Fake Volume in Trading: How to Tell Illusion from Reality and Why It Matters

Introduction

In the world of financial markets, trading volume is one of the key indicators traders and investors rely on. High volume is associated with liquidity, trust, and market activity. However, these numbers often hide manipulation—so-called fake volume. This phenomenon occurs when exchanges or market participants artificially inflate volumes, misleading other players. In 2019, Bitwise Asset Management published a controversial report showing that 95% of Bitcoin volume on crypto exchanges was fake. This report became a starting point for a global discussion of the problem. In this article, we will break down how fake volume is created, what mechanisms are used, and why data analysis is the only way to protect yourself from manipulation.

What is fake volume?

Fake volume is artificially inflated trading activity metrics that do not reflect real demand or supply. Its purpose is to create an illusion of liquidity, attract traders, or manipulate prices.

Examples of fake volume consequences:

- Beginners choose exchanges with high volumes, unaware that they are fake.

- Investors make decisions based on distorted data.

- The market becomes vulnerable to manipulation ("pump and dump").

The problem is especially relevant in the crypto industry, where regulatory oversight is weaker than in traditional markets. However, similar schemes can also be found in stocks, forex, or commodities.

Mechanisms for creating fake volumes

1. Wash Trading

Essence: A trader or bot simultaneously buys and sells the same asset, creating the appearance of activity. These trades do not provide economic benefit—their goal is to "paint" volume.

How it works:

- The exchange or market maker uses controlled accounts for circular trades.

- In the crypto world, the transaction mining scheme is popular: the exchange refunds fees in the form of tokens, encouraging traders to make meaningless trades.

- Example: In 2018, a Blockchain Transparency Institute study revealed that 80% of the volume on the top 25 crypto exchanges was generated by bots.

2. Spoofing

Essence: Placing large orders with no intention of executing them to influence the price.

Mechanics:

- The manipulator places a "wall" of buy or sell orders, creating a false signal.

- After other participants' orders are triggered, the spoofer cancels their own orders.

- Example: In 2020, the CFTC fined BitMEX $100 million for spoofing and other manipulations.

3. Fake APIs and "paper" trades

Some exchanges use fake APIs that display unrealistic volumes. Trades do not result in actual asset exchanges—they are just numbers on the screen.

Bitwise Report: How 95% of Volume Turned Out to Be Fake

In March 2019, Bitwise presented an SEC study proving that out of $6 billion in daily Bitcoin volume, only $273 million was real.

Analysis methodology:

1. Comparison with liquidity. On real markets, volume correlates with order book depth. On many exchanges, volumes were 100 times higher than the order book allowed.

2. Trade patterns. On fake exchanges, 90% of trades occurred at identical prices, characteristic of bots.

3. Blockchain data. Bitwise compared reported volumes with Bitcoin network transactions—most did not match.

Report conclusions:

- Out of 81 exchanges, only 10 showed reliable data.

- Even large platforms (e.g., OKEx) were involved in fraud.

Other studies and cases

- CoinMarketCap (CMC): After criticism in 2019, the service introduced a "real volume" metric, excluding suspicious exchanges from calculations.

- Forbes (2023): Found that 51% of crypto exchange volume in 2022 was fabricated.

- Traditional markets: In 2015, HSBC and Barclays paid billions in fines for spoofing on the forex market.

Why is this dangerous?

1. Distorted pricing. Traders see unrealistic support/resistance levels.

2. Liquidity risk. During a crisis, "painted" liquidity disappears.

3. Loss of trust. Investors leave the market, seeing it as the "Wild West."

How to detect fake volume?

1. Order book analysis. Sudden "walls" of orders and their instant disappearance are signs of spoofing.

2. Checking volume-volatility correlation. If volume grows but the price doesn't change—it's suspicious.

3. Using independent metrics. Services like CoinMetrics or Messari show "cleaned" data.

4. Comparing with blockchain. For crypto markets: exchange volume should match network transactions.

The role of regulators and new technologies

- MiCA (EU): Starting in 2024, crypto exchanges must undergo volume audits.

- SEC: Tightening controls on spoofing and wash trading.

- CEX/DEX exchanges: Implementing algorithms to detect bots (e.g., Binance AML).

Conclusion: Data is your protection

Fake volume remains a serious problem, but proper analysis minimizes risks. Always check:

- Data sources (use multiple aggregators).

- Exchange reputation.

- Volume-liquidity consistency.

As economist Nassim Taleb wrote: "Don't believe what you see until you understand why it's being shown." This wisdom is more relevant than ever in the trading world.

Tip: Before opening a trade, ask: "Who benefits from this volume?" The answer may save you from costly mistakes.