There are 253 crypto exchanges listed on CoinMarketCap. A year ago there were 208. More exchanges are in the planning stages. The universe of crypto exchanges seems to be constantly exploding, like the aftermath of a digital Big Bang. Save for an occasional exchange blowout here and there (QuadrigaCX comes to mind), all this has been occurring amid a sharp decline in values and trading volumes since the crypto market peaked in early 2018.

Many exchanges appear to be thriving, as crypto asset listings also continue to multiply. And thereby a central mystery emerges. How do the exchanges remain profitable and viable as they face intensifying competition from new entrants? Since they are privately owned, the details of their inner workings remain closely held by their owners. An observer is reduced to reading tea leaves to make an informed opinion about just how profitable the exchanges might be.

Paradoxically, while recent trading volume reported by CoinMarketCap is down one third from the peak, reported crypto trading activity as a share of the overall market capitalization has quadrupled from 5 percent at the peak of the market in January 2018 to 21 percent in March 2019. On March 23, average trading volume ($29 billion) was 20.9 percent of the overall market cap of $141 billion. In other words, market caps may be down from their highs, but the volume of assets in play has not fallen at the same rate.

Get the BREAKERMAG newsletter, a weekly roundup of blockchain business and culture.

There’s a good, if troubling, reason for that: The high numbers may be fabricated through wash trading and other market manipulations. That charge was one of several to emerge from a recent study by Bitwise Asset Management that claimed 95 percent of self-reported volumes in bitcoin trading are fake and that all the real trading occurs on only 10 exchanges, nine of them under some form of U.S. regulatory oversight.

The Bitwise study, part of a filing with the SEC in March, made headlines and sparked widespread commentary. “Wow much fake, such crime lords,” said the Australia-based crypto trader, investor and ex-professional poker player Sylvain Ribes in a tweet March 23 in response to the release of the study. Ribes knows a bit about the matter. Last summer, he did his own analysis of order books of all the major exchanges. He found 94 percent of the trades to be “fake” based on how prices moved sharply lower in response to a sale of $50,000 of bitcoin. (If there were real market makers, the price would not plunge so steeply on a trade size that any real exchange should be able to handle without much disruption.)

Not everyone is buying the idea that trading volume reports are fabricated. “It is difficult to make the claim that trades are in fact fake, based on these studies alone,” says Constantine Tsavliris, research analyst at London-based CryptoCompare, which publishes monthly exchange reviews. Such claims should be treated more as “clues” as to which exchanges might be lower quality, he contends.

With the proliferation of exchanges and a growing number of crypto assets trading on them, competition appears to have intensified in a way that’s beneficial to traders. “I believe the overall cost of crypto exchange fees is coming down and that will continue over time,” says Henry James, deputy chief executive officer at Mauritius-based Fincross, an investment banking firm that advises security token sponsors.

Exchanges have proliferated because barriers-to-entry are low, especially outside the regulatory oversight of the U.S. or Western Europe. “Building a matching engine and putting that online is, in many cases, all you need to do,” says James.

The crush of competition is, in fact, having an effect on fees earned by exchanges as they “find more creative ways to reduce fees to attract new clients,” says Simon Grunfeld, senior vice president of business operations for U.S.-based Daollar Group, which owns the 55 Global Markets Exchange that operates on a license from Estonia. “They might reduce commissions and inflate the spreads. Or reduce the spreads and inflate the commissions.” No matter how the exchanges may reallocate revised fee schedules among traders, the overall earnings for exchanges (and costs to traders) is a little lower than it was a year ago, Grunfeld says.

Related: 95% of Bitcoin Trading Is Fake? Let an Analyst Explain

To be sure, exchanges remain highly profitable even with rising competition, especially those that do not face any serious regulatory oversight, according to Gil Luria, director of research at financial services firm D.A. Davidson. “What exchanges are doing is jurisdiction shopping. They are going to jurisdictions that have the most favorable regulatory structure,” he says. With lower regulatory costs in far-flung locations, these exchanges can charge lower fees and lure more traders, Luria says. By comparison, exchanges based in the U.S. and Western Europe have higher costs because they must comply with such rules as know-your-customer and anti-money laundering, as well as fulfill requirements to place customer funds in an independent trust that acts as a fiduciary.

Even as exchanges loom larger, big league traders continue to do much of their trading over the counter. One chief concern is that exchanges can be short on liquidity, according to Michael Moro, chief executive officer at Genesis Global Trading in New York. He oversees trading activity ranging from $500 million to $2 billion a month.

