When you go to a website that monitors the price of Bitcoin or Ethereum, the first thing that catches your eye is the large number marked as the Trading Volume. To the beginners, this number is reminiscent of the score in a game. They feel that the greater the number, the more popular, the safer, and the better the market.
However, in the world of virtual currency, not everything is as it seems. There may be numbers on the screen in front of you that have the makings of a magic trick designed to dupe you. On the surface level of volume alone, you may mistakenly make the wrong decision for how to choose the storage of your funds. According to a famous report by Bitwise Asset Management, nearly 95% of Bitcoin trading volume on unregulated exchanges was once found to be fake.
Below, we will explain why these numbers can lie and how you can find the truth.
What is Trading Volume?
Before talking about why it can be tricky, let us tell you what it is. Trading Volume is a count of how much money has moved back and forth on an exchange in a set time, usually 24 hours. For example, if you purchase one Bitcoin from your friend on an exchange, that counts as volume. If 1,000 people do that, the volume goes up.
High volume usually means:
- Lots of people are using the website.
- It is easy to buy or sell quickly (this is called liquidity).
- The prices are more likely to be fair.
Because high volume makes a site look healthy, some exchanges try to make their numbers look bigger than they really are. A recent study by Forbes looked at 157 crypto exchanges and found that more than half of the reported volume was likely fake or made up.
The Fake Numbers: How Volume is Made Up
There are a few ways in which an exchange can fudge the numbers. These tricks are common because there are no strict regulators for every single exchange in the world.
- Wash Trading: The Mirror Trick
This is the most prevalent trick. Imagine you have two hands. Your right hand has a $10 bill. You sell it to your other hand, your left hand. Your left hand sells it back to your right hand. You haven’t actually made any money or gained any new customers.
But to someone watching from far away, it looks like $20 was traded!
This is called wash trading. Some exchanges use computers (bots) to buy and sell to themselves thousands of times a minute. Research from the National Bureau of Economic Research shows that wash trading is rampant on unregulated platforms to improve their rankings.
- Zero-Fee Trading
Some sites allow users to conduct trades free of charge. Now, this may seem like a great deal, but it may result in messy data. If there is no cost required to conduct trades, users, as well as automated systems, will simply conduct trades to move the price a tiny bit. This creates a huge amount of volume that does not really show how many real people are using the website.
- Reporting Only Buy Orders
Sometimes, the exchange would report every time someone wanted to buy, without a trade ever occurring. It’s like a store claiming it sold 100 toys only because 100 people looked at them.
Why Misleading Volume is Dangerous
If you choose a place to trade based on fake numbers, you might run into big problems. Such as:
- You Can’t Sell When You Want: If the volume is phony, you don’t have many real people wanting to buy your coins. You could attempt to sell your Bitcoin, and you would discover that no one is there to buy it.
- Price Spikes: When there’s little actual activity on a market, a lot can change depending on one person’s buying, and this can shoot the price in one direction or another. This is referred to as volatility and can result in you losing money very quickly.
- Security Risks: Sites that lie about their numbers might be lying about other things, too, like how safe your money is.
When you are seeking a reliable and safe crypto exchange, you can use XBO.com. This platform values transparency and real data over flashy fake numbers. However, it is essential that you do your due diligence before you start trading on any platform.
How to Spot the Truth
How can a normal person tell if an exchange is being honest? You don’t need to be a math genius. You just need to look for these clues.
The first one is the spread check. The spread is the variance in price between buying and selling. Here’s what you need to look for:
- Real Exchange: Buy and sell prices are really close (example: $50,000 to buy and $49,995 to sell).
- Sham Exchange: Prices are far apart, such as $50,000 to buy versus $49,000 to sell, while volume suggests that millions of dollars are moving. A huge red flag!
The other clue is the web traffic test. If the volume of trade is larger than a giant platform and the traffic on the site is only a few per day, something is amiss. There are free online tools you can use to measure the traffic a site receives. If the traffic is small but the amount being spent is massive, the volume is fraudulent.
Finally, there’s the social media test. Check the Twitter (X) or Telegram page of the exchange. Are people engaged in conversations? Are conversations filled with questions and answers? If a site claims to be a top-10 exchange but has zero comments on its posts, it is probably using bots to create fake volume.
What Should You Look for Instead?
Instead of just looking at the biggest number, try looking at these three things:
- Liquidity: It refers to how much you can sell and buy without moving the market price too much. Good exchanges display their order book so that you can see how ordinary people are lining up to trade with you.
- Regulation: Is there a governing body or large organization that oversees the exchange? Good sites follow guidelines that prevent them from engaging in wash trading. According to Chainalysis, as regulatory environments become more stringent, it is increasingly difficult for malicious actors to conceal Wash Trading.
- Security History: Has the site been hacked in the past? Do they hold most of their funds in cold storage, meaning offline, so that hackers cannot access them?
Final Thoughts: Be a Smart Trader
In the early days of the internet, people used to say, “Don’t believe everything you read.” The same is true for crypto today. A big number on a screen doesn’t always mean a big crowd of people.
Faking volume is a shortcut used by some sites to get attention. As a trader, your job is to look past the magic tricks. By checking the spread, looking at social media, and choosing platforms that are open and honest about their data, you can keep your money safe.
