Cryptocompare, a provider of cryptocurrency data and indices, is launching a new benchmarking service to evaluate cryptocurrency exchanges.
The new service uses a proprietary methodology, based upon a combination of 34 qualitative and quantitative metrics, to rate and rank exchanges from around the world.
Cryptocompare’s chief executive officer, Charles Hayter, was interviewed last month in New Money Review.
“The existing processes for evaluating crypto exchanges are failing; metrics such as volume are frequently misleading, methodologies are unclear and preparatory due diligence is lacking across the board,” Cryptocompare said in a report published to accompany the launch of its new service.
According to Cryptocompare, many cryptocurrency exchanges report fake volumes to boost their standings on comparison sites.
“A significant number of crypto asset exchanges are wash trading and using incentivised trading schemes to inflate volumes,” the firm said in a press release.
Wash trading is a process whereby a trader buys and sells an asset for the express purpose of misleading the market.
Exchanges also use air drops (distributions of new tokens, usually for free), trading competitions and transaction fee mining to boost reported activity, according to Cryptocompare. Transaction fee mining involves handing the trading fees usually charged by exchanges back to traders in the form of a native, exchange-issued token.
“Our research shows the problem has been getting worse, with lower-quality exchanges increasing market share by 30 percent in the last 12 months, demonstrating that ranking exchanges by volume is misleading”, Cryptocompare said.
Earlier this year Bitwise, a US-based asset manager, alleged that 95 percent of the reported daily trading volume in cryptocurrencies is fake.
Cryptocompare’s new exchange ratings methodology calculates a score out of 100 for individual cryptocurrency trading venues, based on seven different components.
These components are: the country in which the exchange is located and its regulatory stringency; the legal and regulatory structure of the exchange; the nature of the investors in the exchange; the identities and experience of the exchange team; the quality of the exchange’s data connections; the existence of a market surveillance system; and the quality of the market, including the cost to trade, liquidity and the stability of quotes.
According to Cryptocompare, the top ten cryptocurrency exchanges in the world, based on data from May 2019, are Coinbase (headquartered in the US), Poloniex (US), Bitstamp (Luxembourg), bitFlyer (Japan), Liquid (Japan), itBit (US), Kraken (US), Binance (Japan), Gemini (US) and Bithumb (South Korea), in that order.
According to Cryptocompare’s CEO, the ranking service fills a gap in the market.
“We look forward to bringing greater transparency to the digital asset class and improving decision-making for market participants by providing a dataset they can trust,” said Hayter.
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