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Practice Trading & Backtesting Cryptocurrency Strategies

Practice Trading & Backtesting Cryptocurrency Strategies

By | Cryptocurrency | No Comments

There was a time, in the not-so-distant past, when there existed only one cryptocurrency: Bitcoin. Since the emergence of Bitcoin in 2009, there are not hundreds, but thousands of cryptocurrencies available today. Crypto investors, both individual and institutional, want to succeed in this volatile marketplace by maintaining a strong portfolio and investing in assets that will maximize their profits at the lowest possible risk. In order to properly analyze risks and profitability, crypto investors need performance metrics to measure and evaluate their trading strategies. Here, we introduce new analytics, tools and resources that help crypto investors practice trading and backtesting to optimize their strategy’s potential.

Good Performance Benchmarks

Most crypto investors track cryptocurrencies based on their price. However, if you have a plethora of cryptocurrencies in your portfolio, it is not always easy to track them individually. Instead, benchmarks and indices are useful tools for tracking the performance of multiple cryptocurrencies based on a predefined set of metrics. Benchmarks are intended to be simple, transparent, flexible to changes, easy to understand and can be applied to measure the performance of any portfolio in comparison. We will analyze the performance of two cryptocurrency benchmarks more closely: CCi30 and Bitwise 10. 

Cryptocurrency Index 30 (CCi30) is one of the oldest indexes in the cryptocurrency space – its starting value is January 1, 2015. CCi30 is based on the top 30 cryptocurrencies by market capitalization to measure overall growth, daily and long-term movement of the blockchain industry. 

Bitwise 10 Large Cap Crypto Index (Bitwise 10) tracks the total return of the 10 largest cryptocurrency assets. These assets are measured and weighted by free-float and 5-year inflation-adjusted market capitalization.

What Do You Get In Return?

Timing is everything. When you enter the cryptocurrency market, results in different rates of return on your investment. Let’s explore three different scenarios. 

If you entered the cryptocurrency market in January 2017, CCi30 and Bitwise 10 benchmarks show that your return rates lie between 500-750% in profits (Figure 1a). In contrast, if you entered the market in January 2018, your return rates lie between 70-80% in losses (Figure 1b). Finally, if you entered the market in January 2019, your return rates lie between 10-20% in profits (Figure 1c). 

Figure 1a. Performance of CCi30 and Bitwise 10 benchmarks if investor entered the cryptocurrency market in January 2017. Return rates lie between 500-750% profit. 

Cryptocurrency Backtesting: Benchmark Return CCi30 BITX

Figure 1b. Performance of CCi30 and Bitwise 10 benchmarks if investor entered the cryptocurrency market in January 2018. Return rates lie between 70-80% loss. 

Cryptocurrency Backtesting: Benchmark Return CCi30 BITX

Figure 1c. Performance of CCi30 and Bitwise 10 benchmarks if investor entered the cryptocurrency market in January 2019. Return rates lie between 10-20% profit. 

Cryptocurrency Backtesting: Benchmark Return CCi30 BITX

Putting It To The Test

We tried a simple experiment starting January 1, 2019 to determine how profitable we will be compared to cryptocurrency benchmarks CCi30 and Bitwise 10. In the first week, we invested in 5 cryptocurrencies based on one of the two strategies below. After one week, we sold all 5 cryptocurrencies. We repeated this process every two weeks by selecting another set of 5 cryptocurrencies. 

Strategy 1

In our first strategy, Strategy 1, we choose the top 5 cryptocurrencies with the largest total returns in the past 30 days, found readily in our biweekly Market Reports. For example, in our latest market report from June 24, 2019 (Figure 2), the top 5 cryptocurrencies are Hypercash (HC), MonaCoin (MONA), Bitcoin SV (BSV), GXChain (GXC), and Bytom (BTM). Total returns in the past 30 days is also available in real-time through our Coinscious Terminal

Figure 2. Mean daily returns, historical daily volatility, total returns, and ex-post Sharpe ratio for each cryptocurrencies with the highest total returns from May 25, 2019 to June 23, 2019. The Sharpe ratio is calculated with the 10 year US Treasury bill rate as the annual risk-free rate.

Crypto Report - HyperCasH HC, MONA, BSV, GXC, BTM

Strategy 2

In our second strategy, Strategy 2, we choose the top 5 cryptocurrencies based on Sharpe ratios from the past 30 days, found in our Advanced Market Reports. The Sharpe ratio is a risk adjusted measure of return that describes the reward per unit of risk. The reward is the average excess returns of an investment against a benchmark or risk-free rate of return, and the risk is the standard deviation of the excess returns. A higher Sharpe ratio is better. Ex-ante Sharpe ratio is calculated with expected returns whereas ex-post Sharpe ratio is calculated with realized historical returns.

Will We Profit?

