Recently, a senior analyst from K33 Research, an investigative brokerage firm that offers investment services, dropped an unexploded bomb on X. It turns out that the liquidation data from exchanges has been fabricated, significantly underestimating the actual volumes of liquidations happening in the market.
Related: Ethereum Wants to Beat Bitcoin, Thanks to the SEC - K33 Research
Did you know?
— Vetle Lunde (@VetleLunde) August 29, 2024
Liquidation data from exchanges are bogus and a vast underrepresentation of actual liquidation volumes in the market.
To provide a “fair trading environment” (Bybit, Sep 2021) and to “optimize user data stream” (Binance, Apr 2021), Binance and Bybit changed their… pic.twitter.com/QeGsSVdT0a
Why is this a disaster? If true, it would mean that crypto traders have essentially been navigating the market with rose-tinted glasses. Let’s break down what this could mean for the sector.
How Did This Come to Light?
Binance made changes to its API back in April 2021, Bybit followed in September 2021, OKX has allegedly been fiddling with data not so long ago, but only since March 2023. Not that this excuses them, of course! But at the time, these fleeting updates barely registered on anyone’s radar.
Here are links to the API-change announcements from Binance and Bybit, I have yet to figure out when OKX changed their liquidation API (potentially March 23):
— Vetle Lunde (@VetleLunde) August 29, 2024
Binance: https://t.co/nD9FhfkmDl
Bybit: https://t.co/tIsdt02Z2m
Binance justified its changes as a move to ensure a “more fair trading environment,” while Bybit presented it as an optimization of data flow. OKX, in its own right, limited reporting to one order per second per contract.
These changes have led to a significant underestimation of liquidation data over the past three years, creating a situation where the available data doesn’t quite match up with market reality.
The value of liquidation data lies in its ability to provide a clear picture of risk appetite and leverage ratios on exchanges.
But you might wonder, why on earth would anyone want to underreport these numbers?
It’s safe to say these changes might have been motivated by a desire to control the narrative about market stability and attract more traders.
In the first half of 2021, high-profile liquidations were all over the news and social media, painting a picture of extreme volatility and risk in the crypto markets. By limiting the visibility of these events, exchanges could be trying to create a more stable image to attract and retain users.
Moreover, exchanges might be keeping liquidation data close to their chest to maintain a competitive edge. Some exchanges are interested in investment firms that can trade based on information not available to the broader market.
How to Deal with Unfair Data Display?
You could try making educated guesses based on the dominance of liquidation volume and open interest of the respective exchanges before they changed their APIs. This approach gives a more realistic estimate of liquidation volumes, but is still incorrect. It doesn’t account for changes in market participant behavior over the past three years and it also exaggerates the odd unique liquidations on certain exchanges.
Alternatively, you might evaluate deleveraging events by tracking changes in open interest, either in absolute terms or relative to yesterday’s open interest. This method makes it easier to compare past leverage events to current ones, but it doesn't consider traders who open new positions in the middle of the chaos.
One commenter suggested yet another alternative:
A *potentially* more accurate estimation of real liquidations could be using HMM's, together with Bayesian inference and ML ensembles (with gradient boosting etc). This attempts to solve the problem of not accounting for changing market conditions, as it's real-time.
— vincent (@imotw2) August 29, 2024
While the market might be clamoring for a return to previous levels of transparency, let’s be honest: it’s unlikely this trend will be reversed anytime soon. Historically, these data points were crucial for understanding how volatility impacts the markets and whether a price drop has cleared out excessive leverage.
With the understatement of data, analysts and traders face challenges in accurately evaluating the real dynamics of the market. The impact of a lack of transparency in liquidation data doesn’t just affect individual traders — it has broader implications for the stability and analysis of the cryptocurrency market.
Related: Global Financial Shock: Market Downturn & Crypto Market Crash
As exchanges continue to operate with limited visibility into liquidations, the ability to understand and manage risks in these markets is seriously compromised.
The crypto community will need to find new ways to address these challenges and advocate for greater transparency to ensure accurate market assessments in the future.
Kataryna Habeliia
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