The mainstream financial markets have recently warmed to crypto, wanting to enjoy those upswings, but cautious about the lack of regulatory oversight and the potential downside of investing in an asset with no underlying, or a currency with no central bank to back it up.

And one of the challenges is so basic yet so elusive: What exactly are digital currencies, how should they be regulated, and by whom? Are they currencies, securities, or—as current Commodity Futures Trading Commission (CFTC) thinking would have us believe—commodities? The CFTC’s position may soon change: On January 23, a meeting of its CFTC Technology Advisory Committee will discuss digital currencies. Then on January 31, its Market Risk Advisory committee will consider the risks and opportunities associated with them. 

In a January 4 statement, CFTC chairman Christopher Giancarlo warned that “ignoring virtual currency trading will not make it go away. Nor is it a responsible regulatory strategy,” highlighting CFTC’s “important role” in protecting derivatives markets, and noting instances where the CFTC has taken action against unregistered Bitcoin exchanges, proposed guidance on the definition of markets, and tackled a crypto Ponzi scheme. Then on January 19, the US Securities and Exchange Commission (SEC) released a brief statement that it would work with the CFTC to combat cryptocurrency-related fraud.

John Greenan, CEO of consulting firm Alignment Systems, says the lack of regulation to date has left crypto markets open to manipulation. “How many crypto exchanges have market surveillance? How many can look like a ‘grownup’ exchange with a full regulatory infrastructure? And so big investors are tending to avoid the space,” he says. However, he adds that institutional interest in crypto markets is growing, though “to a large degree, this area is still the Wild West.”

Dr. Timo Schlaeffer, co-founder and CEO of Bitcoin trading and pricing platform Crypto Facilities, agrees that institutional interest in cryptocurrencies was “pretty limited” until around 10 months ago, and that the new-found interest is probably simply a result of the massive price increases of Bitcoin and other cryptocurrencies. “There is actually a lot of data available for free. I think the markets are really transparent. But in terms of tools, data aggregation and services on top of this data—that’s still at a very early stage. And on the trading infrastructure side, that’s at an even earlier stage…. The only way to get prices from all exchanges is to integrate with and post funds at all of them,” he says, adding that exchanges have already made significant progress over recent years and will put other support mechanisms—such as custody and brokerage services—in place as they mature further.

Because of their different origins, there are many differences to be overcome. Alignment Systems’ Greenan is currently working on a project with an unnamed client to “industrialize” data and analytics for the crypto space. “Most cryptocurrency guys don’t come from a traditional market data background. They don’t live in that world, so they just build RESTful APIs—their world is not compatible with traditional market data models and infrastructures,” he says. “The market as it stands is in a state of immaturity. There isn’t the level of data, analytics, and supporting trading ecosystem.”

But demand is growing. “There are a lot of amateur speculators, but also now a lot of smart money. I recently signed an agreement with an elite hedge fund that has just started trading cryptocurrencies, and is really looking for data. So news and news sentiment is critical. Obviously these are short-term indicators… but quants can aggregate short-term indicators like that—say at five-minute, hourly, weekly or three-monthly intervals—so they can create sliding trends,” says Richard Chmiel, chief revenue officer at news analytics provider Accern, who argues that news has a greater impact on cryptocurrencies than other asset classes that have more fundamental factors driving price movements. “Cryptocurrencies are not like other currencies. Currencies are affected by interest rates, economic factors, even other currencies…. But what else drives cryptos? There are no earnings to model, no central banks to meddle…. It’s all news-driven and confidence-driven. It’s about supply and demand—what price is someone willing to pay—and Bitcoin’s run-up from $1,500 to $20,000 was all demand-driven.”

Accern added news analytics for 20 cryptocurrencies in the latest release of its platform in November, and delivers its analytics in the same format as it does for equities data and currency markets news. Adding the new data was more a case of relaxing its controls to include crypto news, rather than building something new from scratch. “We see every news story on the public web. And we discard about 90 percent of all news. We only keep those that mention a public company, a currency, or—now—a cryptocurrency. So we amended our filters to not exclude news that mentioned Bitcoin and other cryptocurrencies in the headline or text,” Chmiel says.

This new institutional interest is starting to drive change—potentially at speeds that are outpacing regulators’ ability to get ahead of it and potentially step on the brakes. And those responsible for much of this are seasoned financial markets and data professionals who know the data challenges that their own markets have encountered, what to expect when creating new markets, and how good data management can solve issues before they arise.

There are two distinct strategies under way to make cryptocurrencies more appealing and approachable to institutional investors who may be restricted from dabbling directly in this new market, or who may be constrained by internal requirements that they obtain a reasonable minimum level of data on any instrument before wading into it without a full view of market activity. The first is creating instruments that deliver exposure to cryptocurrencies without directly having to hold them, while the second is to expand the amount of data available to make these markets more transparent.