We ran our experiment every two weeks for three months. Now, let’s look at how our strategies, Strategy 1 and Strategy 2, perform when compared to cryptocurrency benchmarks CCi30 and Bitwise 10. 

Figure 3 shows that if we entered the cryptocurrency market on January 1, 2019, based on CCi30 and Bitwise 10 benchmarks, our rate of return lies between 10-20%. In comparison, the strategies from our experiment are much more profitable. By using Strategy 1, we yield an 80% return rate while Strategy 2 yields a 50% return rate. 

Figure 3. Cumulative return rates for CCi30 and Bitwise 10 benchmarks, Strategy 1 and Strategy 2 between January 1, 2019 to March 30, 2019. 

Cryptocurrency Backtesting: Benchmark Return CCi30 BITX Benchmark

We can look at performances of Strategy 1 and Strategy 2 through additional plots such as 30-day rolling Sharpe ratio versus time; 30-day volatility versus time; and drawdowns versus time. 

In figure 4a, we see that the 30-day rolling Sharpe ratio constantly decreases for Strategy 2 between the beginning of February to mid-March. This is helpful to perceive as we may consider changing our strategy if the Sharpe ratio continues to decline even further. 

Figure 4a. 30-day rolling Sharpe ratio for Strategy 1 and Strategy 2 between January 1, 2019 to March 30, 2019. 

Cryptocurrency Backtesting: 30-day rolling Sharpe ratio for Strategy 1 and Strategy 2 between January 1, 2019 to March 30, 2019.

Figure 4b. 30-day rolling volatility for Strategy 1 and Strategy 2 between January 1, 2019 to March 30, 2019.

Cryptocurrency Backtesting: 30-day rolling volatility for Strategy 1 and Strategy 2 between January 1, 2019 to March 30, 2019.

Figure 4c. Drawdowns for Strategy 1 and Strategy 2 between January 1, 2019 to March 30, 2019.

Cryptocurrency Backtesting: Drawdown

Practice Makes Perfect

Crypto investors are risk takers who know there’s a huge potential for profit. In order to make the most of their portfolio, crypto investors need access to high-quality historical and real-time technical data to backtest, evaluate, and optimize their trading strategies. By providing direct access to our team’s analysis, tools and accurate data, we make it easy for crypto investors to have all the necessary means to succeed on their own or through our backtesting services. In doing so, crypto investors can adequately manage a strong, profitable portfolio that has one, hundreds, or even thousands of cryptocurrencies.

Learn More

Find out more about all the freely accessible tools and resources we highlighted in this article.

  • This helpful guide is extracted from our CTO & Co-Founder, Daniel Im, and his presentation “Crypto Market Analysis, Analysis Tools & Data.” Watch the full presentation to discover how to detect suspicious exchanges and build a stronger cryptocurrency portfolio:

REPORT SERVICE

  • Market Report: an analysis of recent historical performances of the top 50 assets to identify current cryptocurrency market trends. SUBSCRIBE NOW

TERMINAL

  • Coinscious Terminal: real-time analytics on the top 100 coins/tokens, 18 mainstream crypto exchanges, and top technical trading indicators

SIGN-UP NOW FREE:   MARKET DATA API   |  ALERT APIREPORT SERVICES

Disclaimer

The information contained herein is for informational purposes only and is not intended as a research report or investment advice. It should not be construed as Coinscious recommending investment in cryptocurrencies or other products or services, or as a solicitation to buy or sell any security or engage in a particular investment strategy. Investment in the crypto market entails substantial risk. Before acting on any information, you should consider whether it is suitable for your particular circumstances and consult all available material, and, if necessary, seek professional advice.

Coinscious and its partners, directors, shareholders and employees may have a position in entities referred to herein or may make purchases and/or sales from time to time, or they may act, or may have acted in the past, as an advisor to certain companies mentioned herein and may receive, or may have received, a remuneration for their services from those companies.

Neither Coinscious or its partners, directors, shareholders or employees shall be liable for any damage, expense or other loss that you may incur out of reliance on any information contained in this report.

Building A Stronger Cryptocurrency Portfolio

By | Cryptocurrency | No Comments

With the cryptocurrency market still in its infancy, there are many windows of opportunity for the right investors. Crypto investors, both individual and institutional, want to succeed in this volatile marketplace by maximizing their profits with the lowest possible risk. However, with a plethora of assets to choose from, it’s not as simple as trusting biased opinions that voice optimism one day and skepticism the next. Instead, investors need to focus on researching the potential assets they’re investing in and understanding their risk profile to ensure success. Here, we introduce new analytics, tools and resources that help crypto investors easily identify valuable asset candidates that contribute to building a stronger cryptocurrency portfolio.

Understanding Risk-Return Tradeoff

Technical data may seem daunting perceive without the right know-how. A risk-return plot is a simple way to visually see an asset’s performance relative to its volatility. In the following example, we will examine a historical plot from our market report of the mean daily return versus daily volatility for the top 50 cryptocurrencies between February 28, 2019 to March 28, 2019.

