Trading volume may be fake, but the value of Bitcoin is real.

Bitwise said in a recent report that 95% of Bitcoin transactions are fraudulent. Unsurprisingly, the mainstream world sees this report as a further proof of the cryptocurrency world's obsessive nature and the nature of fraud.

But as important as this statistic are the 10 “real exchanges”, the data of these exchanges constitutes the remaining 5% of Bitcoin trading activities, and there are no controls and other manipulations.


Bitwise submitted the report to the US Securities and Exchange Commission (SEC), hoping that its Bitcoin ETF application will be approved. One page in the report is a screenshot of Coinbase Pro's trading page, showing only 0.0003% of the buy/sell spread, and means that the spread must be the smallest of all financial instruments in the world.

This is the key to supporting cryptocurrencies: this technology brings high efficiency and low cost to market participants by removing the financial intermediation required to execute transactions in the traditional financial system.

Therefore, Bitwise's report is not only a criticism of the price manipulation behavior that prevails in the bitcoin market, it also demonstrates the enormous potential of cryptocurrencies.

Ironically, the report also shows that in order to achieve such potential, more stringent regulation of cryptocurrency transactions is required.

Bitcoin – low liquidity + high efficiency

Considering that real bitcoin transactions are only a drop in the ocean compared to traditional markets, this small price difference is particularly noteworthy because the difference in traditional markets tends to be small.

For example, in the US Treasury market, one of the most price-efficient markets in the world, its daily trading volume is often between $550 billion and $1 trillion. Bitwise estimates that the real bitcoin daily trading volume worldwide is only $273 million. It is also important to consider that bitcoin exchanges are usually open to retail investors, while US Treasury bonds are almost entirely traded by institutional investors, and their capital flows are very large.

In traditional markets, size determines liquidity, which in turn determines price efficiency. But these data show that Bitcoin can achieve high efficiency in small scale.

The reason why its efficiency is so high is because Bitcoin eliminates trusted intermediaries that require fees, which control the background execution and settlement processes in the traditional financial system. But there is a problem here: Bitwise's report shows that in order to be rewarded, traders must rely on reliable entities to perform front-end functions that look for buyers and sellers.

In addition, from the 10 real trading exchanges listed by Bitwise, at least for now, those exchanges that are willing to accept supervision seem to have won trust.

All seemingly cumbersome processes and high-cost KYC programs may be worthwhile. It provides a regulatory framework within which Bitcoin-related activities can be safely deployed.

One might say that when a new decentralized exchange (DEX) emerges, the compliant exchange no longer has an advantage. However, while this will help protect investors, the accident that QuadrigaCX evaporates $190 million no longer occurs, but does not address the core functions offered by the exchange: pricing.

At present, perhaps forever, the centralization platform like Coinbase Pro will bring the network effect advantage to the pricing process inevitable. But if the regulator manages the exchange, investors cannot determine whether the exchange is honest. In these cases, pricing is just empty talk.

Regulated pricing has advantages

One of the big selling points of Bakkt, the bitcoin trading platform of the Intercontinental Exchange (ICE), is that it is compliant, and financial institutions can be completely assured of their pricing. Bakkt said that only with the full support of federal supervision, large institutions can be reliably guaranteed in terms of price, thus fulfilling their fiduciary responsibility to customers.

Of course, Coinbase and other exchanges that compete with Bakkt will not agree with this view. They will argue that a regulatory framework based on state currency transfer licensing rules will be sufficient to protect investors. Perhaps Bitwise's report will help them make this argument.

In any case, Bitwise's report on trading fraud should be seen as a big boost for Bitcoin to seek legitimacy on a large scale, rather than a breach of Bitcoin's reputation.

The report shows this to those who doubt the fairness of the technology, and also proves to the true believers of Bitcoin that it is beneficial for them to accept a certain degree of supervision.