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For $15K He’ll Fake Your Exchange Volume And You’ll Get Noticed

Gotbit inflates trading volumes on obscure cryptocurrency exchanges for a fee and has about 30 token projects as clients. For $15K He’ll Fake Your Exchange Volume And You’ll Get on CoinMarketCap (#GotBitcoin?)
For $15K He’ll Fake Your Exchange Volume And You’ll Get on CoinMarketCap (#GotBitcoin?)

The firm programs bots to trade tokens back and forth with each other, creating the illusion of active markets so the assets can get listed on CoinMarketCap. Its co-founder says exchanges are aware of this manipulation but are not interested in stopping it.
While it’s rare to hear market manipulators talk openly about their trade, there are other businesses like this out there, experts say.

To cryptocurrency professionals trying to legitimize their industry, market manipulation is a scourge. To 20-year-old Alexey Andryunin, it’s a living.

The Takeaway

A sophomore at Moscow State University, Andryunin is the co-founder of Gotbit, a firm that specializes in making obscure cryptocurrencies look like they’re being actively traded. For a fee, the two-man shop will program bots to trade a token back and forth with each other on also-ran exchanges until it has enough “volume” to get listed on CoinMarketCap. Once it appears on that influential market data site, an asset can gain the attention of larger platforms and bigger investors.

Explaining why Gotbit is not registered in any jurisdiction, Andryunin was blunt, telling CoinDesk:

“The business is not entirely ethical.”

The business is not entirely unheard-of, either, in a global market notorious for its lack of transparency. Bitwise Asset Management, one of several U.S. firms seeking regulatory approval to launch a bitcoin exchange-traded fund (ETF), has estimated that 95 percent of bitcoin trading volumes are faked and only 10 exchanges publish reliable data about volumes on their platforms, without inflated numbers.

Bobby Ong, CEO of crypto ranking portal CoinGecko, said businesses like Gotbit exist and “it won’t be too hard to find such people who can help you with these services.”

“These operators usually go around claiming that they can do market-making for token projects and inflate trading volume for a fee. This practice is also known as wash trading and is illegal,” Ong said.

It is possible to detect wash trading from the outside, Ong noted. Looking at the trade history and order book of exchanges, one can notice certain patterns and see that something fishy is going on:

“If trades happen outside the bid-ask spread or constantly within the bid-ask spread, this is a clear example of wash-trading in action. One can also look at the trade interval and trade size to detect common recurring patterns to find wash-trading activities.”

However, it’s rare to hear manipulators openly discuss their trade, for obvious reasons.

In recent interviews, Andryunin walked CoinDesk through the mechanics of Gotbit’s business, which helps crypto projects to literally fake it until they make it.

Extracurricular Activity

Andryunin arrived late for our meeting in Moscow City, an upscale business district of metal-and-glass skyscrapers, fancy cafes and the offices of multiple crypto-related businesses. He had just seen a client. The applied math major hardly makes it to classes. Among his classmates, almost everyone is now obsessed with crypto, he said.

He started Gotbit with a fellow undergrad in 2018, while initial coin offerings (ICOs) were still in vogue. His partner codes the trading bots while Andryunin reaches out to token projects to sell Gotbit’s “market-making” services. Listing on a small exchange costs $8,000; a month of supporting fake trading volumes via algorithms imitating normal market activities will run you $6,000.

Getting the token on CoinMarketCap is a bit steeper at $15,000. To achieve that, first a project needs to get listed on two small exchanges. These platforms would die without artificial volume, Andryunin believes. A telltale sign is that little-known cryptocurrencies trade on these exchanges much more actively than bitcoin, the original cryptocurrency and the industry bellwether with the largest market capitalization.

The exchanges usually know when Gotbit’s bots are inflating the volumes of altcoins, Andryunin believes, but higher numbers are in these exchanges’ own interest. Policing manipulation is not.

These exchanges charge a couple of bitcoins (about $20,000 at recent prices) to list a token, and have no other real criteria, Andryunin said. As examples of exchanges with such standards, he mentioned Hotbit, based in Shanghai, and BitForex in Hong Kong. Neither exchange responded to CoinDesk’s requests for comment by press time.

“It’s well-established that many exchanges likely engage in practices to inflate the volume they report in order to drive interest in their platforms and to attract new customers,” Alameda Research, a crypto trading firm, said in a recent report. Alameda analyzed the order books and trading history of 48 crypto exchanges worldwide and found that on 14 of them, genuine trading volume might well be zero. BitForex is among the 14.

On such exchanges, Gotbit appears to be the main source of liquidity, Andryunin said. “These small exchanges, I don’t even get it what they are living off, there are no real volumes there.”

