Data is an essential element of an effective market. If the market efficiency is to what extent prices reflect all available information, it is crucial to have quality information. And to get to information, you need data. Traditional financial markets are data rich and have high levels of standardization and accessibility, giving market participants abundant ways of analysis. Digital asset markets are monitored in data, but this data has less structure and slightly standardization, which complicates many aspects of basic and quantitative analysis.
It is somewhat ironic that data is an adhesive point for digital assets, as a very recognized aspect of public blockchains is their transparency. Transactions and data on blockchain are essentially available immediately for anyone with access to the system. But transparency does not match accessibility and much less so usefulness. Without prioritizing accessibility, dissemination and context, plenty of raw blockchain data automatically improves the effectiveness of the crypto market. And while blockchain data complexity can create alpha for knowledgeable analysts, the lack of uniform data is likely to contribute to volatility and discourage institutional capital.
You read Crypto Long & Short, our weekly newsletter with insight, news and analysis for the professional investor. Sign up here to get it in your inbox every Wednesday.
Until now, the somewhat incoherent state of blockchain data has not been a problem given a market dominated by retail streams. But if the market is eventually to be institutionalized (that is, the involvement of serious allocation such as pensions, funerals and insurance), it must develop.
To improve, the digital asset space can learn from traditional market methods. The tokens is expected to incur value in accordance with the success of a project. Thus, key praising station indicators (KPIs) should be easily accessible and act as “Investor Relations” pages for token holders. It is unrealistic for start-up-crypto projects to disclose information that public companies do, but preliminary steps can improve the situation.
For example, there are data points that may be relevant for almost all projects to pass on, including: Supply plans (with details of inflation and combustion mechanisms as well as locks), fees, active users and daily transactions. Of course, projects will not have all the same indicators – for example, KPIs for a smart contract platform will look different than those for an application or defi protocol. Smart contract platforms may show how many apps are implemented in the ecosystem. Defi protocols may want to show Tvl or Volume. Regardless of the tool, each project must make an effort to reveal as many data points as possible.
Critically, this data must have detailed definitions and methodologies along with reproducible code for how the information comes from Blockchain. It must also be available with complete stories over time and can be easily downloaded or available via APIs.
Efforts from projects to systematically disseminate key information should reduce the uncertainty (and thereby volatility) and help the capital flow in the crypt area. Investors should expect this level of transparency and reward projects that prioritize presenting KPIs while pushing for improving in portfolio companies that do not.
Larry Fink, CEO of Blackrock, noted in a recent earnings call that more transparency and analysis could expand digital activist investments similar to the development of markets such as mortgage loans and high dividend bonds. There are already strong players like Artemis who provide blockchain data and analysis and set standards for digital financing. Such providers will be important, just as platforms such as Bloomberg and S&P’s Capital IQ are in the traditional markets. However, each project that builds digital assets should do their part to improve data availability for investors. As the crypto market matures in transparency and analysis, as many other new markets did before it, the possibility of investing in space should expand significantly.
