The review itself reserves judgement on the exchanges, but CryptoGlobe has highlighted some inconsistencies with certain types of exchanges, namely Trans-Fee Mining (TFM) exchanges. According to the exchange review, TFM exchanges typically have the thinnest order books (list of buy and sell orders), and unusually low web traffic compared to the large volumes they trade. The exchange review described TFM exchanges as:
Transaction fee mining exchanges rebate 100% of transaction fees in the form of their own exchange tokens.
The data below provides substance to comments made by Binance CEO Changpeng Zhao who in an interview with CryptoGlobe stated that TFM exchanges were clearly “damaging” to the ecosystem but “not a threat” to Binance’s business model.
Order book Analysis
An order book is an electronic list of buy and sell orders organized by price level and the review analyzes the order book depth to determine the stability of each exchange. The chart below shows the average 10% order book depth to average 24 hour volume ratio. In other words - the ratio shows what percentage of daily trading volume it would take to move the market price down by 10%. The smaller the ratio the easier it is to pump or dump the markets.
For example, it would take 40% of the daily volume on ItBit to move the price down by 10%, whereas on TFM exchange CoinBene - it would take just 0.3% of the daily volume. TFM exchanges are skewed disproportionately to the right of the chart; Coinbene, CoinEx, ABCC and BigONE all have ratios of less than 2% - an indication of how thin their order books are and therefore how easily the price on these exchanges can be moved.
Web Traffic Analysis
Web traffic data from Alexa is used to estimate the average daily unique visitors which is compared to daily volume in the chart below. FCoin, EXX, Coinbene, CoinEx are all TFM exchanges which stand out as having large volumes (blue) despite a comparatively low number of daily unique users (red). EXX trades around $160 million per day with an average of 375 unique visitors per day, however, the report stresses that Alexa web traffic data for smaller sites is unreliable.
Bithumb, a relatively well known and well-regarded exchange has a similar profile, however its high average trade size of $2,750 seen in the trade data chart goes a long way to explain this.
Conversely, Coinbase has the highest ratio of unique daily visitors to volume, which can in part be explained by its low average trade size of around $700. Furthermore - the site Coinbase.com is not just used for trading, as the company has several products that visitors use in addition to their trading platform.
Trade Data Analysis
CoinEx, a well-known trans-fee mining exchange, has the highest trade frequency and the lowest average trade size out of the top 25 exchanges - with 176 thousand trades a day and an average trade size of just $125.
Bithumb and HitBTC in contrast, have much larger average trade sizes of around $2,750 and less than 15,000 trades per day. The report doesn’t delve into why these differences are observed, although it does suggest that larger traders likely reside on Bithumb and HitBTC rather than on CoinEx – a TFM exchange.
Thin Order Books and ‘Fake Volume’?
TFM exchanges have been the subject of much controversy and many in the industry believe they have an unsustainable business model that is damaging the ecosystem. The report does show that TFM exchanges tend to have the thinnest order books and lowest visitor-to-volume ratios.
Despite the anomalous data presented in this report, concluding that TFM exchanges have ‘fake volume’ is tricky as the definition of ‘fake volume’ is highly subjective. The incentive structures employed on these exchanges certainly inflate trading volumes, and offer poor liquidity as evidenced by their thin order books making the exchanges less stable. But are TFM exchanges a threat to the industry?
When talking about TFM exchanges, CZ, Binance CEO stated in an interview with CryptoGlobe:
The volume at the exchanges that have tried that have all come down... The law of supply and demand tells us that since there's always more platform tokens being issued, you can almost guarantee that the price will go down over time. So, the way it's done is not correct.
The chart below shows that the top 5 TFM exchanges briefly captured a 37% market share of total crypto volume. However since the peak on July 14th the global market share of TFM exchanges has remained fairly stable between 6-12%.
Two prominent TFM exchanges - CoinBene and CoinEx - have seen their exchange tokens lose over 80% in value vs bitcoin since they hit the markets in June and July respectively. The volumes of both tokens - CONI and CET - have dropped of sharply:
With thin order books and declining token prices, it is clearer than ever that TFM exchanges do not offer the best solution for retail traders - which is evidenced in their declining market share.
While TFM exchanges have undoubtedly made waves - briefly capturing a staggering 37% of the global crypto markets - it seems that their prominence is on the wane.