Daniel Harrison, Co-Founder of cryptocurrency Zurcoin (ZUR), claims it is. In his Medium post entitled The Problem with Exchanges, Harrison writes that exchanges are fabricating trading volumes to take money from its users once they decided to sell their holdings due to a falling price trend
According to Harrison, a boost of volume when there is a reduction in capitalization is antithetical to the market’s logic. Results like this can only stem from manipulation done to acquire custody of user funds.
These exchanges incentivize themselves by artificially driving prices down to a point where users will forsake withdrawing their discounted funds. As a consequence, exchanges have the freedom to gain custody of their assets while offering a lower fiat equivalent. By taking advantage of investor mentality, exchanges make significant profits and gain better liquidity for the assets when the market recuperates.
The Bitcoin Example
The Zurcoin co-founder analyzes Bitcoin’s movement from December 2017 until 2018. Around December of 2017, BTC’s market capitalization was valued at $284 billion with a volume of $14 billion. On 2018 its capitalization was $59.9 billion with a volume of $4.3 billion. He says that in spite of an 82% price reduction from 2017 the market capitalization increased by an impossible 9%. Harrison implies that this is only possible through price manipulation.
Cryptocurrencies and Virtual Currencies
To explain how exchanges are able to exploit its users, Harrison distinguishes the difference between the means of exchange between cryptocurrencies and virtual currencies. Cryptocurrencies are exchanged in a decentralized fashion while virtual currencies are extremely centralized. When cryptocurrencies are exchanged it, most often than not, translates into the ‘units of virtual centralized exchange’. This will then fall under the control of those who are commanding the exchange.
Once a holder deposits his cryptocurrency to a platform’s wallet, the funds are converted, often times are manually done, to a unit of virtual currency to the designated account holder’s virtual currency wallet. The cryptocurrency wallet and its equivalent virtual currency wallet are independent of each other but the account holder relinquishes control of the cryptocurrency wallet (which is decentralized) in exchange for a ‘centralized unit of virtual currency’.
Harrison writes that through this method exchanges are able to gain profits by acquiring, or ‘stealing’, user funds.