Reasons for the Binance Ranking Downgrade
Updated: Apr 23, 2019
As a follow-up to our original report on Binance's reported volume, additional analysis has led us to downgrade our ranking of Binance and question its position as market leader by volume.
While our exchange rankings are merely opinion and should not be taken as financial advice, we feel an obligation to closely watch the platforms that we have recommended.
In this report, we test two potential hypotheses:
Unregulated exchanges are financially incentivized to inflate their IEO volume to encourage future IEO listing fees.
If volume were to be inflated, it would be easier to inflate trading volume on digital assets only listed on their exchange to avoid direct comparisons to trading volume on other exchanges.
Based on our findings, it appears that Binance's trading volume falls foul of both hypotheses listed above - which raises grave concerns for the veracity of all of their trading volume. While we stress that these are merely observations with public data, we find them to be extremely concerning and have downgraded our ranking of Binance.
We would welcome contact from Binance to address the below observations.
Overview of and Testing for our Hypotheses:
Hypothesis One: Exchanges draw source of revenue from 'listing fees' - where companies pay the exchange to list their asset(s). To encourage additional future listings (and revenue), unregulated exchanges are highly incentivized to make assets listed on their platform appear successful. If volume for assets that IEO on a platform deviate substantially from our benchmarks and other assets, this would point to inflated volume.
Hypothesis Two: While many "exchanges" use unsophisticated methods to inflate their volume (see Bitwise Report), in our opinion a smarter approach would be to inflate smaller asset volume that cannot be directly compared to other exchanges. To test this, we have analyzed data from our recommended exchange list, determined which platforms they trade upon, and reviewed the volume against our benchmarks. If volume for single-exchange listed assets deviates from both other assets and our benchmarks, this may point to inflated volume.
Volume Benchmarks: What Should You Observe?
It's difficult to understand what daily volume 'should' look like without benchmarks - especially with the amount of inflated volume reported by malicious exchanges skewing public perception. While prior reporting has provided turnover benchmarks for Gold, BTC, and LTC, in this report we have gone a step further to identify daily trading volume by market capitalization for the US Equity market. We believe this is the most informative benchmark to date, particularly as it accounts for differing daily volume by market capitalization.
The source for this can be found on Table 5 (Page 15) of this 2014 report to the SEC. Some data has been averaged for simplicity.
Key Observations from this Table:
At its highest level, daily turnover is still less than half of one percent
Higher Market Cap. leads to both higher volume and higher daily turnover
These US equity observations are in-line with previous digital asset observations (See below):
Gold (~$7T Mkt. Cap.) = 0.55% daily turnover
Bitcoin ($92B Mkt. Cap.) = 0.39% daily turnover
Litecoin ($4.5B Mkt. Cap.) = 0.28% daily turnover
Now, Why the Rating Downgrade?
Now that we have broken down the our benchmarks and confirmed they are in-line with other digital asset observations, let's explore our methodology and findings.
We pulled down the reported trading volume for each asset for all exchanges included in our BMV exchange ranking. We then reviewed the data against our two hypotheses to check for unusual patterns that could indicate manipulated volume. Even at first glance, we see some shocking volume patterns on the raw plotted data, which we have highlighted below.
For additional clarity, we have consolidated the average daily turnover by type in the table below.
As a reminder, the highest daily turnover we observed for US equities was just 0.49%, making this reported volume extraordinarily questionable. If this is to be believed, every single Binance Launchpad Asset changes hands more than every two days - a rate unheard of in regulated markets, and certainly not the sign of a healthy asset.
Further, this is a Binance-specific pattern. While Non-Binance Listed assets have a relatively high daily turnover, there is a massive difference between 3x our equity benchmark and 120x, which further increases our concerns.
Overall, while we cannot be absolutely certain that that Binance is manipulating its volume, we recommend its reported volume be interpreted with extreme caution at this time.
As always, we want to caveat that any opinions expressed in this article are those of the author(s), and are not financial advice. Please take personal responsibility for yourself and your actions. We are reporting observable public facts only in order to let the reader draw their own conclusions. We do not claim any hypotheses covered are conclusive, and welcome discourse to clear up any confusion.
Our authors trust their own research, and may own positions in assets covered in this article (if applicable). Please do your own research to corroborate our findings. For our full disclaimer, please see HERE.