Mr. Cossar Sohail, Director of Bitlish cryptocurrency exchange shares his views on how bloating of trading volumes can threaten the cryptocurrency market, why there is still no effective mechanism for identifying such cryptocurrency exchanges, and how newcomers should choose trading platform.
Q) What role do cryptocurrency exchanges play in the cryptocurrency ecosystem?
CS) Cryptocurrency exchanges contribute to the development of the cryptocurrency world, promotion of these new types of assets, and attraction of capital in various projects. Cryptoexchanges help to create liquidity – as transactions are constantly being made on trading floors, there is an exchange of assets, and an flow of investments from one asset to another. Cryptoexchange is like a heart that pumps blood circulates it throughout the body.
Cryptoexchanges work similarly to traditional exchanges of the financial market. They originated from the platforms where a merchant could find a customer for its product. Localized exchange points were beneficial to the state. Indeed, in such cases the process of concluding transactions is easier to control.
Now exchanges perform several important functions besides exchanging one asset for another. They allow for diversification of investment portfolios or foreign exchange reserves, hedging risks, and adjusting exchange rates through interventions. All this helps with the stable development of the global economy.
All these characteristics are typical of crypto exchanges. First of all, the liquidity is concentrated precisely on them.
Q) Now there are many cryptocurrency exchanges on the market, many of them go bankrupt afterwards, some become the victims of hackers. What should a user pay attention to when choosing a cryptocurrency exchange?
CS) Although there are hundreds of trading platforms in the cryptocurrency market with different sets of services, there are not many really gainful players with unique tools. When choosing a cryptocurrency exchange, the user should pay attention to the trading indicators, such as daily volume, spread size, market depth, types of orders, indirect signs of trading volume bloating, the availability of necessary trading instruments and the number of trading pairs, as well as technical and legal characteristics. For example, given that the number and sophistication of hacker attacks on crypto exchanges is growing from year to year, you need to not only look at how quickly the exchange system works and monitor the data transfer speed, but also check the security system and control over fraudulent operations. Bitlish applies systems that stop fraudulent schemes.
It is important to pay attention to the jurisdiction in which the cryptocurrency exchange operator company is registered, whether it has necessary licenses, or applies anti-money laundering systems, how it performs the verification of its customers, and whether the exchange has an insurance fund.
Finally, when we talk about a market such as cryptocurrencies, reputation is very important in this Wild West. Therefore, when choosing a cryptocurrency exchange, you should find out who is behind the trading platform, who runs it, what is the level of the team’s competence, where the employees in leading positions have studied and worked before.
Q) Although many large cryptocurrency exchanges register companies offshore, Bitlish has chosen the UK. Why?
CS) When choosing a jurisdiction for our exchange, we were guided by three key criteria, the development of the economy, the stability of development, and the rule of law. The UK is at the top of the list of nations who meet these requirements.
Q) In the past year, the vicious practice of wash trades which many cryptoexchanges use has been actively discussed in society. How does this practice threaten the market?
CS) This problem does exist and it is a big threat to the entire market. The purpose of this behavior is clear. Unscrupulous cryptocurrency exchanges try to attract new users, because the cryptocurrency exchange market is highly competitive. There are hundreds of trading platforms offering exchange services. While exchanges are divided by the type of instruments and goods in the traditional financial market, the differences between one crypto exchange and the other in the crypto world most often consist only of the list of cryptocurrencies included in the listing and the presence or absence of margin trading with leverage. The trading volume turns out to be the most significant indicator by which users select a trading platform.
Technically, it is not the most difficult task to create a crypto exchange. But it requires certain financial investments: servers, development team, security certificates, support service. To recoup these investments, the exchange needs an income, and it receives it in the form of commissions from transactions. The more transactions you make, the higher the income received. For more deals you need more users.
The reason that the problem of wash trades has come up lies in the fact that the market is still too young. It is still in its infancy. It is not sufficiently adjusted. We are talking about the regulation in general, not only by financial authorities of some jurisdictions, but rather about control by the community itself, self-control. The lack of technical ability to quickly detect such behavior of the crypto-exchange makes this a difficult problem to address.
Q) Now they are trying to create adjusted ratings of cryptocurrency exchanges, clearing them from sites with wash trades. How effective have these efforts been?
CS) Key analytic companies involved in the analysis of the cryptocurrency market, CoinGecko, CryptoCompare, CoinMarketCap, are trying to identify cryptocurrency exchanges with wash trades.
For this, they consider information on the period of service of the crypto exchange, the jurisdiction of registration, licensing, and traffic to the exchange website. The problem is that all these are only indirect signs that we should not rely on. For example, a cryptocurrency exchange can have a great quick API through which institutional players carry out huge transactions, while the site traffic is low. Alexa and SimilarWeb will show low traffic to the site. Analyst companies would report that the declared high trading volume is impossible with this low site traffic and will accuse the exchange of wash trades.
Technically, it is very difficult to reveal wash trades. The blockchain is, of course, transparent, but unscrupulous crypto exchanges have the ability to undertake huge volumes of capital between accounts, thereby creating a seemingly high liquidity.
In addition, in 2018, cryptocurrency exchanges created a new mechanism for wash trades. They promised users to charge tokens for transactions, similar to the way the classic loyalty system works with bonuses for purchases. Thus, they encourage users to conclude as many transactions as possible. But the statistics of the trading volume of these crypto exchanges can not be called objective. Their getting into the top rating of the same CoinMarketCap is the result of such a scheme of encouraging the trading activity. But a newcomer to the cryptocurrency market can view the rating, see a cryptocurrency exchange with a tremendous daily trading volume and go to this platform in the hope of getting high liquidity there. But it is not to be found. Such bidding incentive schemes imitate interest in assets and do not reflect the real situation.
Wash trades are forbidden in classical finance and are subject to criminal prosecution, because these can be used to manipulate the price of an asset. But there are no similar rigid mechanisms in the crypto world to prevent and punish wash trades at this time.