The case presented in part 1 does prove the importance of the proof-of-reserves metric and is supported by the situation surrounding HitBTC. Bobby Ong added that despite the importance of the wallet valuation of an exchange, an exchange’s shady reserve count cannot be the be all and end all with respect to fake volume.
Investors are drawn to the luster and hype around a digital assets industry, and in that bright light, the inner workings of an exchange’s wallet estimated cannot be easily demystified. Hence, much more simplistic but revealing metrics are incorporated that even the uninitiated can employ to make a decision on the inner workings of an exchange.
Among these simplistic tools, the exchange will look at trade history, user exchange-ratings, social media analysis and licensing requirements which bear similarities with exchanges in other financial asset classes, hence a relational approach can be equipped to verify these exchange’s volumes.
Trade history is also on the cards with the upcoming version of the Trust Score. Ong added that this would be important to determine which trades are “wash trading,” however, he added that this process is “harder.”
In order to better factor in the opinion of the customers, the CoinGecko CEO stated that user reviews should also be focused upon. Given the multitude of threads on Twitter and Reddit pointing to fraudulent tactics employed by exchanges to funnel user’s funds, and this paper trail revealing a million-dollar heist, this metric will find good value. Ong reiterated the same,
“At this point, in time, a lot of users don’t have an outlet to put a review of an exchange. So, what ends up happening is we get a lot of emails about users complaining how this exchange is bad….so with this user review, users can, sort of, give a rating to the exchange.”
Fledgling investors entering the cryptocurrency space can review these user-exchange ratings prior to making their investment decisions.
In addition to the above key metrics that will soon find a place in the parameters of the Trust Score, Ong stated that “licensing and regulation regimes,” and “social media analysis” will also be incorporated. The former will show the country, jurisdiction, regulatory authority and license number of the operating license while the latter will show an aggregate of social media backing and activity on sites like Facebook, Twitter and the like.
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