June 6, 2023
• Artificial trading volume is a persistent issue in the cryptocurrency industry, which misleads investors and damages the industry's reputation.
• Catalyze Research took an innovative approach based on social data metrics to create a ranking of exchanges based on social interest, analyzing over 200 exchanges to identify the top 10 that were relevant to “Company T”, the first EVM compatible blockchain built on Antelope.
• While the prevalence of fake trading volume poses a challenge in assessing the market position of rival exchanges, Catalyze Research suggests a framework that allows its clients to take an alternative approach in quantitatively dissecting the issue.
Fake trading volume has been a persistent issue in the cryptocurrency industry, with many exchanges artificially inflating their trading volumes to attract users and increase their market share. This practice not only misleads investors but also damages the reputation of the industry as a whole. Despite efforts to address the problem, fake trading volume continues to be a concern for those looking to trade in cryptocurrencies, highlighting the need for greater transparency and accountability in the market.
This challenge was faced by “Company T” looking to list their tokens on an exchange that would provide the most significant increase in token value upon listing, all while working with a limited budget. They soon discovered that determining the actual trading volume on an exchange was no easy feat, with inorganic trading behaviors like bots, rotating trades, and MMs making it difficult to measure the expected ROI after listing.
This is where Catalyze Research came in. We were tasked with analyzing how to select the transactions that would get the most bang for the listing fee buck. Catalyze Research took an innovative approach based on social data metrics to create a ranking of exchanges based on social interest.The analysis included three major categories and eight subcategories: (1)Social Volume, (2) Sentiment, and (3) Region, and involved analyzing over 200 exchanges to identify the top 10 that were relevant to “Company T”.
The story of “Company T” and their challenge of determining the true value of an exchange may be familiar to many companies in the blockchain space. But how did we solve this problem? How did we use social data metrics to create a ranking of exchanges that would get the most bang for the listing fee buck? In this report, we will dive deeper into the innovative approach taken, and highlight our expertise in blockchain consulting.
The graph demonstrating the revenue of cryptocurrency exchanges worldwide clearly illustrates the significant growth of the cryptocurrency exchange industry over the past few years. In 2017, the revenue was at 1.09 billion USD, but by 2027, it is estimated to reach 64.87 billion USD, indicating a massive opportunity for investors to capitalize on.
Between 2017 and 2023, the Compound Annual Growth Rate(CAGR) was an impressive 66.01%. This remarkable growth can be attributed to the increasing adoption of cryptocurrency as a legitimate form of investment and the rise of decentralized finance (DeFi) protocols, which have made trading and investing in cryptocurrency more accessible to the masses.
The estimated average annual growth rate for the next four years is 14.66%, which may seem lower than the previous CAGR, but it still represents a substantial opportunity for investment in the cryptocurrency exchange industry. As more institutional investors enter the market, along with increased regulatory clarity, this growth rate could potentially increase even further.
In essence, the graph above reflects the growing adoption and interest in cryptocurrencies, as more individuals and institutions are looking to invest in this space. This trend is also a positive indication for the cryptocurrency exchange industry, as it suggests that there is a growing market for these platforms, and they have the potential to reach a large user base. However, with this increase in users, it is essential for cryptocurrency exchanges to maintain high security standards and ensure that their platform scan handle the demand. Additionally, as the market continues to grow, it is likely that more competition will arise, making it essential for exchanges to stay innovative and adapt to changing market conditions.
As mentioned in the Forbes analysis, over 51% of the daily bitcoin trading volume being reported is likely bogus. This is a pervasive issue within the cryptocurrency market, where wash trading is commonly employed by some traders and exchanges to inflate the trading volume of an asset, giving the appearance of rising popularity. Wash trading is defined as "entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without incurring market risk or changing the trader's market position."
In some cases, trading bots execute these wash trades intokens, increasing volume, while at the same time insiders reinforce the activity with bullish remarks, driving up the price in what is effectively a pump and dump scheme. Wash trading also benefits exchanges because it allows them to appear to have more volume than they actually do, potentially encouraging more legitimate trading.
The lack of faith in the underlying markets of cryptocurrencies has led to the Security and Exchange Commission's refusal to approve a spot bitcoin ETF. Additionally, persistent fears about the solvency of crypto exchanges have been underscored by the public collapses of Voyager and Celsius.As the Forbes report shows, the lesser regulated exchanges in their study account for approximately $89 billion of the true volume, with some firm stouting big volume but operating with little or no regulatory oversight that would make their figures more credible, notably Binance, MEXC Global, andBybit.
Moreover, the creation of new trading assets and products such as stablecoins and perpetual futures adds complications for national authorities seeking to regulate crypto markets. Major U.S. exchanges hardly utilize these instruments or contracts in any of their trading. However,offshore exchanges make significant use of them as ways to synthetically create U.S. dollar liquidity on their platforms (they cannot get U.S. bank accounts).
