2019 June 3 - Volume.3 Issue.17

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2019 June 3 - Volume.3 Issue.17

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China Special Report

Recent reports have concluded that 85-95% of cryptocurrency trading volume is fake. The research reports found that most of the demand is coming from the US and select global market exchanges, utilizing different techniques from order book analysis to volume spike discrepancies. Should this be true, it would bode well with US regulators who would feel the comfort that Bitcoin price manipulation would be much harder to achieve given that the cryptocurrency exchanges are under their purview.

But a look at funds being moved on-chain for the most prominently used stablecoin, Tether, shows a markedly different perspective. Trends align; when trading volume goes down, so do Tether on-chain transfer to exchanges - and vice versa. This week, Diar delves into what might really be happening in a region that remains very clouded.

Chainalysis provided underlying data on the movements of Tether across exchanges in different regions. And the sums aren't small. In fact, even a single BTC/USDT trade on unregulated exchanges in China would usurp every major cryptocurrency trading venue in the world. This is unlikely to sit well with regulators, first and foremost, the SEC who continues to delay its decision on multiple proposals for a Bitcoin ETF who would now face a globally erratic and unregulated market.

Mirrored trends of trading volume on trusted exchanges against Tether on-chain transactions value to unregulated Chinese exchanges should be taken into consideration as the Blockchain remains a publicly visible ledger as opposed to reported activity. The similarities speak volumes, so to speak.

China Stablecoin and Trading Appetite Dwarfs Global Demand

On-chain data shows Tether movements hitting a new all-time-high for 2Q19 with one month left on the calendar for the period. What is most striking, however, is the volume coming in and out of Chinese exchanges dwarfs western and global trading venues and accounts for more than half of the total transaction value of known parties.

Data provided to Diar by blockchain analysis firm Chainalysis highlights the magnitude of Chinese Tether demand with over $16Bn received by exchanges based in that market in 2018. This year the number has already surpassed an outstanding $10Bn, setting the stage for the biggest year yet.

2019 to date flows into exchanges catering primarily for Chinese traders beat the $7Bn of all the transactional value for 2017.

Tether on-chain movements stateside account for a tiny 3% of known volumes at $450Mn, more than $10Bn less than flows sent and received by Chinese exchanges.

And the demand is on the rise. In the 2018 bear market, Chinese exchanges accounted for 39% of all known on-chain transaction value for Tether. This year to date, the red dragon is responsible for a whopping 60%.

Global exchanges like Binance and Bitfinex have a share equivalent to half that at 31%, dropping from the 47% share seen for both 2017 and 2018.

US-based exchanges saw their share of the stablecoin demand/trading drop from 44% in 2017 to less than 10% in 2018 (see chart 1).


This isn't a matter of cashing out. The stablecoin movements on-chain are just shy of netting out between sent and received funds, indicating a cyclical nature and trading desire across all exchanges. The on/off nature is likely due to custody reasons from potential exchange hack concerns (see chart 3).

This similar character in the net balance of sent and received funds globally and across all regions suggests legitimate flows. There is no disparity or alternative behavior in the movement of Tethers sent to Chinese exchanges versus the transactions sent to regulated US-based trading venues.


On-chain movements out of China are telling and in stark contrast to what the industry now perceives as nothing more than fake volume following an extensive report by Bitwise, an asset management firm that filed for a Bitcoin Exchange Traded Fund (ETF) with the US Securities and Exchange Commission (SEC).

Bitwise, which looked into 83 exchanges, found a mere 10 to be compliant across its own tests. And there are clear examples of dubious trading volumes that resemble simple algorithms filling up order books that fall far from reputable exchange trading trends.


With that being said, however, a look at the on-chain transfers into exchanges using Tether versus reported trading volumes also shows a trend that tells a vastly different story (see chart 2).

On-Chain transactional volume in 2019 has gone up in unison with reported trading volumes.

While it may not be comparing apples to apples, it's not comparing apples to oranges either. Massive amounts of funds are being moved into exchanges in China for no other purpose than trading. Even a single trade of Tethers moved onto Chinese exchanges would equal daily volumes equivalent to $215Mn for the month of April (the period Bitwise analyzed), which is three times as much as Coinbase and on par with Binance (see chart 5). This does not even take into account funds sitting on the exchanges.

The similarities in percentages of reported trading volume versus Tethers moved on and off exchanges is certainly not proof-of-innocence (POI) nor vindicating of potential wash trading and fake volumes (see chart 4).

But in consideration of the billions in Tethers moved on-chain in China that towers over US and world market transactional value, the estimate by Bitwise of 95% of cryptocurrency trading volume being fake is also likely to be far off the mark, possibly by magnitudes.

1: Tether On-Chain Received by Exchanges by Region (%)


2: Tether Exchange Volume Trends Follow On-Chain Tethers Sent

3: US vs China Tethers Sent and Received by Exchanges

SourceChainalysis, Exchange Volume from CoinMetrics

4: April-2019: Trading Volume Analyzed by Bitwise vs Tether On-Chain Exchange Transfer Volume

Source: Chainalysis, Bitwise Report (p46)

5: 2019 Coinbase Trading Volume versus Tethers Received by Chinese Exchanges

SourceChainalysis, CoinAPI

6: 2019 US Exchanges with Tether Trading Volume versus Tethers Received by these Exchanges

SourceChainalysis, CoinAPI

On Trends:
Should reported volumes from unregulated exchanges be untrustworthy, on-chain transaction value could at the very least indicate how much value is being moved into these venues. While it would be difficult to conclude accurate trading volumes, the data below highlights similar patterns. Coinbase traded volumes mirror Tethers sent to Chinese exchanges. As does Tethers sent to US-Based exchange who have USDT pairs. As do major global markets like Binance and Bitfinex. There is a clear trend and it doesn't deviate by region indicating that there is more than meets the eye when it comes to demand from markets outside of the United States.

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