One of the most common mistakes traders make when analyzing cryptocurrency markets is taking an exchange’s bid and ask data and traded volumes at face value. This type of analysis requires the trader to exclude the trading venues mentioned in several reports of “fake trading volumes”, such as the one published by Bitwise in March 2019.
There’s really no way of knowing if the top exchanges are inflating their volumes by giving market makers special access and no fees.
Even the exchanges themselves have no way of knowing whether a group of users are related or are doing multiple transactions with each other to increase prices or volumes. 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 between affiliated companies was developed by the exchange or the crypto projects with a foundation or a marketing team.
As Philip Gradwell, Chief Economist at Chainalysis, explained:
“If you are serious about investing money in crypto, you need to build their trust that there are indeed good places to trade […] If you’re an exchange and you have good incentives to report real volume, you can actually get institutional money, but if you don’t have those incentives they’ll stay away. “
Investors typically speculate that these unethical practices only occur on exchanges on remote islands. The U.S. However, the Commodity Futures Trading Commission fined Coinbase after an employee “traded” to create the illusion of volume and demand for Litecoin (LTC) prior to September 2018.
In case you’re wondering, decentralized exchanges (DEX) have also been used for “wash trading” activities as there are few barriers apart from grid gas fees.
Notice how the short spike in Bitfinex’s 22,000 bitcoin margin began as the price fell below $ 34,000 and stayed at a constant pace as Bitcoin continued to plummet.
The hourly price candles at Coinbase show a descending pattern that fits perfectly with Bitfinex’s margin short activity. It is worth noting, however, that Bitcoin’s $ 2.5 billion monthly option expiration occurred at 8 a.m. UTC, about an hour before the price action highlighted above.
Additionally, the CME futures expired at 3:00 p.m. UTC and potentially included 12.6k Bitcoin contracts valued at $ 412 million. However, there is no reason to believe that the maturities of derivatives are directly related to the increase in Bitfinex margin shorts.
One has to analyze the volumes of the spot exchanges to understand whether Bitfinex played a significant role in the Bitcoin price correction initiated in the early hours of June 25th.
The hourly volume candles for the past four days clearly show a significant increase in Bitfinex’s market share from June 25th at 9 a.m. UTC. The movement lasted seven hours, but soon afterwards largely disintegrated.
Traders might as well have been spooked by a similar move earlier this month when the Bitfinex margin shorts rose to 25,000 BTC just before the price hit Jan.
Such events may or may not result in a profitable trade for bears, which usually makes a strong impression on traders. After all, not everyone has the margin required to buy short of $ 726 million worth of bitcoin.
In short, there is a clear indication that the market downturn had little to do with derivatives phasing out, as Bitfinex’s spike in spot volume coincided with the rise in margin shorts. However, once the pressure is gone, Bitcoin could regain support of $ 32,000, which could be enough to motivate buyers.
Weekends are typically lower in volume so it will be interesting to see how cautious investors are on this huge short seller.
The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risks. You should do your own research when making a decision.