After a token is listed on two exchanges and shows some trading activity provided by bots — the volume can be less than $100,000 a day per exchange – there is a chance to get it listed on CoinMarketCap. From there, Gotbit is out of the picture, according to Andryunin, who said other intermediaries help accomplish the last step.

Exactly how they do it, he doesn’t know. But it gets done: “Our clients are at [the] 300-500 positions on CoinMarketCap.”

Carylyne Chan, CoinMarketCap’s head of marketing, told CoinDesk that to get listed on the site, a token must satisfy a set of criteria, including using blockchain tech; having a functioning website; being listed on two exchanges that are, in turn, listed on CoinMarketCap; and providing a direct line of communication with a project representative.

Asked if it’s possible to fool the system by inflating volume, Chan said: “Our stance is to list as many crypto assets as possible, covering the universe of crypto assets over time. We are not in the business of censoring information.”

CoinMarketCap also flags projects with suspicious activity on its website, she added, “based on regulatory circulars or user-submitted information.”

The clients
Gotbit’s clients typically have done an ICO and now need to calm their investors by showing some market activity, Andryunin said.

Most of these founders care about their projects and are trying to make them work, he believes, but out of the 30 projects Gotbit is working with, only two or three are “really creating some value,” have a working business model and reached the point of building an actual product.

Others can live a couple of months on fake volume, allowing the founders to cash out, then stop paying for the “market-making,” after which the token’s price will plunge. They close down a couple of months later.

At that point, people who bought those tokens come to terms with reality, Andryunin said, joking:

“No more Lambo dreams, a bike would be fine.”

CoinGecko’s Ong said optics are indeed a motivation for many crypto teams.

“Token projects are sometimes pressured to use such market-making operators because they need to show their major investors and token holders that there is significant market interest in their project and things are going well,” he said. “Some are also doing it because they do not want their price to fall precipitously and want to maintain an ‘optimal’ price or have it increase over time.”

Part of the pressure, Ong added, comes from exchanges, which require a minimum trading volume and de-list thinly traded tokens.

“Thus, faced with a delisting option, token projects engage these market-making firms to inflate their volumes artificially,” Ong said.

In a rare case, one project that used Gotbit’s market-making service made it to the top 100 on CoinMarketCap, Andryunin claimed. He wouldn’t name the token but said the project had a strong team and business model from the beginning.

Why would a legit team use artificial volume pumping?

“They wanted to get listed on large exchanges, and get some cash, too,” Andryunin said.

The Bots

To show imaginary volumes, Gotbit’s bot fills an exchange’s order book – again, we’re talking about small exchanges with minuscule volumes – and closes the orders itself using the same or another account. Usually, clients have four accounts, but two are enough for trading with yourself, Andryunin says.

In order to make these volumes plausible, Andryunin said, Gotbit programs its algorithms to mimic the normal patterns of trading in different parts of the world at different times of the day and year.

Gotbit’s pitch deck – yes, it has a pitch deck – features charts of trading volumes it pumped for several tokens, with their names redacted (Andryunin said he signs non-disclosure agreements with clients). Sometimes a client decides to turn off the bot and the volume plunges to zero, if nobody but Gotbit’s bot is trading the token.

The volume bot’s orders are not supposed to be executed and settled, just create an illusion of trading. In theory, some real holder who purchased tokens during an ICO can come to the exchange and take the orders – in this case, Gotbit would end up with a heavy bag of illiquid coins.

To prevent this from happening, the bot watches the exchange’s wallets on Etherscan, a popular block explorer for the ethereum blockchain, and when there is a big transaction of the coin in question, all orders are immediately canceled. Gotbit works only with the ERC-20 tokens which run on top of ethereum, so it’s easy to monitor the movement of funds on the network.

Another Gotbit service is placing buy and sell orders at certain price intervals to control the bid-ask spread, or gap between what buyers are willing to pay and sellers are willing to accept. Normally, this spread is a strong signal of market maturity or lack thereof; a tight spread shows sufficient demand and supply to meet at a compromise price, while a wider spread indicates an illiquid market.

Hence, Andryunin said, some projects want to show that their tokens are traded at a narrow spread, to create the impression that there is a live, healthy market for the coin.

Gotbit also has an algorithm allowing the bots to dump a token without affecting the price: to do that, the bot looks for buy orders already present in the order book and quickly fills them.

This is possible, he said, if there are at least some real buyers on the market – sheep, as Andryunin calls them, which are herded into the market by the projects and then “shaved” when the price is high (pumped by the bot).

Time To Close Up Shop

Andryunin has no illusions about the future of his business.

