How to select the exchanges you should AVOID for buying or trading cryptocurrencies

Here I m writing a new article about exchanges, and which exchanges you should avoid. In fact, I m writing this article because I have a target in mind : WASHTRADING.

This thing has been around for months and probably even years now in the cryptocurrency world, and it will most likely never go away, because some exchanges will always remain out of any possible regulations. So, if we can’t stop those fraudulent exchanges to keep going on tricking new users, then the only solution is to inform them as best as we can on how to avoid this major risk (because yes, chances are that by using this kind of exchange, your funds will be at risk…)

1. What is Washtrading

This definition comes from investopedia.com, and it summarizes perfectly what washtrading is :

So if we apply that to cryptoexchanges, the main purpose of whastrading is to build up volume to a token or even to an exchange. And why do they want to show a lot of volume ? Because many websites which list cryptoexchanges and tokens, order them depending on their volume. The higher their volume is, the higher they will rank. For those internet oldtimers like me, this might remind you of how SEO were ranking websites 15 years ago. The more you were spamming a word in a webpage, the higher you would rank in the Searchengine results (yes, that really did exist…).
The main listing website we all know here is coinmarketcap (I won’t even bother linking it). They are currently the most widely used, and one of the reasons is probaly because they rank pretty high on search engines on keywords such as “market cap”. Even if this company said they would make some efforts to improve their listings, the results are still pretty poor, and when I asked them over reddit why they were still listing exchanges that were well known washtrading exchanges, here was their answer :

Now you know whastrading exist, you probably wonder why exchanges are using this ?

2. What’s the point of washtrading ?

So let’s say you deceide to invest into an ALT coin, or your participated into an ICO and you would like to sell your tokens now that it has been brought on some exchanges. Well, you probably would go have a look at CMC and check where that token is listed, isn’t it ? What is your next step ? Signing up to that exchange. You ll be giving them your email, and some informations required to get your account with them. And then what’s your next step ? You will deposit your tokens to that exchange. And the final step ? You will place an order on that exchange !
So they won 3 things :
- An active user
- Assets in their wallets
- Liquidity on their trading pairs
And all this, without even spending a buck on advertising… (they might have paid a third party to generate the fake volume though, or they also might have done it themselves… who knows…).
All this, also means that your funds are at risk, remember the well known line in crypto “not your private key, not your money”. So when you leave your funds on an exchange that is not regulated, has no official adress and offices, or is in a shady jurisdiction and that is actually faking numbers to its users, we can assume that one day or another, you could end up not seeing your tokens back if you ever want to withdraw them.
Now that you undersand one of the major reason why some cryptoexchanges are washtrading, I ll give you some keys to avoid them as much as possible.

3. How to find out if an exchange is washtrading

Here are some of the key points to check before joining an exchange and start trading there.

  • Volume and number of orders in the past month
    This is probably the first thing to look at. If on a certain token, you see an exchange with a volume which is way higher than any other, then you have to dig a bit into it before joining it.
    Once you are on the exchange, on the token trading pair, check volume for past days. Is it always around the same ? Is it slowly increasing ? You can also check how BTC and ETH behaved on other exchanges on the same period, and see if there were any major market moves. If you do see big moves, but that on the exchange you look at with your token, the volume is pretty much always the same, it means there s probably something weird.
  • Spreads, are orders being taken at best bid/ask or in the middle of the spread ?
    Spreads play a huge role in washtrading. Just a reminder, spread is the difference between best buy and best bid offers. Also, if you see that last orders’ price was in the spread, you should keep monitoring the token until you see next trade. If you see a new trade appearing in the trade history, but didn’t see any new bid/ask offers in the orderbook, it means that you wouldn’t have been abble to hit this last order. While it can happen that some honest bots make trades happen very fast, you should still be abble to see some appear in the orderbook at a time or another.
  • Trades frequency and trades volume, is there some pattern in the frequency of orders ?
    If you see new orders every x seconds or every x minutes (for example every 20–40 seconds) and that those orders are very similar in size, it should also be a warning sign.

However, note that the biggest sign of washtrading from me is when orders in history never show up in the orderbook before being taken (even half of a fraction of a second…), and that despite not-blinking my eyes, nothing move in the orderbook while orders keep being pushed every x time.

Now you are probably all confused, so to make it easier to understand, I ll take an example and detail it as much as possible.

4. Case study

At first, I thought I would give the name of the exchange. But who knows, how medium people could end up censoring this article if the people behind the exchange start complaining… However, I ll give you a few hints to help you find them out. This the currently #1 exchange in volume on the BEAM token.

Here are two screenshots, first one is the orderbook, second one trading history.

So, we can see that BEAM best ask price is 1.018375 USDT and BEAM best bid price is 1.010779. So the spread is in fact pretty tight, not event a cent. What we can also find out is that last orders are all > 1000 USDT, which is a pretty big size compared to the average BID/ASK in the orderbook.
Lastly, all the orders from the order history are in the current very tight spread (between 1.012 and 1.016) and orders happen every 10 seconds or less…

Now, let’s check again those datas, 10 minutes later :

So what do these 2 new screenshots tell us :
- The orderbook didn’t change much, best BID is still the same, best ASK is still the same.
- There have been over 40 trades in those 10 minutes, for over 70k worth of USDT. But the best BID for 0.01 USDT was not taken. All those trades kept happening within a range of less than 1 cent…

Do you know understand how all this looks wrong ?
I would like also to mention, that during those 10 minutes, none of the orders that were taken appeared at any moment in the orderbook…

5. What can we do ?

Honestly, I have been trying many things over past few months to make things change, pointing these kind of behaviours to different people over social medias. I haven’t been the only one. Even specialized data companies have shown how wrong are some numbers with deep studies. But nothing is changing. Why ? Probably because many people have serious interests to keep the crypto world pumped with fake volume. Let’s remember that many journalists from traditionnal media are relying on the data provided by coinmarketcap. And all this fake volume is being counted as being part of the cryptocurrencies Market Cap. Some people think that the higher the global Cap is, the more people from traditionnal finance will start getting interested in it. That’s a possibility, but it will also show them that, as not being regulated, cryptospace is quiet an irresponsible place, where funds might be at risk. Who would invest millions of its hard owned FIAT into something that look as shady as this ?
So, individually, the only thing we can do is to be very careful on the exchanges we use, to double, or triple check the data we see. Some of the ideas are :
- Only start by sending a small amount of crypto on exchanges on which you have some doubts
- If you end up finding out your orders never get filled while they remain the best BID/ASK offer for hours or even days and while hundreds of other go through, then consider the exchange as not being trustworthy
- Don’t hesitate to communicate over social media about your bad experience.
- You can also send an email to coinmarketcap to notify them of what happened when you tried trading on the concerned exchange.

Conclusion

I hope this quick article will be useful for several of you, and avoid bad experiences. Do not hesitate to share it with people surrounding you. And if you have any quetsions or doubts, feel free to comment to bring the discussion about washtrading even further !

Crypto enthusiast. Internet and sport addict. Writing about life, crypto and whatever goes on my mind !