CRYPTO: BitMax and $1.5 Billion in Phantom Daily Volume from Transaction Mining

Once in a while we land on Coinmarketcap's crypto exchange ranking, and choose "Reported" volumes instead of "Adjusted" ones. In that world, everything is topsy turvy. Binance is no longer on the top, and BitMax, Bithumb and other unmentionables float around the meniscus. The answer as to why this happens is called "Transaction Mining", and was a big deal halfway through last year. This practice is not really mining, as much as it is churning. Normally, an exchange charges a fee to the buyer and seller for facilitating a trade on its platform. In this case, however, the exchange also pays the trader a rebate in the form of its own token. The more you trade, the more of the exchange's proprietary token you receive. And some tokens, like Binance's BNB, have become valuable to the tune of $2 billion.

The positive way to look at this practice is to say that it is "growth hacking" the exchange rankings, thereby creating more visibility for high ranking platforms. Imagine you are trying to maximize visitors to your website. Well, you might practice some search optimization techniques, get back links from blogs, and perhaps even pay for some fake ones. Or, you are growing a social media audience, and decide to cheat by buying fake followers to create the impression of engagement. These techniques -- while misleading -- are merely meant to get you noticed, and then real activity can begin. Traditional banks offer $250 rebates to sign up for a new account or credit card all the time! And in the case of crypto exchanges last year, a number of them used transaction mining to growth hack the rankings, spread around their token, and have now switched to more accepted pricing models.

But Bitmax, and its $1.4 billion of mined volume per day, seems an extreme. The negative way to look at this practice is to compare it to churning an account. If a financial advisor with a fiduciary duty directs trades in a client's account in order to generate fees and create the impression of activity, they are breaking the law. In such an example, the financial advisor has full control of the account. You may say that crypto exchanges are optional, and that the decision to churn trades in order to generate/mine exchange tokens is voluntary. Sure. But if bot-driven advertising can swing an American election, certainly misleading financial incentives can skew how people make investment decisions. The belief that the exchange token is worth something -- backed by little other than promises that it will be worth more once other people have it -- leads to destructive financial activity. To us, this looks a lot like a digital-first version of churning driven by a suspect financial promotion. 


Source: Coinmarketcap (Exchanges), CoingeckoBitmax, Crypto Currency Hub (Is transaction fee mining a ponzi scheme)