While cryptocurrency exchanges, trading firms and investment funds lay off staff in droves, one sector is bucking the last year’s savage bear market: data provision and analytics.
Several companies involved in collecting, cleaning, analysing and distributing cryptocurrency data told New Money Review that they are increasing their staffing levels, raising new finance, or both.
It’s easy to see why optimists see the cryptocurrency data business as offering potentially rich rewards, with the advantage accruing to first movers.
Great business empires have grown out of gaps in the existing market for the provision of financial information.
Exploiting data gaps can lead to business fortunes
In the 1850s, Julius Reuter made clever use of carrier pigeons to distribute stock exchange prices more quickly, setting the foundations of a media empire now called Thomson Reuters.
From 1982 onwards, Michael Bloomberg’s eponymous “terminal” conquered the bond markets through user-friendly analytics. Bloomberg’s hefty terminal subscription revenues (reportedly around $20,000 per year per user) helped the firm develop into another media giant.
And in the 2000s a start-up called Markit (now IHS Markit) developed the central data hub for a hitherto unmapped but increasingly important area of trading, credit derivatives. From its origins in a barn in London’s northern suburbs, IHS Markit now employs over 13,000 staff.
Data provision is an increasingly important business for the world’s stock exchanges, too: according to Burton-Taylor International Consulting, information services now represent the second-largest segment of global stock exchange income, after the revenue from trading, clearing and settlement.
Worldwide, stock exchanges’ information service income grew by a compound annual growth rate of 13 percent between 2012 and 2017, says Burton-Taylor, significantly outpacing other business areas.
None of the established media giants have yet made a significant move into cryptocurrency data and analytics, leaving the field open for a variety of start-ups.
Yet the firms wishing to stake a claim to be the next cryptocurrency market Bloomberg or Markit have to grapple with a number of challenges specific to this asset class.
These challenges include the open-source and highly decentralised data landscape; the non-stop nature of trading; the lack of information on off-exchange transactions; the tendency of some cryptocurrency networks to mutate; and the separation of internal (or ‘on-chain’) and external, market data.
Managing the chaos
One feature of the cryptocurrency market distinguishes this asset class from other, more established market segments—open access to exchange trading data.
“You can get trade data from cryptocurrency exchanges for free,” Timo Schlaefer, founder of trading platform Crypto Facilities, told New Money Review.
“But that doesn’t mean you can use it for commercial purposes and sell it on without some agreement in place. We have licensing agreements in place with the exchanges from which we source the data for our Bitcoin Reference Rate.”
Crypto Facilities’ Bitcoin Reference Rate, which is used as the underlying settlement price for the Chicago Mercantile Exchange’s bitcoin futures contract, is based on a standardised price feed from five exchanges.
“In some ways, it’s unregulated chaos”
Ambre Soubiran, chief executive of Paris-based cryptocurrency market data provider Kaiko, contrasts cryptocurrency market information with that available in the equities market.
“In equities, you have an official exchange closing price, which you can use as an input to settle financial contracts such as derivatives,” Soubiran told New Money Review.
“Market data in the traditional financial industry is relatively well-structured and there are a few mainstream data providers. But the cryptocurrency market is the Wild West by comparison. Every exchange has its own application programming interface (API).”
This leads to some basic definitional problems for those used to sourcing market data from stock exchanges, says Soubiran.
“What is the price of bitcoin? There is no official rate. And there’s no market open and close—bitcoin trades 24/7/365.”
“In some ways, it’s unregulated chaos”, says Mark Griffiths, technical lead at cryptocurrency data and index start-up CryptoComposite.
“The whole space is full of religious wars, vendettas and many, many tribes”
“There are thousands of crypto tokens and anyone can start an exchange with the right API set-up. The whole space is full of religious wars, vendettas and many, many tribes.”
The ability of any third party to link to a variety of cryptocurrency exchanges’ order books means that it’s relatively easy to provide a comprehensive top-level picture of global market pricing.
Cryptowatch, for example, a website owned by cryptocurrency exchange Kraken, amalgamates price feeds from 24 exchanges worldwide, providing live market prices and charting tools for free.
Some data providers seek to justify charging for cryptocurrency market price information by adding verification, breadth and granularity to such open-access price feeds.
“We normalise the data we receive from cryptocurrency exchanges using our proprietary format. We then provide millisecond-level precision, trade direction and volume on over 6,000 different cryptoasset pairs from over 100 exchanges around the world,” says Kaiko’s Ambre Soubiran.