Figure 1. Mean daily return against historical daily volatility from February 28, 2019 to March 28, 2019.

a) Comparing Similar Assets

Let’s say we wanted to consider a return level just above 1%, how do we determine which asset to consider adding to our portfolio?

In Figure 1, the red line (1) shows that there are four assets that have mean daily returns slightly above 1%: Litecoin (LTC), OmiseGO (OMG), Basic Attention Token (BAT), and Ontology (ONT). Although the assets may have similar daily return levels, they do not share the same behaviour.

Next, we look at the diagonal blue line (2) in figure 1 and see which asset falls on the left-most side. Assets towards the left of the plot represent assets with lower volatility. Therefore, among the assets that offer the same level of return, Litecoin is the least volatile and the best choice out of the four to add to our portfolio.

b) Investigating Outliers

Riskier assets are found in the top-rightmost corner of the risk-return plot. These outlier assets represent assets that offer the highest mean daily return but are also the most volatile.

In Figure 1, the green line (3) shows that Tezos (XTZ) stands out. Tezos is a self-amending proof-of-work dApp platform that removes the need to hard fork when implementing protocol amendments. Although, higher risk investments may have the highest potential return, there is no guarantee. We can use real-time analytics from our Coinscious Terminal to look at Tezos’ performance for a longer duration of time and determine whether it’s worth adding to our portfolio or if it’s too risky.

Figure 2. Tezos (XTZ) return and risk table from: https://terminal.coinscious.io

From the table in Figure 2, we see that in terms of return, Tezos offers positive returns with price changes – constantly growing from one day to three months. The same table also shows that in terms of risk, Tezos’ volatility over one month and one year are both relatively low, and its price sits on the higher end.

Based on the data above, Tezos looks to be a favourable asset to add to our portfolio. We can deepen our understanding of by looking at performance analytics, trend sentiments, and indicator analytics featured on Tezos’ individual asset page (Figure 3).

Figure 3. Tezos (XTZ) performance analytics, trend sentiments and indicator analytics from: https://terminal.coinscious.io/details/XTZ/en

Tezo’s overall one-year performance and risk analytics identify: Sharpe ratio, alpha, beta, r-squared, mean return and volatility values, maximum drawdown, Value at Risk (VaR), and expected shortfalls. Trend sentiments help gauge Tezos’ trend momentums and moving averages over long periods of time. Indicator analytics are useful for discovering which strategy works best for this asset under performance metrics like Sharpe ratio, win rate and profit factor.

Together, all this technical data objectively shows an asset’s performance compared to its risk, and helps crypto investors determine whether they are good candidates to add to their portfolio or risky investments to avoid.

Realizing Cryptocurrency’s Potential

Crypto investors know there’s a huge potential for profit. However, overcoming the risks requires effort and planning. Reading the whitepaper to understand the problem a project is attempting to solve, identifying the team behind-the-scenes, and determining the uniqueness and prospect of a potential asset are fundamental steps to take. However, they only represent the first phase of much bigger learning curve.

In order to make the most of their portfolio, crypto investors need to digest a lot of historical and real-time technical data to grasp the full tradeoff between risk and return. By providing direct access to our team’s analysis, tools and accurate data, we make it easy for crypto investors to have all the necessary means to succeed. In doing so, crypto investors no longer need to rely on biased opinions that favour currently hyped assets. Rather, they can focus on building stronger cryptocurrency portfolios by choosing valuable assets based on data-driven insights.

Learn More

Find out more about all the freely accessible tools and resources we highlighted in this article.

  • This helpful guide is extracted from our CTO & Co-Founder, Daniel Im, and his presentation “Crypto Market Analysis, Analysis Tools & Data.” Watch the full presentation to discover how to detect suspicious exchanges and learn how to backtest strategies:

REPORT SERVICE

  • Market Report: an analysis of recent historical performances of the top 50 assets to identify current cryptocurrency market trends. SUBSCRIBE NOW

TERMINAL

  • Coinscious Terminal: real-time analytics on the top 100 coins/tokens, 18 mainstream crypto exchanges, and top technical trading indicators

SIGN-UP NOW FREE:   MARKET DATA API   |  ALERT APIREPORT SERVICES

Disclaimer

The information contained herein is for informational purposes only and is not intended as a research report or investment advice. It should not be construed as Coinscious recommending investment in cryptocurrencies or other products or services, or as a solicitation to buy or sell any security or engage in a particular investment strategy. Investment in the crypto market entails substantial risk. Before acting on any information, you should consider whether it is suitable for your particular circumstances and consult all available material, and, if necessary, seek professional advice.

