Binance spark wash trading bonanza but it’s all part of their plan

The crypto bear market is in full swing.

Bitcoin has dipped below the level of its previous bull market high in 2017.

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NFTs have been crushed – the collection that was supposedly “blue-chip”, the Bored Ape Yacht Club, shed 75% of its value in the space of 7 weeks. It’s almost as if people realised that in a suddenly risk-off environment, cartoon monkeys do not yet qualify as a safe haven asset.

Elsewhere, the world’s vocabulary expanded as we all learned the meaning of a new phrase – “death spiral” – after the spectacular UST collapse wiped bank accounts, college savings and more in a devastating blow to the industry. Personally, it was the saddest episode I have witnessed in my years in crypto, given so many invested believing it was a stablecoin, rather than one of those “unstable” stablecoins that are suddenly so fashionable.

In truth, the high-beta industry has done what high-beta industries always do in dire macro situations – followed the stock market down, only a lot more violently. This should not be surprising, as I wrote about last week.

Stock market nets together a winning streak

Last week, however, brought slightly better news. The S&P 500 was floating along quite nicely, clocking four straight days of gains in the lead-up to the all-important Friday jobs report. After this report came in well above expectations  – 372,000 compared to 250,000 forecasted – the market…kind of lulled and even closed down 0.1%.

It’s a strange one. However, markets seemingly were impressed with the numbers but hesitant to show too much glee given better macro numbers mean a lower chance of recession. And a lower chance of recession, of course, means Jerome Powell is perhaps more likely to raise those pivotal interest rates. So good news sends stocks down, and bad news sends them up?

It’s a funny world we live in, and being an investor currently reminds me of my ill-fated support of a struggling football team (Newcastle) over the last two decades. I always wanted my favourite players to do well, but not too well, otherwise they’d get signed by better clubs (looking at you, Yohan Cabaye).

What exactly am I then hoping for? I don’t really know, which is exactly how investor sentiment was Friday.

Cryptocurrency Rebound?

Anyhow, let’s move on from tangential footballing analogies to Bitcoin. As mentioned above, the macro is all that really matters at the moment. I’ve written umpteen pieces recently about death spirals, contagion and the other idiosyncrasies that have reverberated through the crypto markets (what’s a guy got to do to get some good news around here?), but with no large-scale happenings for a couple of weeks now, it’s back to being macro controlled.

But as I stumbled out of bed this morning and sipped on my wake-me-up smoothie (I would highly recommend – although I added too many frozen berries into this edition which was very upsetting), I pulled up my phone to see my inbox was stacked full of newsletters and stories about Binance setting record high volumes following their decision to remove fees on Bitcoin trading.

This confused me.

Binance already offered among the lowest rates in the business at a 0.1% fee (with a further 25% discount if one pays in native token BNB), and yet a 100 bps cut is causing volume to explode? I’d be sceptical that even the great Jerome Powell could cause this much movement with a 100bps cut, and that man single-handedly controls the universe, it seems. (Underlying data for below graphs provided by the excellent Kaiko).

Moving your cursor to the very right on the above graph, you will see the spike in volume immediately on Friday, jumping to $11 billion daily figure. That is second only to the monstrous $14 billion on 19^th May 2021, a month burned in every crypto investor’s memory given Bitcoin opened at $57,000 and closed at $37,000.

But comparatively speaking, Friday’s spike came amid relatively tranquil market conditions, with nothing really happening outside of Elon Musk pulling the plug on a $44 billion transaction (what’s new?).  Yet evidence seemed to support the claims that the zero-fee change had encouraged a surge in volume. This was further backed up when flipping the USD denominator from the previous graph to Bitcoin.

For a longer time horizon of the volume trends going all the way back to Binance’s founding, hit “Play Timeline” in the top left of the below graph. And yeah, this isn’t something I thought I would be saying anytime soon, but we have an all-time high. In terms of Bitcoin, Binance had its highest ever daily volume traded on July 8^th and it wasn’t particularly close.

Thinking my computer was acting up when I saw Bitcoin trading hit all-time highs, I then plotted the same graph but included Ethereum to see if I could catch any pattern. As you’ll see below, there has been a near-exact relationship between BTC and ETH volume historically. The major exception to this is – you guessed it – last Friday. When you move your cursor to the right of the graph and look at Friday, when volume in BTC went vertical as mentioned above, ETH volume remained largely stagnant.  

For those of you who prefer statistics than looking at pretty pictures, the correlation since the start of 2020 has been a pretty staggering 0.87, so Friday was definitely an outlier. I actually compiled my own hypothesis test here to conclude that the result was statistically significant even at the 99% confidence interval, before realising I was just being a loser and it’s been a while since I got to practice my statistics. A look at the graph below is all you need to see the relationship and divergence on Friday.

So, what gives?

I’ll tell you – wash trading, that’s what gives. This is one of the most egregious cases of wash trading I have seen recently, and that’s saying something when talking about crypto. These trades aren’t real, to use more simplistic language.

Binance pushes its native token, BNB, aggressively, and one of the routes they take is with VIP tiers. The more you trade, the more you advance through the tiers and the more rewards you get. In removing fees entirely from Bitcoin trading, there is nothing stopping accounts from trading with themselves to increase their volume and advance up through the VIP tiers.

This was soon acknowledged by Binance, in fact, who announced they would re-model volume-based VIP tiers. But then the natural question is why have VIP tiers at all when there are already zero fees? Why not just remove Bitcoin from the equation?

Advertisement

2022 is a year where Coinbase, crypto.com and a whole host of competitors have struggled mightily while spending big on advertising. Remember those expensive SuperBowl adverts where Matt Damon pranced across screen for 60 seconds (at a cost of $6.5 million per 30 seconds) before seductively announcing “fortune favours the bold”?

Yeah, well those advertisements don’t look so smart in retrospect, but Binance was not involved – as their CEO Chengpeng Zhao (CZ) pointed out recently as competitors scrambled to lay off employees.

That’s the tip of the iceberg, too. I’m in Miami at the moment, and I just walked by the home of the Miami Heat a few minutes ago on my lunch break. Traditionally known as the American Airlines Arena, the naming rights were bought last year by FTX in a record-breaking $135 million deal. That could buy you half the crypto world these days.

But look what is happening now. They cut 100 bps off their fees and the whole industry is talking about them. I’ve just spent half my afternoon writing a story about a total non-story. You’ve just spent five minutes reading it (maybe that part is on me, I’m sorry). That’s time we are not getting back, but it’s also free advertising for CZ and Binance. Not to mention CZ’s stance at the time that it was irresponsible to be spending so freely on SuperBowl ads.

Sometimes, smart people do smart things. This is one of them. And the advertisement continues, with CZ turning the future of zero-fee Bitcoin trading over to the public.

Anyhow, let’s hope I have something more newsworthy to write about tomorrow. More importantly, let’s hope I get the berry-to-banana ratio right in my next smoothie, because this morning was rough.

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