Exchange Volumes May Be Fake, But Bitcoin's Value Is Real

The mainstream reaction to Bitwise's recent report showing that 95 percent of total reported bitcoin trading is fake was, predictably, to see it as further proof of the lawlessness and scammy nature of the cryptocurrency world.

Just as important as that statistic were the ones that the asset manager used to describe trading activity on the 10 "Real exchanges" hosting the 5 percent that is not made up of wash trades and other manipulations.

Within its presentation seeking approval from the Securities and Exchange Commission for a bitcoin-based exchange-traded fund, Bitwise included one slide with a screenshot from Coinbase Pro showing a mere 0.0003 percent bid/offer price spread and stated that it had to be "Among the tightest quoted spread of any financial instrument in the world."

More than merely a critique of the price manipulation rife across bitcoin markets the Bitwise report is a demonstration of cryptocurrencies' great potential.

The thin price spreads are especially remarkable when you consider that authentic bitcoin trading represents a drop in the ocean compared with those traditional markets where price spreads tend to be tight.

Daily turnover in the U.S. Treasurys market, considered one of the most price-efficient markets in the world, tends to range between $550 billion and $1 trillion, whereas Bitwise estimates worldwide daily authentic bitcoin trading to be just $273 million.

It's perhaps tempting to argue that this regulated exchange advantage will disappear when new decentralized solutions such as the model developed by Arwen allow traders to retain full custody of their coins and exchanges are left to perform solely the price-matching function.

If the exchange isn't compelled by a regulator to refrain from manipulating prices, investors can't be assured that it isn't trading against it.

In this context, it's noteworthy that the key selling point that the Intercontinental Exchange uses to promote its yet-to-be-launched bitcoin trading platform, Bakkt, is that it will give financial institutions the peace of mind of "Federally regulated price discovery." Only with the full backstop of federal oversight, Bakkt says, can large institutions be assured of reliable prices and thus maintain the fiduciary duty they owe their customers.

In any case, far from representing another damaging blow to bitcoin's reputation in the public eye, Bitwise's damning report on scammy exchanges should be viewed as a big boost to bitcoin's bid for legitimacy in the wider world.