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Depicting Crypto’s Data Dilemma Before the Next Winter Cold Bites

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By Berta Ares Lombán, Head of Digital Assets Financial Information at SIX.

The crypto winter, when a basket of leading cryptocurrencies lost around $1.9 trillion in value, put a much-needed spotlight on the long-term future of digital assets. While this is not the first time cryptocurrencies have seen significant adjustments to their valuations, the fallout has raised questions around the long return potential of these assets for institutional investors. Despite this, new evidence continues to emerge showing that institutional interest in crypto has certain dependencies and conditioning factors.

As a case in point, even though Bitcoin saw a 15% price decline back in May, there was still $25 million of net inflows into Bitcoin products, and global AUM for Bitcoin products still stands at $30 billion (source: Coins hares). At the same time, it’s clear that more regulatory certainty is needed to protect investors and provide more clarity around the nature of digital assets. As a regulatory framework is fleshed out and crypto as an asset class continues to mature, there must be a greater emphasis on marrying the decentralisation and efficiency that have been the strength of the market so far with the provision of timely, accurate data that will cement digital assets a credible long-term investment option for financial institutions.

The issue is that, to date, the decentralisation nature of blockchain infrastructure underpinning digital asset markets has been a challenge when it comes to data accuracy. While it has unquestionably been fuelled by the rise in value and interest in the likes of Bitcoin and Ether, this same decentralisation also makes it difficult to derive the crypto pricing data needed to comply with the impending regulatory regimes across different jurisdictions – whatever these rules may end up looking like. This is a particular concern for large traditional financial institutions that have more assets, more stringent fiduciary responsibility to investors, and an infrastructure that they will need to adapt to the new environment.

Unlike traditional asset classes such as equities, where transparent market data has historically enabled investors to get a grasp of current prices for stocks, as well as monitor for price changes over time, digital asset markets are much less transparent. Due in part to crypto price volatility and volume, it is much harder to access and interpret accurate and timely crypto market data.

Another major factor behind the lack of maturity of crypto market data is the vast number of trading venues from which it originates. In contrast to equity markets where there are 60 national stock exchanges reporting transactions, in digital asset markets, pricing data is retrieved from 500 different crypto exchanges, each calculating prices in various ways. As a result, accurately assessing the value of a crypto asset at any point in time is highly complicated, which subsequently makes it much harder to work out what is the best buy or sell price.

There is no escaping the fact that digital assets, which are experiencing exponential growth with numerous coins in the market and innovations such as non-fungible tokens (NFTs) and central bank digital currencies (CBDCs) coming to the fore, need to address the elephant in the room that is the underlying data. The importance of having fast, accurate market data to the continued maturity and institutional credibility of this market must be taken into account. One of the distinguishing features of modern-day capital markets is the speed of the dissemination of information. With access to clear, consistent, trusted historical data, trades and prices are accessible almost instantly.

Crypto is no different except, and here is the catch, the nature of digital assets means the market is functioning on multiple computers across numerous locations around the world, as opposed to one central location. The last crypto winter may have given unexpected frost bite to vast swathes of investors, but unless attempts are made to address the underpinning data issue, institutional investors should brace themselves for an even colder experience come the next market downturn.

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