In the first group, perhaps the largest initiative so far is CME Group’s decision to list Bitcoin futures, creating a regulated derivative that offers exposure to the unregulated cash Bitcoin market. The futures are cash-settled based on the CME CF Bitcoin Reference Rate, a benchmark designed around Iosco principles for financial benchmarks and developed with Crypto Facilities. To provide additional transparency around the asset class, the pair also publish the CME CF Bitcoin Real Time Index, which reflects the spot Bitcoin market, and can be used for marking portfolios, pricing intra-day trades, and risk management.

An advantage for CME is its existing client base. “Many investors already trade on CME, so if CME lists Bitcoin futures, it’s easier for investors to start trading them there than to plug into a lot of other different markets,” Schlaeffer says. “These futures allow you to trade Bitcoin without touching or holding Bitcoin itself.”

Another way to gain exposure without needing to handle cryptocurrencies themselves is to use a synthetic alternative, such as the “Delph” instrument created by credit default swap (CDS) trading platform DelphX to boost CDS liquidity and increase hedging opportunities. DelphX uses a central counterparty and issues Delphs as “alternative, regulated OTC” securities that could contain CDSs, equities, or even initial coin offerings, meaning that investors could trade a regulated security that acts as a proxy for an unregulated cryptocurrency that might deter some investors, says DelphX president and CEO Larry Fondren. 

A security that responds more traditionally to fundamental factors may also help curb volatility. Cboe Global Markets was actually the first exchange to launch Bitcoin futures trading, a week ahead of CME. For its part, Cboe partnered with Frankfurt-based specialist index provider Solactive, which created the Solactive Bitcoin Front Month Rolling Futures 5D Index, which tracks the performance of the futures on Cboe, and enables investors to gain exposure to the futures via the index, which can be licensed to create investment vehicles such as structured products and exchange-traded funds (ETF) that could attract a broader base of investors—including institutional investors—and to hedge risks of directly trading the futures, which would still be subject to Bitcoin’s voltaility.

“An index or ETF on top of the future is just creating a wrapper around it. The underlying issues, such as volatility, don’t go away—and those wrappers will still reflect that,” says Timo Pfeiffer, head of research at Solactive. “You might get more liquidity from new investors, and while a larger audience and more liquidity should in theory lead to less volatility, that won’t eliminate volatility in the underlying… so you need to have a process for evaluating the underlying assets.”

Defying Data

This presents a challenge: Cryptocurrencies defy established methods of valuation used by other markets. They have no underlying assets, they aren’t closely linked to a peer group, they aren’t backed by any standard or government, and they don’t have a long track record of historical data for fundamental analysis. 

As Greenan puts it, “Trying to price cryptocurrencies is like trying to price a perpetual bond from an issuer rated as junk—do you just look at the last price?”

However, those traditional factors are not necessarily needed in the crypto markets, Pfeiffer says. “It’s more important to have a consistent model for evaluations, rather than having historical data. What’s more important is having the price today and a fundamental valuation model looking into the future,” he says.

And the data vendors best associated with providing evaluations are still coming to grips with crypto data themselves. Intercontinental Exchange’s ICE Data Services division (formerly Interactive Data) has just unveiled a consolidated feed of data from 15 cryptocurrency exchanges, in partnership with blockchain technology vendor Blockstream, while Bloomberg carries limited content and is taking a very conservative approach to crypto data, and Thomson Reuters provides prices for Bitcoin, Ethereum and Bitcoin Cash, MVIS indexes contributed by Cryptocompare and Cboe and CME Group’s Bitcoin futures. 

In contrast, low-cost data terminal provider Money.Net says it now carries prices and descriptive data for 550 digital currencies and tokens, along with supplemental data such as a market capitalization module, cryptocurrency-specific ratings, an initial coin offering (ICO) calendar, and cryptocurrency-specific news created by filtering news from existing its providers.

“From no interest six months ago, this has become the number one dataset that clients are requesting over the past three or four months,” says Money.Net CEO Morgan Downey. “Demand is coming from foreign exchange (FX) traders and equity traders. A lot of it is purely for informational purposes—they aren’t necessarily trading cryptocurrencies, but with so much money in the space, they want to be aware of those trades. Even if you don’t trade them, being aware of those markets in real time… is essential for a trader across any asset class.”

“As crypto assets are a growing segment in the market, we recognize the need to provide transparency and a way to monitor their developments for our customers,” says Sam Chadwick, director of strategy for innovation and blockchain at Thomson Reuters. “Building on that, we are looking into other value-add data—for example, volume analytics, volatility curves, indexes, benchmarks and other analyses similar to those offered within the traditional foreign exchange markets, but [we] have not made any commitments yet because these new assets pose some interesting new problems currently. For example, if Kraken’s prices contribute meaningfully to an index but it goes offline for several days, how do we want to handle such events?”