Coinscious and its partners, directors, shareholders and employees may have a position in entities referred to herein or may make purchases and/or sales from time to time, or they may act, or may have acted in the past, as an advisor to certain companies mentioned herein and may receive, or may have received, a remuneration for their services from those companies.

Neither Coinscious or its partners, directors, shareholders or employees shall be liable for any damage, expense or other loss that you may incur out of reliance on any information contained in this report.

Crypto Exchanges

How To Detect Suspicious Crypto Exchanges

By | Cryptocurrency | No Comments

The entire crypto market has been on a fast uptrend this past week with the recovery of bitcoin. For crypto traders, choosing the right crypto exchange platform to trade on is equally as important as choosing the right asset to have in your portfolio. With recent catchy news headlines about “suspicious exchanges” and “fake volumes,” the public has long speculated that exchanges have manipulated the crypto market. As easy as it is to be swayed by sensationalized headlines, how can crypto traders objectively look for suspicious exchanges by themselves?

Using Technical Data to Spot Abnormal Trends

In the following section, we will share examples of how to use our team’s tools and research – like our Coinscious Terminal and exchange reports – to learn how to detect suspicious exchanges on their own.

a) Real-time Analytics

We start by analyzing Figure 1 which shows huge spikes in Bitcoin volume and price pump that occurred on April 2, 2019.

Figure 1. Price of Bitcoin (BTC) in USD at Bitfinex on April 2, 2019 at 7 A.M. EST.

Crypto Exchanges

We can look at volume changes directly from our Coinscious Terminal for the top 18 mainstream exchanges. The data table in Figure 2, shows volume changes on April 2 for the top ten exchanges in blue. There are very drastic volume changes greater than 70% for all exchanges listed, except for Fcoin. Fcoin only had a 10% volume change, indicating that crypto traders should be wary of trading on this exchange as it is most likely faking its volume.

Figure 2. Top 10 crypto exchanges by ranked 24-hour volume on April 2, 2019 from: https://terminal.coinscious.io/exchange/

b) Historical Data

Next, we will analyze a plot of ETH/BTC daily volume for the same 18 crypto exchanges between January 16 to February 16, 2019 from our exchange report. In Figure 3, ZB is the only crypto exchange with an exchange volume curve that sticks out to the far-right. What exactly is going on here?

Figure 3. ETH/BTC pair daily volume for each exchange from February 16, 2019 to March 16, 2019 in USD.

Crypto Exchanges

We can further analyze this anomaly by using principal component analysis (PCA) and plotting exchanges based on the first two principal components, PC1 and PC2. From the plot in Figure 4, we can see several crypto exchanges clustered together at the bottom-left. These represent exchanges that are correlated with one another and hence, follow similar volume trends. Conversely, there are clear outliers like Binance, Fcoin, HitBTC, HuobiPro, OKEx, and ZB. These outlier exchanges have volume trends that diverge from the market mean.

Figure 4. PCA volume analysis for ETH/BTC. The biplot, where the two main principal components are used to represent the exchanges, allows us to identify clusters or groups of exchanges that might be correlated according to volume.

Crypto Exchanges

We can even take this one step further and use a more quantitative way of measuring, by looking at volume correlations between exchanges. In the green box in Figure 5, all the intersections coloured in bright orange means that these exchanges are positively correlated; they follow similar crypto market trend patterns.

Figure 5. Daily volume correlations between exchanges from January 16, 2019 to February 16, 2019 for ETH/BTC. Correlation ranges between -1 and 1. Correlation close to 1 indicates a more positive relationship between the pair of cryptocurrency returns and correlation close to -1 indicates a more negative linear relationship. Correlation close to 0 indicates no linear relationship.

Crypto Exchanges

The exchanges in the blue box, with intersections coloured in red and black are anti-correlated to the exchanges in the green box. Therefore, this means that bitFlyer, Fcoin, HitBTC, Zaif and ZB have volume trends that go against those exchanges in the blue box listed on the x-axis.

What’s really interesting are the exchanges in the yellow box. Some of these exchanges have no correlation to one another while others have negative correlations. An explanation for this may be due to different trading bot algorithms that run on each exchange. Since they have different algorithms, this creates no correlation or negative correlations between the exchanges.

c) Additional Research

This March, Bitwise Asset Management released a report to the SEC highlighting the problems and common misconceptions of crypto exchanges. Bitwise’s study reveals that “95% of volumes is fake and/or non-economic in nature, and that the real market for bitcoin is significantly smaller” [1].

By looking at the shape of trade size histogram distributions, they compare crypto exchanges that follow a natural exponential decay pattern (Figure 6a) versus suspect exchanges that have highly irregular shapes (Figure 6b). Their findings indicate that there are only 10 well-known exchanges that have actual volume including: Binance, Bitfinex, bitFlyer, Bittrex, Bitstamp, Coinbase, Gemini, Kraken, itBit, and Poloniex.

