CRYPTOCURRENCIES 7 minutes to read

Why the real BTC volume is much lower than you think

Jacob Pouncey

Cryptocurrency analyst, Saxo Bank

Summary:  As efforts to get a Bitcoin EFT approved continue, Bitwise has undertaken a thorough analysis and discovered that the real market for Bitcoin is smaller, more efficient and more regulated than commonly presented.


The basis for this overview is primarily derived from the recent Bitwise presentation for the United States Securities and Exchange Commission in which the firm addressed several of the oft-cited concerns of the commission in regards to approval of a Bitcoin ETF. The concerns include – but are not limited to – fake volume, market manipulation, custody solutions, valuation and market efficiency.

Biggest spot exchanges

The Bitwise report suggests that the real market for Bitcoin is smaller, more efficient and more regulated than commonly presented, especially when excluding exchanges with noticeably inflated or fake volumes and wash trades. Bitwise asserts that upwards of 95% of the Bitcoin trading volume is fake or non-economic. Therefore, the argument goes that the actual Bitcoin market is smaller, more efficientand more regulated than perceived. The reported volume of the Bitcoin market averages about  $6 billion daily, where BTC trades against fiat or fiat-pegged stable coins, however much of this is fake volumes or wash trading. Using three metrics for analysis which include trade size distribution, volume distribution, and spreads, Bitwise found just ten exchanges have 'real' volume out of a total of 81 exchanges with reported volumes above $1m.
Source: Bitwise. AVG daily volume March 4-8 2019l

This means out of a reported $6bn in trade volume only 4.5%, or $273m, of it is real economic activity. Although BTC’s given market cap of $70bn and has a volume of $273m, its daily turnover is still comparable to gold.


Furthermore, these exchanges trade at a very tight spread, suggesting a uniform and highly connected market. Sustained arbitrage opportunities lasting greater than 100 seconds are extremely rare, and the average deviation in price is below 20 basis points for nine of the ten exchanges.

Most of the trading volume takes place in Malta and the US with each jurisdiction accounting for 40% and 30% respectively.
Another key takeaway from the Bitwise report is that the CME and CBOE futures volume is significant compared to the actual spot volume. In fact, the two firms rival combined are comparable to the largest spot exchange Binance, each with $91m and $110m respectively.
Nine of the top ten exchanges are registered as a Money Services Business in the US, and five of them are regulated under the New York Department of Financial Services’ BitLicense.

Bitlicense requires more stringent compliance than MSB regulation. Additionally, many of the top exchanges are using sophisticated market surveillance tools and protocols. 
Source: Bitwise
OTC trading desk

There are several OTC trading desks and market makers for the cryptocurrency market. For instance, Jane Street and Flow traders have become active traders of the top five cryptocurrencies as they are authorised market participants and market makers for the AMUN ETP products and the XBT Provider’s ETPs.

Last year alone Goldman Sachs-backed Circle processed over $24bn worth of OTC trades across 10,000 trades. Each trading house has a different minimum order limit; however, trade sizes are typically larger than $100k. The largest US-based cryptocurrency exchange Coinbase also has an OTC desk.

Additionally, Susquehanna International Group, one of the world’s largest investment firms has been offering OTC services to its clients since 2016. These OTC desks often operated 24 hours a day and are based all over the globe. Bitcoin Suisse and Xapo are both headquartered in Switzerland and manage proprietary trading arms as well as custodial solutions. OTC trading has been a popular way for HNWI and institutional investors to accumulate Bitcoin over the past year. This section highlighted just a few of the dozens of firms moving billions in notational volumes annually.

Custody solutions

Bitcoin is a cryptographically secured digital asset that uses public key cryptography to track ownership. Public key cryptography involves two keys: A public key that is like a safety deposit box and a private key that is like the key to that safety deposit box. Whoever owns the private key, therefore has access and ownership rights to the contents of the public key. Keys are just digital strings of letter and numbers. Hence custody of a cryptocurrency like Bitcoin merely is about safeguarding the private keys associated with the public keys that hold the Bitcoin in question. 

There are now several regulated, insured, third-party crypto custodians. Below is a list of US-based custodians; however, there are custodians in almost every major jurisdiction. For example, Crypto Facilities AG is the chosen custodian for the SIX stock exchange.
Source: Bitwise

The list above is far from exhaustive, with Swiss Crypto Vault, Vontobel, Börse Stuttgart, IBM, JP Morgan, Goldman Sachs are all offering or looking to offer solutions to their clients.

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