With the cryptocurrency market bouncing back after a disastrous winter, the eyes of the media are once again pointed towards the various coins that traders want to buy and the exchanges on which they buy them.
Less reported on are the data and pricing information providers. That may be because they represent the nuts and bolts of the industry - vital yes, but much less interesting than the next get-rich-quick token.
But with companies trying to get institutional investors on board, data providers are fast becoming the most vital part of the cryptocurrency trading industry. Retail traders may just want to make a quick buck, but companies need solid data before they can begin investing.
With that in mind, we spoke last week to Charles Hayter, the founder and chief executive officer of data provider CryptoCompare. Launched in 2013, Hayter’s company made headlines last July when it announced it would be providing cryptocurrency pricing data to Reuters.
In our brief chat, we discussed the move to bring financial institutions to the cryptocurrency markets, regulations and the ins and outs of providing data in the often Wild West-like world of cryptocurrency.
What interest have you seen from the institutional side in investing in cryptocurrency?
We have seen a few institutional developments across the crypto industry; Goldman Sachs looking at crypto custody and derivatives products and reportedly signing up a limited number of customers for its yet-to-launch bitcoin trading product; Nasdaq plans to launch Bitcoin Futures contracts, and NYSE’s cryptocurrency platform and developments around crypto custody.
Overall, the crypto markets have taken positive steps in two main areas in order to attract institutional investors: the development of a nascent crypto derivatives market, and better trading tools.
And, although trust by regulators regarding crypto assets still needs to be garnered, it is expected that more international regulations will move forward with approving new financial tools, pushing through stronger regulations and verification procedures and thereby supporting maturation of the crypto market for institutional investors.
As a data provider, what have you done to meet institutional demand for trading in crypto assets?
We launched a new API service in December 2018 in response to customer demand for more complex, often bespoke yet highly scalable cryptocurrency data solutions.
Our API Service enables institutional and retail investors to retrieve cryptocurrency market and pricing data with a high degree of granularity, offering real-time and historical data for all coins and exchanges with full market coverage.
Additionally, the bespoke API service offers more flexibility such as extended historical data, customizable API endpoint solutions and call limits, dedicated support and service level agreements, and the ability to save/cache data locally for internal business purposes.
What do you think is preventing institutions from getting involved in the crypto markets?
Some cryptocurrency exchanges do not have common standards for security, disclosures or other investor and consumer protections required by law for traditional exchanges, leaving many vulnerable to abuse by currency manipulators using automated trading.
And some estimate that 68% of cryptocurrency exchanges operating in the U.S. and Europe are not fully KYC compliant.
There is a lack of an investor-grade infrastructure that prevents market penetration for institutional investors. Qualified custodians are needed to meet regulators’ security standards and safeguard the growing amount of crypto assets. There also need to be better mechanisms to provide deeper pools of Liquidity for Cryptocurrencies .
Much of the marketing and PR of crypto firms has been very retail-oriented, how can firms go about changing gears to focus on bringing institutions on board?
In order for investors to have confidence investing in crypto assets, concise information is required to have a better understanding of the markets. This, in turn, means that industry stakeholders need to come together to standardize data across the crypto landscape so that information can be properly defined and measured.
A number of efforts by various working groups include a Code of Conduct and best practices for crypto assets, as well our Taxonomy report which provides an independent classification of crypto assets.
All of these efforts need to continue, in order to help educate market participants and regulators, while protecting consumers and supporting the growth of the crypto industry.
Many crypto firms are now looking to be regulated. How do you fit in there, do you want regulation and what would regulation governing a site like CryptoCompare look like?
A real driver to accelerate institutional investment is greater regulatory clarity. I think more jurisdictions will strive to create appropriate regulations to protect investors without hurting innovation, similar to moves in Malta, Hong Kong, Japan, and Switzerland. Furthermore, we see that regulators are especially keen to bring rogue players involved in fraudulent activity to justice.
We have also seen the UK’s FCA is consulting on where different types of crypto assets might fall in the regulatory perimeter. ESMA also believes that Anti Money Laundering requirements should apply to all crypto assets and activities involving crypto assets, as well as appropriate risk disclosures in order to help inform consumers.
And it appears that most institutional investors are now working closely with the regulating bodies to develop clear KYC/AML policies and guidelines that favor both parties.
Our main objective is that the information we provide is clear and transparent and in no way misleading. On the index business, there is certain benchmarking regulation to adhere to. We are founding members of CryptoUK and GDF and are looking to aid the correct level and type of regulation to be brought to this industry globally.
One major problem with services such as CryptoCompare is that it’s unclear as to where you are getting your data from - how do you actually gauge trading volumes and prices?
We encourage and drive transparency across the industry and regularly issue documents about what we do, from our Fork Policy to our CryptoCompare Aggregate Methodology.
We aggregate from 160 exchanges on a real-time basis and count each trade. We map pairs and types of trading per specific pair - i.e., XBT on Kraken is mapped to BTC, and Bitmex vols are classified as derivative products.
There is speculation at present in the industry about fake volumes and what is true volume. A number of outfits have taken very black and white positions on this. The truth is there are various shades of grey in between. Examples of this would be one algorithmic trader dominating a particular market giving rise to uniform trading patterns.
One recent report estimated that approximately 80 percent of cryptocurrency trading volume is wash trading aimed at boosting exchanges' volumes. Do you think those figures are accurate? Do you have any procedures in place to prevent those volumes from being reported as real?
We are unable to comment on whether those figures are correct at present, given that there are a few recent studies on fake volume, all with different methodologies and hence results.
At present, via our regular exchange review process, we curate a pool of exchanges that we deem to have met a minimum standard in terms of trading activity such that they can be included in our aggregate pricing feeds for over 35,000 pairs. Exchanges that have met this standard are whitelisted, while those that don’t are blacklisted until further review. We examine peculiar trading activities and currently exclude trans-fee mining exchanges from volume calculations, for example.
We currently also aggregate individual trades for all pairs across every exchange. Therefore we do have the ability to cross-check the total volumes the exchange is reporting.
What relationships do you have with exchanges? How can data providers monetize their services without having to rely on deals with crypto firms that may create conflicts of interest?
We have very firm internal guidelines to mitigate potential conflicts of interest and adhere to best practices for industry codes of conduct.
We monetize through allowing a single API to connect to multiple venues as well as having relationships with larger data providers to act as a conduit to their client base and potential liquidity providers. We monetize by providing different data feed quantities, and types - i.e., full instances serving Level 2 orderbook data are more expensive than 500,000 calls per month.
Coupled with that, we monetize through our derived data products - i.e. creating indices, reference rates and other price methodologies for settlement of various futures contracts.
Where do you see the cryptocurrency market heading in the next 12 months?
Over the next 12 months, new methods for institutional investors to get involved may yet be invented. Regulators will definitely continue their efforts to lay out a clearer groundwork for how crypto assets will be governed. One thing is for certain, the tokenization of assets by whatever vehicle or tool means that more things will be traded, in more quantities, and in more ways.
We also see more bridges for money to enter into the market - for example, ETPs in different jurisdictions giving those market participants access and exposure to the asset class.
