the 80 they examined (all of which list bitcoin). While Bitwise’s analysis was perfect for a bitcoin ETF, it’s an error to use their findings broadly to all or any crypto markets.
The public’s response to the report has been unfair to upstanding exchanges not examined by Bitwise. Too many readers have given the report a cursory glance and concluded that there are only 10 exchanges with true volume: this is often an incorrect assumption.
Much of the response to Bitwise’s report has involved restricting volume analysis (and market data in general) to the ten exchanges identified as having “actual volume.” However, this reduction in scope leads to analysis that’s stuck in time; it also over-extends Bitwise’s findings to cryptoassets aside from bitcoin, and exchanges that don’t have BTC/USD or BTC/USDT markets.
But the important problem with restricting global cryptosphere analysis to only 10 exchanges is that it shifts our reliance from one centralized provider (e.g. CoinMarketCap) to a different (e.g. Bitwise). Instead, as an industry we’d like to urge iteratively better at spotting suspect exchange behavior on a near real-time basis. and that we need formal open source methodologies which will be employed by any independent third party to guage exchange activity in real time.
Dollars under hand glass image via Shutterstock
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