As regulation of the crypto market gets tighter across the globe, the world of little exchanges full of junk coins with bizarre charts will ultimately be stamped out, he acknowledged.

The main factor, he said, will be the new international guidance from the Financial Action Task Force (FATF) for regulating crypto-related services and exchanges, which will require more stringent customer-identification processes akin to traditional banking.

“I think FATF will shut it down quickly: the cryptocurrency exchanges will be regulated like NASDAQ and pumping fake volumes will be banned,” Andryunin said, adding:

“I’m not big on legal questions, but I think doing on NASDAQ what we are doing here would be a financial crime. And the exchanges will have to monitor it that people are not trading with themselves. Otherwise the exchanges will get blacklisted.”

Hence, Gotbit’s market-making business is winding down, and the team is switching to other services, the most popular of which is initial exchange offerings (IEOs), a type of ICO that is conducted on an exchange.

Updated: 1-6-2020

We Still Don’t Know Bitcoin’s Real Volume

Fake volume became one of crypto assets’ leading narratives of 2019, as a U.S. regulatory application for an exchange-traded product (ETP) followed the work of earlier researchers in showing how as much as 95 percent of lit markets’ reported bitcoin trading volume might be fake. That’s resulted in conservative estimates of bitcoin volume that are probably far too low, and a condition of uncertainty as to how much bitcoin is actually being traded.

You Could Think Of Fake Volume As A Natural Feature Of Crypto’s Novel Market Structure, In Which:

* Liquidity Is Divided Among Many Competing Exchange Venues
* Trading Fees Are High Relative To Other Asset Categories
* Exchanges Provide Data For Free

In crypto markets, data is a marketing tool instead of a revenue source, and some exchanges have been shown to use it that way, exaggerating volumes in order to enhance their perceived liquidity.

These realities and the data presented by researchers like BitWise in its March 2019 ETP application have led market data aggregators to adjust their volume representations. The chart below compares adjusted daily bitcoin volume figures for the month of November offered by two such aggregators, Messari and Nomics, against the unadjusted reported daily volume figures offered by CoinMarketCap, historically the best-known market data provider.

The discrepancy between the two examples of adjusted bitcoin volume shown stems from the list of exchanges each data aggregator includes. Messari limits its “real” bitcoin volume number to the 10 exchanges identified in BitWise’s ETP application. Nomics rates 32 exchanges high enough on its “transparency rating” metric to include them in its “transparent volume” aggregate.

In its October response to an application for ETP approval by BitWise, a San Francisco-based fund manager, the U.S. Securities and Exchange Commission (SEC) noted exchanges that BitWise excluded as fake are likely supporting some volume of real trading activity, a “gray area” that BitWise conceded in a reply to comments on the application.

The SEC’s response specifically mentioned HitBTC, Huobi, OKEx and a handful of exchanges based in South Korea, which were excluded due to capital controls there. Nomics’ adjusted bitcoin volume number includes HitBTC, but not Huobi, OKEx or any of the larger South Korean venues.

Anecdotally, traders say excluding liquid markets wholesale doesn’t make sense – especially Huobi and OKEx. “I’ve traded on OK since 2013, and it’s executable,” said Dan Matuszewski, former head of trading at Circle, a Boston-based developer of financial products in crypto. “That liquidity is there. Those markets are actionable. Do I think the number is 100 percent true? Absolutely not.”

The chart above shows that, at least on Huobi, some bitcoin-base pairs are nearly as liquid as they are on Coinbase, according to order book data provided by Kaiko. Real daily bitcoin volume in November was probably somewhere between the $1.97 billion “transparent” volume that Nomics reported and CoinMarketCap’s unadjusted average daily volume figure of $22.56 billion – and even though Nomics’ number excludes some major exchanges, it probably gets closer to the truth than the unfiltered data on CoinMarketCap.

To some extent, it doesn’t matter. Aggregate bitcoin volume is a general data point, unlikely to inform a specific investment decision. In crypto’s fragmented markets, volume at specific venues, selected for their relevance to geographies or categories of investor, may be better signals. For example:

* Coinbase’s Cash Market Volumes As An Indicator Of New Retail Participation
* Activity On Localbitcoins Or Regionally Dominant Exchanges
* CME And Bakkt Bitcoin Futures Activity As An Indicator Of Us Fiduciary Institutions’ Participation

However, a reliable figure for bitcoin’s aggregate volume is important when establishing market infrastructure such as volume-weighted indexes. The crypto asset category’s inability so far to settle on such a number is an indicator of its immaturity. When media organizations emerged on the internet, their new approaches to revenue also brought new questions as to which information could be trusted. The same thing is happening in crypto.

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