Calling the cryptocurrency trading business ripe with fraud and manipulation, cryptocurrency data and indices provider CryptoCompare has begun rating the reliability of exchanges.
The Cryptocurrency Exchange Benchmark, produced in partnership with exchange traded fund (ETF) and mutual fund manager VanEck, will fight the rapidly worsening problem of shady exchanges using tricks to inflate their trade volumes, the company said in a release on June 11. In just the past year, low-rated exchanges have increased their market share by nearly one-third, it added.
On the same day, CryptoCompare said it was rolling out a partnership with Nasdaq to create a cryptocurrency pricing product aimed at institutional investors. And on June 10, CryptoCompare announced it had joined up with BitMEX to offer data on cryptocurrency futures.
The blatant use of wash trading, incentivized trading, and other volume manipulation tactics is a growing problem in the cryptocurrency industry. It is among the main reasons U.S. regulators have given for refusing to permit cryptocurrency ETFs. And ETFs are needed if cryptocurrency is going to break into the investment mainstream.
Pointing to “industry concerns over inflated volumes and the lack of reliable metrics for assessing cryptocurrency exchanges,” CryptoCompare CEO Charles Hayter said the new Exchange Benchmark will bring “greater transparency to the digital asset class and improv[e] decision-making for market participants by providing a dataset they can trust.”
CryptoCompare provides data on more than 5,800 cryptocurrencies and 270,000 currency pairs globally.
The company rated exchanges AA, A, B, C, D, E, or F, it said. This grade is based on a score reached by using a combination of due diligence and ranking “market quality based on order book and trades … without using volume directly in the ranking.”
The problem was thrust to the forefront of the cryptocurrency business’ attention after Bitwise Asset Management released an in-depth study on March 21 claiming that 95% of all Bitcoin trades were fake. The study was part of Bitwise’s attempt to gain permission to launch the first U.S.-approved ETF by identifying 10 honest exchanges. So far, the Securities and Exchange Commission has been putting off a response, postponing its ruling twice.
CryptoCompare also released a top 10 list of the best exchanges, which shared eight exchanges with Bitwise’s list. In its analysis of its own list, CryptoCompare went to lengths to explain its differences with Bitwise’s study.
It looked at due diligence in six main categories, rating each exchange on geography, legal/regulatory metrics, calibre of investment, team/company quality, quality of data provision, and trade surveillance.
Market quality was measured with five metrics based on trade and order book data, measuring cost to trade, liquidity, market stability, behaviour towards sentiment, and “natural” trading behaviour. Exchange ratings were based on nine of the most liquid bitcoin (BTC) and ether (ETH) markets. Exchanges were compared to peers.
The 10 exchanges with CryptoCompare’s best grades are below, with exchanges singled out by Bitwise highlighted.
The top six on the list were rated AA by CryptoCompare. The remaining four were rated A, as were OkCoin, BITpoint, and OKEx.
Bitwise’s list also included Bitfinex (No. 14 on the CryptoCompare list and rated B) and Bittrex (No. 22, also rated B). Binance is by far the largest of the rated exchanges, accounting for 40% of the trade volume of the 10 exchanges studied by Bitwise.
Coinbase, Gemini, itBit, and Bitflyer have earned very highly regarded and hard-to-get BitLicenses to operate in New York from the state’s Department of Financial Services.
“This is a breakthrough report that will foster transparency and support operational, regulatory and business best practices among crypto trading platforms,” said Gabor Gurbacs, VanEck’s director of digital assets strategy. “We believe that many trading platforms have already made a lot of progress in meeting regulatory concerns regarding money laundering and manipulative trading practices via surveillance and market standard operational and business improvements.”
Cryptocurrency pricing with Nasdaq
On the same day it announced its exchange ratings, CryptoCompare also launched a cryptocurrency data product, the Nasdaq/CryptoCompare Aggregate Crypto Reference Prices.
The reference pricing tool is aimed at institutional investors who need to monitor digital assets in order to “assess investment opportunities,” CryptoCompare said in a release. It includes information needed for trading strategies, quantitative research, risk modeling, NAV calculations, and back-testing. In other words, they are providing crypto data for quant jockeys to build trading models.
Quantitative analysis tries to explain behavior using mathematical and statistical modeling, measurement, and research—giving reality a numerical value.
“We are delighted to partner with Nasdaq,” said Hayter. “Reliable data is the bedrock of transparent, liquid markets and by bringing our high quality, granular dataset to a global institutional client base … we will give traders and investors a competitive edge.”
Futures data with BitMEX
A day earlier, on June 10, CryptoCompare announced a partnership with cryptocurrency derivatives trading platform BitMEX.
CryptoCompare will funnel real-time data on cryptocurrency futures from BitMEX to institutional investors via its existing partnership with Refinitiv, a provider of financial market data. It offers cryptocurrency order book and trade data sourced a global pool of trusted exchanges.
The goal is to “increase transparency and confidence in the cryptocurrency markets [in order to] attract greater institutional participation in the digital asset class,” Hayter said in a statement.
“We are pleased to deliver a new wealth of data on cryptocurrency futures for institutional investors that can contribute to their overall confidence throughout their decision-making process,” said BitMEX CEO Arthur Hayes. “When it comes to trading, good decision-making depends on access to solid data insight.”