Taking a closer look at order book data shows Bitfinex has the best liquidity, and just how widespread wash trading is

It's an open secret that the overwhelming majority of cryptocurrency trading volumes are fake. 

Some estimates for the percentage of erroneous volumes top 90%. Notably, crypto asset manager Bitwise submitted a report to the Securities and Exchange Commission which concluded that only 5% of the $6 billion in reported cryptocurrency volumes was legitimate activity. The Block's Larry Cermak estimated a similar number, analyzing reported volumes relative to an exchange's web traffic. 

While it is clear that exchanges are faking volumes, it isn't clear how investors and traders can't distinguish between real and fake volumes. 

Coinpaprika, a Poland-based cryptocurrency data provider, is taking steps to remedy that problem. The firm shared exclusively with The Block its findings from a months-long investigation into cryptocurrency exchange trading data to measure the possibility of wash trading on a given venue. CoinGecko also recently announced its Trust Score rating algorithm, which deploys a similar model.

Unsurprisingly, many of the firms that have the highest possibility of wash trading are ones you've likely seen on the top of CoinMarketCap's rankings, such as BitForex and BitMAX. Exchange venues based in Asia also tend to have a much higher possibility of wash trading.

Strikingly, the firm's findings conclude that there is a non-zero possibility of wash trading even on registered U.S. exchanges such as Gemini and Coinbase, which are included in Bitwise's real 10 index (and highlighted in the below graphs in teal). According to Coinpaprika, Binance has the highest chance of wash trading out of the exchanges vetted by Bitwise.

The findings are in line with recent remarks by the SEC head Jay Clayton, who noted that traders in crypto are "sorely mistaken" to think that there is thorough price discovery akin to equities markets.

Coinpaprika essentially reached these results by looking at order book data instead of the self-reported volume data. They examined the 1% and 10% section of the order book from the midpoint price to see how many orders were sitting on the exchange. Order book data, to be sure, can be faked, but it is difficult and expensive to do.

Examining trading volumes in this context paints an interesting picture of which exchanges have the deepest liquidity. Bitfinex skeptics beware, but the exchange comes out on top, followed by most of the well-known, U.S.-regulated exchanges, such as Coinbase and Bitstamp, which both hold BitLicenses.