How Are Bitcoin Exchanges Capable of Faking Trading Volume?

By March 15, 2017Bitcoin Business
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How Are Bitcoin Exchanges Capable of Faking Trading Volume?

A lot of people have suspected Chinese bitcoin exchanges successfully fake their trading volume these past few years. Up until now, this has never been proven, nor does anyone know for sure how the exchanges would pull off such a stunt in the first place. As it turns out, there are quite a few ways to generate fake transactions at an exchange platform.

How Bitcoin Exchanges Can Fake Their Volume

Generating a lot of fake transactions as an exchange sounds like an easy feat, but that is not necessarily the case. To be more precise, it depends on how these platforms would go about doing such a thing. In most cases, people look at the bitcoin trading volume to determine whether or not they should buy or sell cryptocurrency. If exchanges successfully skew the numbers, there is a lot of volatility to be found in the bitcoin market.

So far, three possible ways to fake exchange volume have been uncovered. The first option is by just releasing a fake number of bitcoin transactions taking place in the past 24 hours. This is by far the easiest way to trick people into thinking there is a lot of bitcoin trading action going on, even though that is far from the case. Since most Chinese exchanges release their transaction numbers 24 hours later, it is very easy to fake volume after all.

Additionally, it is possible for exchanges to move funds back and forth between shell addresses. Having the option to report more trades with multiple accounts to boost the overall trading numbers is a worrisome development. Bitcoin exchanges serve as one giant order book, hence it is not unlikely someone has taken advantage of this tactic in the past. Do keep in mind it is unclear which Chinese platforms may have used this tactic, though.

Last but not least, there is the option of legitimate generating fake order volume of trading between two IP addresses. Sending BTC funds back and forth with different IP addresses and wallets would make it seem as if the number of real-time trades is exploding exponentially. While this method should not be condoned by any means, it is a very effective way to make traders believe there is more volume than meets the eye. Unfortunately, this method also creates more market volatility, as it allows exchange operators to directly influence the price as well.

The recent PBoC intervention aims at removing all of these cheating factors from the equation moving forward. Bitcoin exchanges need to be honest and transparent, which means some necessary changes will need to occur sooner rather than later. Bringing an end to fake trading volume is of the utmost importance right now, This also explains why all exchanges have limited bitcoin withdrawals for the time being, as they are all implementing major changes right now

JP is a freelance copywriter and SEO writer who is passionate about various topics. The majority of his work focuses on Bitcoin, blockchain, and financial technology. He is contributing to major news sites all over the world, including NewsBTC, The Merkle, Samsung Insights, and TransferGo.

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