Figure 6a. Trade size histograms for well-known exchanges that show natural patterns

Crypto Exchanges

Figure  6b. Trade size histograms for suspect exchanges that show irregular patterns.

Crypto Exchanges

Developing Stronger Technical Skills

Technical data is crucial for understanding the nuances of the existing crypto market. All of the examples above demonstrate how simple it is to identify outliers and suspicious exchanges once crypto traders know how to read and interpret technical analyses. By providing direct access to our team’s analysis, tools and accurate data, we make it easy for crypto traders to have all the necessary means to succeed. In doing so, crypto traders no longer need to make decisions solely based on catchy headlines but rather, they can discover fairer and more reliable crypto exchanges based on objective data-driven insights.

Learn More

This helpful guide is extracted from our CTO & Co-Founder, Daniel Im, and his presentation “Crypto Market Analysis, Analysis Tools & Data.” Watch the full presentation to discover tools to help build stronger portfolios and learn how to backtest strategies.

Resources

Find out more about all the tools and resources we highlighted in this article:

REPORT SERVICE

  • Exchange Report: an analysis of recent historical volumes and prices of 18 mainstream exchanges to identify better or fairer cryptocurrency platforms. SUBSCRIBE NOW
  • Market Report: an analysis of recent historical performances of the top 50 assets to identify current cryptocurrency market trends. SUBSCRIBE NOW

TERMINAL

  • Coinscious Terminal: real-time analytics on the top 100 coins/tokens, 18 mainstream crypto exchanges, and top technical trading indicators

SIGN-UP NOW FREE:   MARKET DATA API   |  ALERT APIREPORT SERVICES

Reference

[1] Bitwise Asset Management. “Presentation to the U.S. Securities and Exchange Commission.” 2019, www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf

Disclaimer

The information contained herein is for informational purposes only and is not intended as a research report or investment advice. It should not be construed as Coinscious recommending investment in cryptocurrencies or other products or services, or as a solicitation to buy or sell any security or engage in a particular investment strategy. Investment in the crypto market entails substantial risk. Before acting on any information, you should consider whether it is suitable for your particular circumstances and consult all available material, and, if necessary, seek professional advice.

Coinscious and its partners, directors, shareholders and employees may have a position in entities referred to herein or may make purchases and/or sales from time to time, or they may act, or may have acted in the past, as an advisor to certain companies mentioned herein and may receive, or may have received, a remuneration for their services from those companies.

Neither Coinscious or its partners, directors, shareholders or employees shall be liable for any damage, expense or other loss that you may incur out of reliance on any information contained in this report.

[VIDEO] Crypto Market Analysis, Analysis Tools and Data

By | Cryptocurrency, Videos | No Comments
This video is available to view with English, Chinese or Korean subtitles.

As part of this year’s Toronto Blockchain Week, Coinscious hosted Crypto Market Analysis & Insights.” During this record turnout event, we showcased speakers and panelists from a wide range of backgrounds –  cryptocurrency, blockchain, banking, government, legal and investment – to share their insights and unique perspectives on the current crypto market. This exciting opportunity allowed us to provide a wealth of knowledge to the general public which would otherwise only be reserved to members of those respective industries.

One important presentation from the evening, was by our CTO & Co-Founder, Daniel Im, who presented “Crypto Market Analysis, Analysis Tools and Data.” As a crypto data and analytics provider, our team has built a suite of tools and services to help cryptotraders, at all levels of trading, to maximize their strategies to obtain the highest returns. Challenges in the existing crypto market – like volatility and fake exchange volumes – can hinder strategies if cryptotraders do not have access to useful resources and accurate crypto data to overcome them.

In the video above, we share Daniel’s presentation as a chance to provide guidance to all cryptotraders on how to better determine: where to trade, what to trade and how to practice/backtest their trading strategies, all by simply using our data, tools and resources. For example, from our exchange reports, Daniel demonstrates how cryptotraders can identify outliers from technical data and shows ways to look for suspicious exchanges by using our volume correlation data. He also highlights how to use our market reports in conjunction with our Market & Trading Strategy Terminal to decide which coins/tokens to have in your portfolio based on risk versus return data and performance analytics.

Watch the full video to learn more about how to best pair our crypto data products and services with your trading needs. 

Check out the products and services we’ve highlighted:

REPORT SERVICE

  • Market Report: an analysis of recent historical performances of the top 50 assets to identify current cryptocurrency market trends. SUBSCRIBE NOW
  • Exchange Report: an analysis of recent historical volumes and prices of 18 mainstream exchanges to identify better or fairer cryptocurrency platforms SUBSCRIBE NOW

TERMINAL

  • Coinscious Terminal: real-time analytics on the top 100 coins/tokens, 18 mainstream crypto exchanges, and top technical trading indicators

DATA SERVICE

  • Market Data API: the most accurate and comprehensive raw crypto market VWAP, OHLCV, trade and order book data. Try our live stream API free. SUBSCRIBE NOW

Technical data is crucial for understanding the nuances of the existing crypto market. However, data is difficult to collect and interpret without the right resources and know-how. By providing direct access to our team’s research analysis, analysis tools and data, we make it easy for cryptotraders to have all the necessary means to succeed. We hope that through this video, cryptotraders can learn how to best apply these objective methods towards building a stronger portfolio. In doing so, cryptotraders no longer need to make decisions solely based on sentiments but rather, they can discover and improve existing strategies based on objective data-driven insights.

