A recent study of Bitcoin trading claimed that about 95% of all reported Bitcoin trading volume is a hoax. The transactions are mostly spoofed in an attempt to manipulate Bitcoin prices for various reasons. If that is in fact the case, does it even make sense for people to invest in Bitcoin?
It’s important to remember that spoofed trading exists in all markets, and it especially has affected cryptocurrency markets. If you look at the meteoric rise and fall of numerous cryptocurrency exchanges, it’s clear that some of them are created for reasons other than just providing a place for investors and users to trade their cryptocurrencies. Some exchanges are only around for months or a year or two before they fold.
The recent study found that of the $6 billion in average daily Bitcoin trading volume, only around $273 million was actually legitimate, i.e. genuine sales and purchases. The rest was mostly wash trading, in which a single user buys and sells the same Bitcoin in order to provide the illusion of actual trading. Some of that can be done to pump up the trading volume so as to rank an exchange higher, or to try to influence Bitcoin’s price on a certain exchange, or even to launder illicitly acquired cryptocurrency funds. Of the top 81 exchanges by market volume, 71 were engaged almost solely in wash trading.
For those who are new to the cryptocurrency world and to cryptocurrency investing it can be easy to get sucked into trusting their funds to new and unproven exchanges. No investor should trust an exchange that doesn’t have a long track record and a robust reputation. Investors should remember too that for every legitimate exchange such as Coinbase there are probably a dozen others of questionable reputation.
But most importantly, investors should realize that exchanges are at best a source of exchanging Bitcoin and other cryptocurrencies but not a place one should store cryptocurrencies. Investment options such as Bitcoin IRAs offer investors a number of secure storage solutions for their cryptocurrency holdings, allowing them to buy, sell, and store Bitcoin without having to worry about getting scammed on a fly-by-night exchange. As with everything related to investment and finances, adhering to the maxim caveat emptor can save investors a great deal of heartache.