Cryptocurrency Trading Pairs and Benford’s Law: Investigating Market Irregularities

In the context of MiCAR implementation, we propose a simple and effective approach that national competent authorities can use in their supervisory role to detect potential market manipulation. Our method is based on Benford’s Law as a quantitative tool to assess the conformity of crypto-asset transactions with expected numerical distributions, helping supervisors identify anomalies that may indicate market manipulation. From a practical perspective, we have evaluated the conformity of various cryptocurrency trading pairs with Benford’s Law by applying two well-established metrics: Mean Absolute Deviation and Sum of Squared Deviations. These metrics were used to assess how closely each pair’s transaction distribution aligns with the theoretical expectations of Benford’s Law, using literature-recommended thresholds as a benchmark. The analysis highlights a distinct separation between the transaction patterns of major cryptocurrencies paired with fiat currencies and those of less established or more volatile assets. BTC, ETH, and even LUNA exhibit strong conformity with Benford’s Law, suggesting greater market stability, transparency, and organic trading behavior, while exotic pairs and assets like DOT deviate significantly, pointing to potential irregularities, inefficiencies, or unique market characteristics. Such deviations can sometimes be associated with market manipulation, wash trading, or other fraudulent activities commonly observed in less regulated, lower-liquidity, or highly speculative markets. These findings highlight the potential of Benford’s Law as a diagnostic tool for detecting abnormal transaction patterns, identifying markets susceptible to manipulation, and improving overall market surveillance and security. Our study contributes to a deeper understanding of cryptocurrency market dynamics and offers a foundation for further research into fraud detection, regulatory oversight, and market integrity within the rapidly evolving cryptocurrency environment.