SIGN-UP NOW FREE:   MARKET DATA API   | REPORT SERVICES

Accurate Crypto Market Data Ultimately Leads to Winning Model

By | Coinscious Lab, Cryptocurrency | No Comments

The world’s most valuable resource is no longer oil but data. [1] This holds true even for the finance industry. The control that financial companies wield over their data gives them enormous power, and the abundance and quality of data they use changes the very nature of the competition. According to Bloomberg, the financial sector is adopting big data analytics to maintain a competitive advantage in the trading environment” [2]. Quantitative- and high-frequency trading are ubiquitous, indispensable tools in current times, and their full value in cryptocurrency trading are being realized. A key aspect that is still often overlooked in quantitative crypto-trading is the quality of the data being used to design sophisticated prediction models.

In this era of cryptocurrency trading, those with the most data of the highest quality will surely win. In algorithmic trading applications, accuracy is one of the best quality indicators of a data source. It determines the execution prices, the model’s behaviour, and the model’s ability to fit the market efficiently and effectively. In the extreme case, high frequency traders care about order-by-order data to simulate precise market-making algorithms. In order to accurately determine what and how much to trade at a low cost, traders desire the finest scales of accurate data with low latency.

Many algorithmic traders incorporate massive amounts of data into their algorithms to create better pricing models and leverage large volumes of historical data to backtest their trading algorithms. Particularly with recent advances in machine learning, the data-driven approach to modelling is being emphasized more than ever before. Market behaviours are learned from black box models that recognize patterns in big data. This means that the accuracy of the data affects what the model learns and predicts. Thus, the more accurate data you have, the better you can simulate execution quality in algorithms.

Available Sources of High Quality Crypto-Trading Data

There are several companies that provide cryptocurrency market data. Kaiko, CoinAPI, and Coinscious are three well-known crypto data vendors. Most of these companies offer live and historical trading, order books, and OHLCV1  (open, high, low, close, volume) cryptocurrencies. However, what remains unknown, until now, is the quality of data these companies claim to provide. Therefore, the key question is: which data vendor has the highest quality data for you to gain a competitive edge?

The Basics

A simple way to assess data quality is to compare the exchange’s OHLCV data with derived OHLCV data. In the analysis below, the hourly level OHLCV data is computed for December 2018 amongst different data vendors. The error rates were measured over eight well-known exchanges: Binance, Bittrex, Bitfinex, Bitstamp, Bitmex, Huobi Global, Okex, and Coinbase Pro.

Figure 1. OHLC error rates for Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP)2. Given that our budget limits us to purchase just one dataset between Kaiko and CoinAPI, we chose the more expensive one: Kaiko’s data

Figure 2. OHLC error rates for OHLC error rates for four alternative coins (ADA, XLM, TRX, ZRX)

Coinscious data proves to be the most accurate among these data vendors for the top 3 coins (BTC, ETH, and XRP). In average, Coinscious data are 38% better than Kaiko’s data, where the relative errors on OHLC are 39%, 41%, 31%, and 37% respectively (see Figure 1). Similar results have also been shown using four alternative coins (ADA, XLM, TRX, ZRX). Surprisingly, even though Kaiko data is accurate for high and low prices, their open and close prices are quite divergent when compared to Coinscious and CoinAPI.

Error In Trading Volume

In Figure 3 and Figure 4, volume error rates over time reveal the dates when the higher error rates occur. The spike in volume error rates occurs in two scenarios; the first scenario occurs when the volume and volume error rates spikes simultaneously, whereas the second scenario occurs when the volume error rates spike, but volume does not. The former can be attributed to increased latency on exchanges as traffic increases, whereas the latter can be attributed to internal server issues.

Figure 3. Absolute error between exchange volumes versus data vendors’ volumes in December 2018 (the lower, the better). The errors were measured for BTC/USD, ETH/USD, and XRP/USD on the top 7 exchanges3.

Coinscious’ error rates remain relatively low compared to other vendors’ error rates. Overall, it is clear that Coinscious data has the lowest error rates with respect to volume data.

Figure 4. Absolute distance error between exchange volumes versus data vendors’ volumes in December 2018 (the lower, the better). The errors were measured for the following alternative coins: ADA/USD at Bittrex, XLM/USD, TRX/USD, and ZRX/USD at Bitfinex.

