Data are an essential element of an efficient market. If market efficiency is the degree to which prices reflect all available information, having quality information is crucial. And to get to information, you need data. Traditional financial markets are rich in data and have high levels of standardization and accessibility, which gives market participants abundant roads. Digital asset markets are flooded in the data, but these data have less structure and little standardization, which complicates many aspects of the fundamental and quantitative analysis.
It is somewhat ironic that the data is a point of conflict for digital assets, since a very alavory aspect of public block chains is their transparency. Transactions and data in the block chain are essentially available immediately for anyone with access to the system. But transparency is not equal to accessibility and, much less usability. Without prioritizing accessibility, diffusion and context, unprocessed block chain data masses will not automatically improve cryptography market efficiency. And although Blockchain’s complexity can create Alfa for intelligent analysts, the lack of consistent data probably contributes to volatility, deterring institutional capital.
You are reading Crypto Long & Short, our weekly newsletter with ideas, news and analysis for the professional investor. Register here to get it on your entrance tray every Wednesday.
Until now, the somewhat disarticulated state of Blockchain data has not been a problem given a market dominated by retail flows. But if the market is finally institutionalized (that is, it obtains the participation of serious assignments such as pensions, endowments and insurance), it must evolve.
To improve, digital asset space can learn from traditional market approaches. Tokens are expected to accumulate online value with the success of a project. Therefore, the key performance indicators (KPI) must be easily accessible, acting as pages of “relationships with investors” for tokens holders. It is not realistic that initial cryptographic projects reveal information such as public corporations, but intermediate steps can improve the situation.
For example, there are data points that could be relevant for almost all projects to reveal, including: supply schedules (with details of inflation and burns mechanisms, as well as unlocking), rates, active users and daily transactions. Naturally, the projects will not have the same indicators, for example, the KPI for an intelligent contract platform will be different from those of an application or defi protocol. Smart contract platforms may want to show how many applications are implemented in the ecosystem. Defi protocols may want to show TVL or volumes. Regardless of utility, each project must make an effort to reveal as many data points as possible.
Critically, these data must have detailed definitions and methodologies, together with the reproducible code on how the information is derived from the block chain. It must also be available with complete stories over time, and be easily downloadable or accessible through API.
Project efforts to systematically disseminate key information should reduce uncertainty (and therefore volatility) and help capital entries to cryptographic space. Investors must expect this level of transparency and reward projects that prioritize the exhibition of KPI, while promoting improvement in portfolio companies that do not.
Larry Fink, CEO of Blackrock, said in a recent calling calls that more transparency and analysis could expand the investment of digital assets, similar to the evolution of markets such as mortgages and high performance bonds. There are already strong players such as Artemis that provide blockchain and analysis data and establish standards for digital finances. Such suppliers will be essential, as well as platforms such as Bloomberg and Capital IQ of S&P are found in traditional markets. However, each project that builds digital assets must do its share to improve the availability of data for investors. As the mature cryptographic market in transparency and analysis, as many other nascent markets did before, the scope of investment in space should expand materially.
