Koinju: The New Generation of Crypto Data Provider

What’s the matter?

Is there a market manipulation issue?

Since its early days, Cryptocurrency exchanges have suffered from an exceptional fragmentation and lack of transparency in clearing and settlement mechanisms. Most Cryptocurrency trading compagny acts as a trusted third party in an unregulated space by only complying with their own rules in accordance with its main economic priorities:

• organic growth based offered by liquidity: the more active are the markets of the platform, the more likely customers will be to trade on it (also true for security reputation).
• fee schedule: most of the time based on traded volume but also on the spread, this economic advantage decreases with the magnitude of the order volumes.

Since mid-2016, a lot of new exchanges popped-up expecting to overtake the market. They tried almost all possible marketing hook, from “zero trade fee” to “craziest liquidity ever seen”. Todays, everyone agrees that many operators artificially inflate their volume in order drive interest in their platforms. Bitwise Asset Management, a U.S cryptocurrency index fund, has released several reports about the veracity of exchanges crypto trading volume (the last one filled to the SEC can be found here : https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf ). Operators from the traditional sector are fully regulated by national authorities but until now, the few state initiatives about cryptocurrency regulation drafted have not yet been implemented.

Simply put, we think that cryptocurrency markets suffer from exposure to the possibility of loss or other similar unwelcome circumstances due to market operators. The central issue here is the risk exposure based on two factors: the probability of an adverse circumstance and the cost of such an adverse circumstance.

Is this risk you’re exposed to measurable or avoidable?

The need for a transparent price

Basically, the trading volume is an indicator of the intrinsic price of an asset. Here, cryptocurrency prices are determined by supply-and-demand on several exchanges that provide their own proprietary and un-auditable data. In fact, the trading volume depends on truly liquidity present in the order books of each exchange — this is especially important for institutional investors and traders — but all you can do is look through the “window inwards” API of these operators and hope that the truth is what you see without any guarantee of what you would get by dealing with it. In response, the first crypto data providers ( CoinMarketCap or CoinGecko for the most known) proposed a “simple” concept: watch crypto prices established by the aggregating the average price of each exchange. But those services have only solved the scattered market information problem, not the underlying problem of market risk management. Indeed, the difficulty to determine the real and precise price of a cryptocurrency has not disappeared. Even worse, providers have complexified it by using unadapted crypto market representation models — like the “market cap” (https://medium.com/koinju/whats-wrong-with-crypto-market-cap-a1afd5e6f2ea) — and rates calculation methods that misrepresent the price of crypto-assets.

Clearly, the lack of reliable price signals in the crypto space can exponentially increase customer uncertainty in regards to their portfolio values as well as uncertainty about operators’ transparency (like exchanges who run OTC desk). It is what we define from now as the Crypto Market risk: the risk of impairment losses resulting from market price fluctuations due to uncertainty about available observable market information (incomplete or asymmetric information).

The Price Discovery Process

Measuring risk exposure is even more complex.

The issues mentioned above are major obstacles to transparent price evaluation and, consequently, to the creation of financial products like ETF that would legitimize and grow the cryptocurrency markets. On March 10, 2017, the U.S. Securities and Exchange Commission denied a request to list what would have been the first U.S. exchange-traded fund built to track Bitcoin. In its statement, the SEC stated:

The Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.

In other words, the commission concluded that the operator could prove its resistance to manipulation. Nearly 3 years after, The SEC still rejects every bitcoin ETF proposal. The last reject was announced on Oct. 9, 2019. Filed by Bitwise Asset Management in conjunction with NYSE Arca, this proposal did not meet legal requirements to prevent market manipulations again. In the SEC’s view, no listing exchange or comment letter has met the burden of proof to demonstrate that bitcoin and bitcoin markets are resistant to manipulation.

In fact, the cryptocurrency trading prices provided by each market don’t fully and strictly reflect all available information. Like any radio transmission, the reception can contain blanks, noise or even “false” signals. Historically, market information aggregation services have emerged in many of the traditional markets affected by the lack of available data or transparency. These services are typically referred to as pricing or benchmarking services. They collect price estimates from market participants and aggregate these price data into so-called consensus prices. This consensus price is intended to reflect the current state of the market by using price calculating methodology according to the broad principles of the financial sector.

So, what can we do from here?

we need to mitigate the crypto market risk

Koinju aims to be a professional-grade crypto data provider delivering market information using cutting-edge statistical and financial methods. It continuously aggregates, verifies and normalizes highly-selected spot exchanges’ data to make standardized benchmarks and financial statistics.

Our mission is to help to manage the risk of dealing with the cryptocurrency market. We strive to make cryptographic market information usable and suitable for all types of financial and accounting requirements. We base our calculation methods on benchmark best practices requirements with regards to index production :

• Relevance: the price index should reflect supply and demand as well as the real value of the underlying asset as accurately as possible.
• Stability: the price index must not exhibit price fluctuations other than those caused by actual changes in the real value of the underlying asset and must not be sensitive to outliers and data quality issues.
• Frequency: the price index should refer to a specific time or interval as short as possible and should be available or delivered as soon as possible after that time or interval.
• Resistance to manipulation: it must be as complex or costly as possible to deviate the price index from the real value of the underlying asset.
• Independency: the index calculation process should use as fewer arbitrary parameters as possible in order to mitigate price manipulation concerns.
• Verifiability: the index calculating method must be transparent and its input data must be easily accessible so that the results of the calculations can be independently verified.

Note: Let us pay tribute here to the fine work done by Andrew Paine and William J. Knottenbelt of the Imperial College Centre for Cryptocurrency Research and Engineering in their report entitled “Analysis of the CME CF Bitcoin Reference Rate and Real-Time Index” who have inspired us this approach

“How” do we do?

applying accurate financial methods into the crypto space.

As mentioned before, we are dedicated to focus on normalization and precise data. One of the main examples that we can use is in comparison with typical market cap websites. Instead of calculating the weighted average price of the relevant transactions in each partition of time we observe, we calculate the weighted median price as a better approximation to reality than average price based on the candle on even VWAP. The use of medians to calculate the weighted median price of each timeframe significantly reduces the sensitivity to the extreme prices that can be observed sometimes in crypto. A median automatically filters the extremes by its definition. And the use of volume-weighted medians ensures that the calculated price correctly reflects significant transactions and filter noise of trading bots activity.

Using a weighted median is like using a “median filter” (usually used in digital image processing): a median filter deletes outliers without limiting itself to an averaging calculation which will tend to influence neighboring values (here, the suspicious volumes) with this outlier and blur the result.

In the near future, we will provide public and personalized support complying with regulations’ provisions and finance sector formality. Indeed, all the documentation is in compliance with the French regulator requirements. Also, we made an effort to make the documentation as instructive as possible. With normalized contents comes understandable terms! It will include (but not limited to) the calculation methodology, the risks cartography, the risk limitation measures description, the indices policy, and the constituent exchanges selection procedure.

First schedule

SOONER THAN EVER

Help us to build your crypto data provider!

Koinju is constantly looking for improvements and wishes to continuously iterate on our products to fit with your needs. In doing so, your feedback is essential to help us move forward and design the best data provider.

If you want and are willing to participate in the Koinju adventure, please take a few minutes to give your feedback on the two main existing platforms:

• Your feedback on CMC (2 minutes): https://forms.gle/Cnkw6hij39j9fjnW6
• Your feedback on CoinGecko (2 minutes): https://forms.gle/UigiMPGUNoByV5RE6

→ Try Koinju soon on: https://koinju.io/