FINANCE


Crypto Wash Trading Management Science, 69,11, November 2023


LINK TO PAPER LINK TO VIDEO


LIN WILLIAM CONG ASSOCIATE PROFESSOR OF FINANCE


RUDD FAMILY PROFESSOR OF MANAGEMENT Samuel Curtis Johnson


Graduate School of Management


Cornell SC Johnson College of Business Cornell University


Co-authors • Will Cong


Associate Professor of Finance, Rudd Family Professor of


Management, Samuel Curtis Johnson Graduate School of Management, Cornell SC Johnson College of Business, Cornell University


• Xi Li, University of Reading • Ke Tang, Southern University of Science and Technology • Yang Yang, Columbia Business School, Columbia University, NBER


Summary


Te combined market capitalization of all cryptocurrencies reached a peak of $3 trillion of U.S. dollars (USD) in late 2021 and despite recent market crashes, still surpassed $1.2 trillion as of July 2023. Te monthly crypto trading vol- ume in 2020 amounted to trillions of USD, multiplying that of equity mar- kets (Helms 2020). Both financial institutions and retail investors have had substantial exposure to the cryptocurrency industry, but crypto exchanges, arguably the most profitable players in the ecosystem, remain mostly unregu- lated until recently. As of mid-2022, regulated exchanges (Coinbase, Bitstamp, Gemini, BitFlyer, itBit, etc.) cover less than 3% of spot market transactions.


Cong et al. present the first systematic approach to detect fake transactions on cryptocurrency exchanges by exploiting robust statistical and behavioral regularities associated with authentic trading. Tey look for indications of widespread manipulation by sampling 29 centralized exchanges, in which regulated ones feature transaction patterns consistently observed in financial markets and nature, and in which unregulated exchanges display abnormal first significant digit distributions, size rounding, and transaction tail distri- butions. Te authors then quantify the wash trading on each unregulated exchange, which averaged more than 70% of the reported volume, and further document how these fabricated volumes improve exchange ranking, distort prices, and relate to exchange characteristics. Overall, this study cautions against potential market manipulations on centralized crypto exchanges with concentrated power and limited disclosure requirements and highlights the importance of fintech regulation.


TO IMPACT CONTENTS


RESEARCH WITH IMPACT: CORNELL SC JOHNSON COLLEGE OF BUSINESS • 2023 EDITION


31


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68  |  Page 69  |  Page 70  |  Page 71  |  Page 72  |  Page 73  |  Page 74  |  Page 75  |  Page 76  |  Page 77  |  Page 78  |  Page 79  |  Page 80  |  Page 81  |  Page 82  |  Page 83  |  Page 84  |  Page 85  |  Page 86  |  Page 87  |  Page 88  |  Page 89  |  Page 90  |  Page 91  |  Page 92  |  Page 93  |  Page 94  |  Page 95  |  Page 96  |  Page 97  |  Page 98  |  Page 99  |  Page 100  |  Page 101  |  Page 102  |  Page 103  |  Page 104  |  Page 105  |  Page 106  |  Page 107  |  Page 108  |  Page 109  |  Page 110  |  Page 111  |  Page 112  |  Page 113