Genesis Global Trading relies heavily on over-the-counter trading because “it’s less costly to execute the trade because exchanges are very inefficient from a price execution standpoint,” says Moro. A large trade on an exchange will cost a trader more than any of the trading fees because it will significantly move the market against the trader. “A million dollars can move the price one percent or more depending on the exchange’s liquidity,” he says. A privately placed trade can avoid the costly impact on prices and cost less in fees, he contends.

The amazing proliferation of crypto exchanges is tied directly to the surge of ICOs in 2017 and 2018, according to Matt Hougan, global head of research at Bitwise. The coins from those ICOs led to a surge in crypto assets. There were 636 crypto listings on CoinMarketCap in January 2017, 1,359 in January 2018, and 2,136 in April 2019.

“To get these projects off the ground and give their coins some liquidity, they wanted their coins traded on exchanges,” Hougan says. Not surprisingly the coin sponsors first went to “legitimate” exchanges to get listed, according to Hougan. “But there was no way Coinbase was going to put their coin on their exchange. That is not Coinbase’s business. It’s not the business of any legitimate exchange.”

This created an opportunity for new exchanges that would accept coin listings, which in turn increased demand and powered the proliferation of exchanges. The exchanges would fabricate huge trading volumes to convince coin sponsors to list on their exchanges for huge fees ranging from one to three million dollars, Hougan says. (Lawyers familiar with crypto think this wash trading could lead to litigation.)

Bitwise was not the first to spot the dynamic driving the creation of new exchanges. In a study last year, the nonprofit Blockchain Transparency Institute (BTI) charged the artificially high trading volumes on 56 exchanges it tracked were created to attract coin listings that generate millions in earnings for the exchange.

“Many of these exchanges exist solely to collect these fees while their bots run their exchanges,” BTI claimed. The average listed coin spent $50,000 in listing fees last year, usually paid in bitcoin, according to BTI. “This adds up to an estimated $100 million stolen in 2018 from the crypto ecosystem.”

Exchanges with real trading volumes can reap profitable returns. Estimates of average fees from traders surveyed by BREAKERMAG vary widely from 2 basis points to 50 basis points. A basis point is 1/100th of a percent. Hougan estimates the ten exchanges Bitwise found to have real trading volumes charged up to 30 basis points, with the average between 10 and 20 basis points. Based on a 15 basis point average, BREAKERMAG calculates that the ten exchanges would have generated more than $480 million in fees last year for all their crypto trading.

Exchanges charge fees to both market-makers (those who offer trades at set limits) as well as market-takers (those who place orders at the market price). While most exchanges publish fee schedules, it is difficult to determine how much of the trading occurs at each price point. Most exchanges charge as little as 2 basis points to market makers. However, to attract liquidity, some charge makers no fees at all. Some exchanges give traders a rebate (in the form of coins issued by the exchange), a practice called trade or transaction mining.

ItBit, one of the ten exchanges on Bitwise’s ten favorites list, says increased competition led them to introduce rebates to market makers, giving them a share of the exchange’s fees. “One point of differentiation from us now is that we’re the only major crypto exchange with a rebate,” says David Wells, general manager of the itBit exchange, which is owned by Paxos. Other fiat exchanges, such as Coinbase Pro, Bitfinex, Kraken and Gemini, have zero maker fees at higher trading volumes.

Singapore-based WOWX (pronounced wow-ex), a new exchange, plans to give rebates in the form of WOWX coins that can be spent at participating retailers using a bank rate smart card, according to its chief executive officer Marc Bell. WOWX also hopes to help retail crypto traders avoid the many onerous fees they face on most platforms. “Within the industry now there are high trading fees. Sometimes it’s up to two percent. There are withdrawal fees and sometime there are deposit fees,” Bell says. Currently in alpha testing, the exchange expects to go to the beta phase late this month and then do an ICO in May to fund its launch.

Bell says WOWX will make it easier for traders to spend crypto assets without incurring huge fees in the process. “Once you pull money out of an exchange, you have sometimes hidden costs and admin fees and the spending is difficult when you do pull money out,” he says. “By the time you use it, you might as well be using a high interest credit card with 12 to 18 percent.”

As exchanges find new and more creative ways to compete, costs and fees charged to traders are bound to fall. Even so, there does not appear to be a consolidation wave among exchanges at present. Traders will still be drawn to exchanges that are not regulated because the fees are lower and exchanges can operate “very profitably” in unregulated jurisdictions. “Very few traders want regulation until they lose money. That’s the tradeoff they’re making,” Luria says.