The volume quality for alternative coins (i.e., altcoins) was also considered. Eight altcoins were randomly selected from different exchanges, including NEO, TRON, XLM, EOS, LTC, ZRX, and ADA. From the figure above, CoinAPI does not perform well on volumes with respect to these altcoins.

Reason For Data Discrepancies Between Vendors

Now you must be wondering, if the exchange provides public API, why would you need to purchase data? Firstly, public APIs have limited histories of information they provide, and unless a trader has stored historical price data, they would need to gather it from a third-party source. Secondly, even though exchanges provide public APIs, aggregating and preprocessing all possible cryptocurrency pairs for different exchanges is cumbersome, and arguably the most tedious step in developing a trading system. This is especially the case as the data receiving intervals gets coarser as the number of requests for data grows. It is for these reasons that the aforementioned data vendors exist.

More importantly, why do discrepancies in the accuracies exist across different data vendors? There are several possible reasons. It could be due to downtimes of exchange APIs. Or, given the thousands of combinations of cryptocurrency exchanges and trade pairs, there exist API rate limits on all cryptocurrency exchanges, and therefore a large number of data collection clients and complicated infrastructure is required.

While many companies are collecting vast amounts of data across different exchanges and coins, the quality of the data may be hidden underneath the quantity of the data. Especially in this era of a data-driven finance world, success and risk can be heavily dependent on the data quality and the data operations environment. Obtaining the right trading tools and hiring talented traders can certainly help, but even then, tools and people cannot guarantee success if the data is flawed. The cryptocurrency finance market definitely could benefit from having more of data quality analysis in order to understand the granular level of datasets and where they can obtain them.

Footnotes

  1. Open, high, low, close, volume (OHLCV) prices.
  2. Given that our budget limits us to purchase just one dataset between Kaiko and CoinAPI, we chose the more expensive one: Kaiko’s data.
  3. Top 7 exchanges include: Binance, HuobiPro, Bitfinex, Bitmex, OKEx, Bitstamp, and Coinbase.

References

[1] “The world’s most valuable resource is no longer oil, but data”. The Economist, 6 May 2017, https://www.economist.com/leaders/2017/05/06/the-worlds-most-valuable-resource-is-no-longer-oil-but-data

[2] “3 ways big data is changing financial trading”. Bloomberg, 5 July 2017, https://www.bloomberg.com/professional/blog/3-ways-big-data-changing-financial-trading/

Cryptocurrency Arbitrage

What is Arbitrage?

By | Cryptocurrency | No Comments

What Is Arbitrage and How Is It Used in the Coin Market?

The Merriam-Webster dictionary defines arbitrage this way:

The near simultaneous purchase and sale of securities or foreign exchange in different markets in order to profit from price discrepancies.

Let’s break that down further and also understand how arbitrage strategies are used in the cryptocurrency market.

A Simplified Explanation of Arbitrage

Arbitrage is considered a no-risk profit strategy when executed against traditional financial instruments. Why? Because you are buying an asset and selling it simultaneously for a higher price at a profit. It’s considered no risk because there is no hold time or delay between the transactions and the profit is guaranteed.

This type of transaction can be completed with any asset type, but typically the assets are bonds, stocks, currency or other financial instruments.

Here’s a simplified example. A stock is trading for $10 in the New York Stock Exchange (NYSE), but is trading on the Tokyo Stock Exchange (TYO) for $11. You would buy the NYSE stock at the lower price and simultaneously sell the stock in the TYO, making a $1 profit per share.

Because of automated trading systems and high-frequency trades it’s rare for this sort of price discrepancy to occur, making it rare for arbitrage trades like this to happen. Today, when these discrepancies are noticed, they usually only last for a short window of time, measured in seconds or even microseconds. High interest in the “cheap” stock raises its price and subsequently drives down the price of the “expensive” stock. Even before automated trades, arbitrage was viewed as a mechanism for maintaining equilibrium across markets.

What Does Arbitrage Have to Do with Cryptocurrency?

Unlike the stock market, the coin market is ripe for arbitrage. Cryptocurrency don’t support high-frequency trading, which means there are fewer automated trading robots controlling or responding to price fluctuation. There are fewer pressures or controls to ensure pricing equilibrium across exchanges. Also, when new exchanges open, they offer an opportunity to buy in a more established exchange to sell at a profit in the new exchange.

If you plan to pursue arbitrage as a trading strategy, there are three things you must consider:

  • Fees. This can include trading fees, withdrawal or deposit fees, and blockchain fees. You have to calculate if the fees you incur will eat the profit that you anticipate making.
  • Time. Rarely do trades happen simultaneously in the coin market as they can in the automated stock exchanges. You have to weigh the risk that you’ll miss the pricing window if a trade is slowed down for some reason.
  • Risk. Arbitrage in the stock market is considered no risk. Because of the time and fee considerations mentioned above, arbitrage in the coin market is hardly a no-risk venture.

