For several years after bitcoin’s launch, Mt. Gox, a Japan-based exchange that crashed in 2014, was the only place where traders could exchange bitcoin. Investors are spoilt for choice now. Traders are spoilt for choice now as anyone with access to sufficient capital or a passable order book can create an exchange now.
But the surfeit of exchanges has created its own set of problems.
Clay Collins, CEO of Nomics – a company that provides crypto data services to institutions, says the number of exchanges responsible for 50% of overall trading volume in cryptocurrencies on their platform has quadrupled to 11. Thirty-six percent of those exchanges were started in 2017 and another 12 percent in 2018. This should be good news for traders as more exchanges means more profit opportunities for them.
But the surfeit of exchanges has created its own set of problems. “It was reasonable to have the entire trading history (of an exchange) on a laptop or AWS server,” explains Collins. “That’s become impractical now.”
In the larger scheme of things, however, there are bigger problems.
The Problems with Cryptocurrency Exchange Data
The devil lies in the details for cryptocurrency data. The rapidly-blinking numbers for bitcoin prices conceal myriad problems. Some relate to the data’s provenance while others are about their quality.
Collins points to Brave Browser’s Basic Attention Token (BAT) as an example. The token, which is listed on multiple exchanges, goes by different names at those listings. For traders, the difference in nomenclature can translate to millions of dollars in missed arbitrage opportunities.
Another problem: differences in time zones. Twenty-four-hour trading multiplies profit-taking chances. But those chances come with riders. For example, a difference in seconds or minutes can mean the difference between a successful or failed trade.
“It can be difficult to stitch (multiple time zones) together in a coherent way,” says Collins. Even a downtime at crypto exchanges can be problematic for traders. This is because some exchanges report the trading gap as a persistent data candle while others report it with four zeros, resulting in confusion for the trader’s systems.
The billing for erroneous cryptocurrency data is multiplied when accounting for the expense of data scientists. “What we are finding is that hedge funds might hire data scientists to find hedges but the scientists end up spending time doing data janitorial work (such as cleaning up data and making sure it is accurate),” says Collins.
Dealing In Data
Nomics describes itself as an API-first cryptoasset data company. That might be a mouthful. According to Collins, this means that the company is not focused on presenting crypto data in a beautiful way. Rather it has positioned itself as a provider of tools for Application Programming Interface (API), which are used to connect different systems and networks, that help connect cryptocurrency exchanges to trader platforms and provide accurate and normalized data. “We are primarily focused on creating a dataset,” explains Collins.
To do that, the Minnesota-based company has broadened its reach. Currently it draws data from 12 exchanges. By the end of this month, however, it will connect to 120. “I think when it comes to aggregated data like that for bitcoin, issues are ironed out with a bigger dataset,” says Collins, adding that the number of exchanges will expand in the future.
Those exchanges will result in a deluge of data. Collins says the company has developed “a scalable way” to ingest more data even as the cost of incrementing connections approaches zero over time. In the future, Nomics plans to normalize data based on pre-defined specifications circulated to exchanges. Collins says the company has already tried this approach with a decentralized cryptocurrency exchange and partnerships with more exchanges are in the works.
The current customer mix for Nomics is an assortment of funds, exchanges, and a mix of Fintech apps. While regulation and hacks seems to be the topic du jour for cryptocurrency exchange news headlines, traders are more concerned with mundane matters. Liquidity, for example. “Liquidity is king,” says Collins. According to him, traders prefer deep markets with sufficient liquidity over regulated exchanges that may not have a broad pool of funds. For example, Hong Kong-based BitMex is more popular with traders than Gemini, which bills itself as the first regulated cryptocurrency exchange in America.
Nomics made headlines last year after raising $3 million in funding from big names last year. Crypto’s current bear market played a large role in the amount raised by the company.
“I think our company is emblematic of the types of startups raising money in this bear market,” says Collins, who was earlier CEO of Lead Pages, sees parallels in the growth of cryptocurrency exchanges and solutions for digital marketing. As he explains it, there was a doubling of vertical SaaS products for digital marketers between 2013 and 2017. “With that doubling came centralization of power,” he says.