All of these factors contribute to the difficulties faced by “Company T” in accurately valuing their business due to the prevalence of fake trading volume generated by their competitors. In order to address this issue, a thorough analysis of the market and competitors, as well as potential regulatory measures, would be necessary.
Taking the problem statement above into account, Catalyze Research uses a unique approach to determine the true value of “Company T” by analyzing social data metrics from over 200 exchanges. We analyze three major categories and eight subcategories to identify the top 10 exchanges that are relevant to the “Company T” situation. By analyzing all of these metrics, Catalyze Research hopes to identify the top 10 exchanges that are most relevant to “Company T”, which will help the company accurately value its business. This is a unique approach that goes beyond just analyzing market data, and takes into account social data metrics, which can often provide valuable insights into market sentiment and trends. By doing so, Catalyze Research helps “Company T” gain a more accurate understanding of its value and potential market opportunities.
Catalyze Research's framework for analyzing competitor exchanges is based on three major categories, each of which has several subcategories. The first major category is Social Volume, which measures how many people are talking about a topic on social media. This category includes Unique Mention SOV, which is the share of the number of unique mentions on a specific topic, # of Reach SOV, which is the share of the number of reach on a specific topic, and Growth Rate, which is calculated as the Compound Monthly Growth Rate from '22 Jan to July over 7 months YTD.
The second major category is Sentiment, which analyzes the tone of voice on social media. This category includes Positive Sentiment SOV, which is the share of the number of positive sentiment mentions on a specific topic, # of Positive Reach SOV, which is the share of the number of positive reach on a specific topic, and Positive Sentiment Growth Rate, which is calculated as the Compound Monthly Growth Rate from '22 Jan to July over 7 months YTD.
The third major category is Region, which analyzes where the social volume is coming from. This category includes “Company T” Audience Interest, which is the regional distribution correlation between the exchange's interest and “Company T”' audience interest, and Macro Crypto Interest, which is the regional distribution correlation between the exchange's interest and Macro Crypto Interest.
Once the subcategories and major categories have been established, weight is added to each of them to prioritize their importance.Once weights have been assigned to each category and subcategory, the figures are quantified and standardized, which allows for an unbiased comparison between exchanges. The final weighted average figure is then used to identify the Top 50 Social-Optimized Cryptocurrency Exchange List, which helps “Company T” identify its competitors in an unbiased manner, and accurately conduct a fair valuation of its business. This methodology ensures that the selection process is objective and impartial, and it eliminates any subjective bias that could be introduced by using other evaluation methods.
By using unbiased social data from these categories,Catalyze Research is able to identify and rank competitor exchanges to find the top 10 that are relevant to the “Company T” situation. This approach ensures a fair and data-driven analysis, allowing “Company T” to make informed decisions based on the insights gathered from the social data metrics.
After analyzing the social data metrics from over 200 exchanges, Catalyze Research discovered that Binance had the highest overall score of 84.94%. Coinbase followed with a score of 34.23%, and KuCoin with a score of 28.43%. The other exchanges that made the top 10 list in order of score were Billance, Huobi, BTCEX, Crypto.com, OKX, Bybit, and MEXC. These top10 exchanges had scores ranging from 16.54% to 20.09%.
Based on these findings, we recommend that “Company T”focus on monitoring the top 10 exchanges in the list to accurately estimate competitor trading volumes, and consider investing in their own marketing efforts to increase brand awareness and attract genuine trading volume. This will help the company paint a more accurate picture of their business in relative terms, thereby helping them accurately value their business, and make informed decisions about their growth strategy and investment opportunities.
Catalyze Research's framework for analyzing competitor exchanges using social data metrics has resulted in quantifiable and qualitative outcomes that have effectively delivered a fair and data-driven analysis to “Company T”.
By analyzing over 200 exchanges, we were able to identify the top 10 exchanges that are most relevant to “Company T”, which helped the company accurately value its business. Our methodology, which uses a quantitative approach to social data analysis, has allowed us to measure andrank exchanges through unbiased data. As a result of our engagement, “Company T” now has a more accurate understanding of its value and potential market opportunities.
The benefits of our framework extend beyond just “Company T” and can be applied to many other similar cases. Our approach helps companies gain a better understanding of their competitors and the market sentiment surrounding their industry, allowing them to make informed decisions based on unbiased and objective data.
Additionally, our framework can help identify potential acquisition targets, providing companies with insights into their market position and strategic opportunities. By utilizing social data metrics,companies can gain a deeper understanding of their business and the market,which can ultimately lead to increased value for shareholders and enhanced financial and operational insights to inform business decision-making.