What Do You Need to Profit from Coin Arbitrage?

Reliable information about cryptocurrency is one of the most valuable assets you can possess. In this relatively new market, it’s also one of the hardest assets to find.

If you plan to use arbitrage in the coin market, what information and tools should you look for?

  • Rates: To benefit from arbitrage, you’ll need to know current rates of exchange. Seek out information sites that provide up-to-date coin prices.
  • Opportunities: Try to access a service that can send alerts about potential opportunities. Alerts can help you act on opportunities before other traders do.
  • Simulations: Success in the coin market relies on creating and executing smart trade strategies. Simulation tools can help you validate and improve your trade strategies.
  • Bots: Automation helps traders stay on top of market changes. You can use bots set up to take specific actions based on limits that you set.

You may need nerves of steel to execute coin arbitrage, but having reliable, credible information should remove at least some of the guesswork.

Data or Noise: Making Sense of the Cryptocurrency Trading Market

Data or Noise: Making Sense of the Crypto Trading Market

By | Cryptocurrency | No Comments

Too good to be true press reports.
Misleading ads.
Unscrupulous exchanges.
“Gold rush” fever.

These are just a few of the things that can overhype crypto-coin value. If you’re a serious investor, how do you resist the hype and rely only on data? Where do you find reliable, unbiased information to guide your trade decisions? If you’ve been in this market long, you know answering those questions is difficult. You’re left to your own ingenuity to figure it out for yourself.

Risky Business

As a cryptocurrency investor, you face risk. That risk is higher because you have no easily accessible tools to help you manage your investments. Unlike the traditional stock market, cryptocurrency investors can’t choose from a wide array of apps or measurement guides to drive their trade decisions. For active traders, it’s difficult to set up investment buy/sell parameters tied to return, liquidity, or market movement.

All investment carries risk, but in new and uncertain markets, that risk is heavier. The price volatility of cryptocurrency convinces some traders to stay away, or to only invest small sums. Others are suckered by the hype and gamble too much based on too little information.

Many factors affect coin prices—social media buzz, news reports, trade activity. It’s hard, if not impossible, for traders to calculate how each factor plays into cryptocurrency price fluctuations. To compound matters, traders are hit with lots of information at every step of the trading process. Investors find themselves making trade decisions based on scattered information from random online sources. Scouring that information takes time and adds uncertainty to the process.

How AI and Machine Learning Manage Risk

The cryptocurrency market is nuanced, complex, and volatile. As this market matures, it attracts more interested traders. That interest will create demand for tools that support both casual and professional investors at each step of the trading process—from building a portfolio to developing and improving trade strategies. Any solution must address the two core questions that traders ask: How can I understand the market to better build my portfolio? How can I manage my trade strategy?

These are also the questions that Coinscious has asked. Our team of blockchain engineers, data scientists, and AI researchers found the answers in AI and deep learning. Using deep neural networks, the Coinscious Collective™ platform has been trained to automatically recognize patterns and make predictions by observing data. The platform applies statistical machine learning algorithms to the cryptocurrency market to understand and recognize the patterns in available data.

With these technologies, the platform extracts the information needed to help traders make informed decisions. The platform’s AI and machine learning capabilities focus on areas that investors care about most: future value prediction, uncertainty estimation, market correlation detection, and monetary and coin movement patterns.

Separating Data from Noise

The goal of the Coinscious Collective™ platform is to separate signal from noise in price data, trade data, social media data, etc. We have three goals:

  • To be immune to noise as much as possible
  • To determine the noise-to-signal ratio at any given time
  • To improve the decision making process for traders and investors

Whether in the stock market or crypto market, information overload often drowns out the valuable signal. The ability to separate noise from data helps investors better evaluate market performance and create smarter strategies. In fact, studies show that what separates successful traders from all the others is the ability to distinguish data that matters from information that doesn’t.

With the explosive growth of data, information overload is a common problem and causes traders to get distracted. This creates a number of problems for serious traders:

  • The chance of discovering meaningful information is equivalent to finding a needle in an exponentially growing haystack.
  • There are limits to how much information any human can process and filter.
  • Even if you overcome the first two limits, human bias accumulates over time and affects the filtering process.

To remedy this, Coinscious leverages an AI system. Using deep learning, the platform uncovers hidden patterns. The platform achieves this through gathering a good representation of data (i.e. feature engineering), ensuring the model extracts noise while also generalizing future trends, and modeling uncertainty. It’s with this process that the Coinscious Collective™ platform limits non-essential data and delivers statistically credible information. If you’re a serious investor, you can spend your day trying to find the right information, or you can let Coinscious deliver the right information to you.

Want a deeper understanding of the technology behind the Coinscious Collective™ platform? Learn how Coinscious works.