Bitforex’s Multibillion-Dollar Cryptocurrency Transaction Volume Could Be Inflated
Singapore-based cryptocurrency exchange BitForex rose from relative obscurity to the top in a few short months. However, with the platform reporting daily transactions that exceed $5 billion, many are critical of the exchanges questionable business practices, Bloomberg reported on September 27, 2018.
Crypto’s Open Secret
Once just one of the dozens of obscure exchanges offering users the ability to trade in major cryptocurrencies such as bitcoin, BitForex is now reporting daily transactions that exceed $5 billion. If the company’s numbers were correct, that would imply that the crypto exchange is nearly matching turnover on London’s 217-year-old stock exchange (LSE).
However, the numbers seem highly unlikely to most market experts, which led to Bloomberg questioning the company’s business practices in a September 27 report.
Among the 219 tracked by CoinMarketCap, the reported transaction volume at BitForex is by far the largest, despite the traffic on its platform amounting to a tiny fraction of most peers.
According to Bloomberg, many market participants say they suspect these fast-growing exchanges are either offering incentives that encourage users to inflate volumes or are not doing enough to stop abuse on their platforms.
Neil Woodfine, a former crypto exchange executive who now runs Clavestone, a Bitcoin key management service, told Bloomberg that the practice is not uncommon for digital currency exchanges.
“Some exchanges will say ‘everyone’s doing it, so I’m doing it,” Woodfine explained, adding that new traders will get feedback very quickly from engaging with the market on trades not executing at the price they want.
A Ponzi Scheme?
Garrett Jin, vice president at BitForex, told Bloomberg Businessweek that one of the main reasons trading has surged on the exchange is because of the exchange’s so-called transaction mining system.
The exchange introduced this controversial reward model in early August 2018, and according to Jin, it has been running well ever since. A detailed report from Hacken Blog, however, put the practice under the spotlight and raised suspicions that the model might be an ingenious Ponzi Scheme.
On BitForex, users earn the equivalent of $1.20 in digital tokens issued by the exchange for every $1 they pay in transaction fees. It’s a system that Business Week says is tailor-made to encourage wash trading — in which a trader, or a team of traders, buy and sell the same asset repeatedly to inflate market activity.
The system, called “wash trading,” allegedly “mines” coins without actually creating value for any of the coins involved.
BitForex’s vice president admitted that while it is was “technically possible” for users to trade with themselves using two accounts, the exchange “opposed” all kinds of manipulation and is planning on ending the incentive soon. However, Jin failed to provide any additional information on whether the venue has tools to monitor and prevent this kind of abusive trading.