One way is to price such events into one’s valuation of an asset. Since cryptocurrencies defy traditional factors in pricing, they may require new datasets. For example, behavioral analytics provider MarketPsych has released a series of sentiment “indexes” that deliver an overall evaluation of the top 100 cryptocurrencies across 43 different types of sentiment, based on the perceptions of people talking about them online. These factors range from general sentiment and factors such as optimism, fear, uncertainty, price direction and volatility to cryptocurrency-specific factors such as adoption and adoption forecast, criminal activity, innovation, sentiment relating to a cryptocurrency’s code or development team, transaction speed, whether a currency is likely a scam or a potential target for a crackdown by regulators, and even one called “noobs,” which monitors the level of “newbie” or naïve investor activity.

“We have developed analytics to look at how people are discussing these currencies in the online communities and chatrooms that cover them. We monitor all types of references, from vulnerabilities in code to hack attacks… for people who can’t monitor the hundreds of chat rooms that are talking about them,” says MarketPsych CEO Richard Peterson.

And like their other characteristics, sentiment for cryptocurrencies works differently from traditional financial markets and their taxonomies. “ Obviously there are negative words, like ‘bad,’ but there are also more sophisticated terms, like ‘vulnerable’ code or ‘compromised’ code or ‘wallet,’ or phrases like ‘can’t be used as payment’ or ‘slow transaction speeds,’” Peterson adds.

In addition to new datasets, this emerging space is also providing the impetus for the creation of completely new data providers specializing in crypto data. 

One such provider is Seigniorage, a new company providing market data, reference data and analytics for the cryptocurrency markets co-founded by former traders Sean Kruzel and Steve Harrington and financial technology business development executive John O’Connell.

“Steve and I were both around at the start of electronic trading. And now, we realized there are a number of similarities between that time and this cryptocurrency market, and the tools required—and first and foremost among these is data and reference data,” O’Connell says. “Our main focus right now is talking to crypto funds… and the feedback we hear consistently is that the data currently out there is very poor, is not aggregated, and that people struggle with accuracy.”

Seigniorage provides three core offerings: an institutional-quality token masterfile of more than 4,000 coins and tokens with 50 reference data fields per token—such as symbol, description, and market capitalization—and a proprietary industry and sector classification system; intraday time-series market data sourced directly from cryptocurrency exchanges, which the vendor scrubs to remove any errors in the data; and analytics ranging from token risk and factor analysis to sentiment derived from following around 2,100 entities on Twitter.

Another new entrant is Cryptoquote, which collects and aggregates real-time data from initially eight crypto exchanges using Websocket APIs, and aims to supply the data to proprietary trading firms seeking to back-test their strategies and decide whether they want to participate in crypto markets, and to software vendors wanting to incorporate real-time crypto data into their trading systems and back-fill them with historical data.

“This market seems to be getting more mature, and people who are used to trading currencies, for example, are now looking at how they could also trade cryptocurrencies. Right now, there are still a lot of arbitrage opportunities between exchanges around the world—and I think that’s what professionals want to take advantage of. A lot of trading groups are forming separate entities to explore cryptocurrencies,” says Mitch Naumann, founder and CEO of Cryptoquote, and director of North America for European data and technology provider Web Financial Group.

Naumann says he set up Cryptoquote as a side project after Web Financial found it challenging obtaining crypto data for some client websites it was building last year. He says a developer was able to code to the crypto exchanges’ streaming APIs using an old ticker plant, and had data up and running in a matter of hours. “What I intend to do is standardize and commercialize feeds for the cryptocurrency market,” Naumann says.

He adds that the crypto exchanges have thus far been more intent on ensuring uptime than on licensing policies and viewing data as intellectual property. “I haven’t seen any of the exchanges interested in protecting or commercializing their data with prohibitive license policies. They’re more focused on reliability—they go down, and it can be like the Wild West,” he says. “Right now, the cryptocurrency exchanges are similar to how FX operators would look in the sense that they want to offer as many tools as possible for free to the end user to encourage them to open and fund accounts. But there is definitely room for seasoned professionals to commercialize that data.”

And perhaps the Wild West is still a good analogy for today’s cryptocurrency markets. Yes, the Wild West was a lawless frontier rife with land-grabs, murders and poverty, but it also established the settlements that became major cities today, connected the country with railroads, and turned panhandlers and goldminers into millionaires. The crypto markets offer similar opportunities—at least they will once more complete data becomes the norm and larger consumers and providers all enter the space.