Soubiran told New Money Review that Kaiko has expanded from 4 to 12 people in the last 3 months and is now hiring a sales team in US.
There can be other challenges involved in taking cryptocurrency exchanges’ information at face value.
“Volume data on exchanges can be inflated,” says CryptoComposite’s Mark Griffiths.
“So you try to spread yourself deep and wide to allow your volume-weighted price algorithm to smooth all that out.”
In a market where anyone can ‘fork’ an existing blockchain with minimal effort to start a new cryptocurrency, often one competing with the parent network, the classification of tokens is a particularly important challenge.
“Keeping our reference data tool up-to-date is a manual job,” says Kaiko’s Ambre Soubiran.
“We have to go to all the exchanges, download all the trading pairs and then map them to our system. There can be forks or the renaming of individual currencies or cryptoassets. We receive automatic alerts but we then have to update things by hand.”
“If one link breaks, the whole space can drop out”
Forks of cryptocurrencies can present other types of difficulty, says CryptoComposite’s Mark Griffiths.
“When the bitcoin cash fork happened in November 2018, no one knew how to get data: initially, there were no sources to connect to,” Griffiths told New Money Review.
“The whole cryptocurrency data space is set up on a mesh of interconnected APIs. If one link breaks, the whole space can drop out.”
But the difficulty in obtaining reliable data was not just down to a connectivity problem—instead, it reflected the battle between the competing chains launched by the fork, says Griffiths.
“There was a full cyberwar raging,” he told New Money Review.
“Behind the scenes, people were attacking the blockchains, with tens of thousands of bogus transactions being created. People were trying to grind the competing networks down.”
On and off-chain
In fact, say some observers, relying on market data alone to map the progress of cryptocurrencies risks missing the bigger picture—what’s going on within the networks themselves.
“You need a system that integrates all the real-time market APIs with data from within the blockchain,” says CryptoComposite’s Griffiths.
“The holy grail is data that is as much based in the blockchain as in the market”
“The blockchain itself contains several key market characteristics, such as the number of coins in circulation. Then, once you have blockchain data as the foundation, you can add levels of interpretation on top. If you’re relying on someone else’s data, often they’re making a bunch of assumptions that you have no idea about,” says Griffiths.
Analyses of blockchain data can also help provide important safeguards to potential investors in cryptocurrencies.
For example, in December 2018 CoinMetrics, which specialises in on-chain analyses, revealed that the creators of ‘bitcoin private’, a new currency, had secretly inflated their coin’s supply by around 10 percent, apparently benefiting insiders.
Other important information contained within cryptocurrencies’ blockchains includes details on mining difficulty, the participants in mining, transaction velocity, transaction amounts and the fees payable for recording transactions into the blockchain.
It seems a reasonable guess that if anyone manages to build a future information empire on the basis of cryptocurrencies, it will arguably be by providing a full picture of market activity. This means attaching data analysis tools to cryptocurrency networks in a low-level digital way, as well as collecting market price information from exchanges and other trading venues.
“The holy grail is to create a real-time data stream that is as much based in the blockchain as it is in the market. Once you have that, it’s relatively easy to build in machine learning and new areas of market analysis on top,” says CryptoComposite’s Mark Griffiths.
Kaiko, CryptoComposite and CoinMetrics all told New Money Review they are currently engaged in new funding rounds.
The future—decentralised exchanges and security tokens
Concerns about market manipulation and the absence of reliable market data have been cited by the US securities market regulator as key reasons for delaying the approval of bitcoin exchange-traded funds (ETFs).
“If you start to launch investment products, you need to know that the prices going into the products are accurate,” says Andy Harvell, a founding shareholder of CryptoComposite.
“In a cryptocurrency you may need to adjust for pre-mined, lost or stolen coins. Working out the market capitalisation of coins is actually quite difficult,” says Harvell.
Meeting the demands of regulators is one thing. But cryptocurrency data providers are also looking ahead to try and map the structure of a market that continues to evolve at break-neck speed.
“The availability of data for off-exchange trading is a key challenge,” says Kaiko’s Ambre Soubiran.
“Decentralised exchanges, which will be important for the securities token market, will also be increasingly important going forward. And on-chain data is also an opportunity for the future,” Soubiran told New Money Review.
And therein lies the big commercial opportunity that cryptocurrency data firms aim to capitalise on.
“Gathering the data will be harder and harder, but it will become more valuable,” she predicts.
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