Today data is at the core of any data-driven industry. And, in the same way, the growth and development of any industry are dependent on the availability of good data. This is particularly true for the crypto space. There are a few reasons why this is so. First, the crypto landscape is still in its early stages. As such, the data is not yet standardized or reliable. Second, the crypto industry is quite global, which means that data needs to be collected and analyzed in a variety of contexts and regions. The solution to this problem is data normalization. What exactly this means and why is it critical to normalize cryptocurrency trade data?
Normalization is the process of converting data into a single format and comprehending what that data represents. This is the process of reducing data to a universal structure (e.g. Each exchange may present in different format transactions or bids, and we as CoinAPI present what exactly that was).
Understanding the crypto market is difficult if we don’t normalize the data. There are several factors that come into play when normalizing trade data for cryptocurrencies. In this article, we’ll look at normalization types, and why they’re so important for end users.
Why is it critical to normalize cryptocurrency trade data? Understanding crypto data
There are two major reasons why normalizing crypto data is important. The first is that it can ensure that the markets are more transparent and accurate than they currently are. This is important because, as the crypto space matures and evolves, more and more people starting to use it. If they are unable to trust the data, they will be less likely to participate. Because the market is still so new and the data is less standardized, there is a greater potential for error. For example, crypto exchange data is often reported in very different ways. This is often because exchanges are trying to optimize for their own particular business model.
When it comes to cryptocurrency, there are a number of complexities that can make normalizing trade data a tricky task. These include the decentralized nature of cryptocurrency, as well as the fragmented nature of the market. Additionally, there are issues surrounding the identification of asset types and market participants, which can be difficult to determine. However, CoinAPI is working to make this process easier.
We match the data we receive to our predetermined variable by comparing it to the exchanges’ documentation. We continue to work on this problem because many exchanges do not publish trades or require extensive effort to obtain a reply from their support teams. We can also evaluate an exchange’s order book and compare the trades that were executed to determine whether the exchange reports in a certain direction. This method of determining an exchange’s trade direction might be particularly inaccurate in the presence of intense frequency/algorithmic traders who rapidly add and remove orders. We always request confirmation.
Data normalization is not data cleansing
Because cryptocurrency is a decentralized system, information is distributed across nodes and networks, making the process of normalization more difficult. This creates problems locating metadata. A trader sends one ETH from one address to another. All nodes on the network record this transaction. Each node in a decentralized system is likely to store information differently. To accomplish this, metadata must be identified manually, which could take a long time. Artificial intelligence (AI) may be used to assist in identifying the metadata, making the process more efficient. It will most likely take some time for the industry to adopt such a solution.
We do not clean or remove any data as CoinAPI; this is not the purpose of normalization. By normalizing the data, we ensure that it is legitimate, came directly from the exchange, and was communicated correctly by the exchange. So, what is subject to standardization?
We collect data from multiple sources and present it through a single interface as CoinAPI. We provide users with an easy way to operate on this data and specify any information important to the customers. What’s more, we at CoinAPI never change the data or values. We do not conceal anything, nor do we remove data errors. An error is something subjective because we simply represent what happened in the stock market, and if something bad happened, it is not an error even if the price was high, but people traded at that price.
The second scenario is that something goes wrong in the stock market and we do not remove it because, from the perspective of one user, it is irrelevant and unnecessary for him, whereas another user requires exactly such data. Such information is required, for example, when conducting investigations, where every mistake or minor detail matters. We, at CoinAPI, make no changes or deletions to this data.
Another issue that needs to be addressed when normalizing cryptocurrency trade data is the issue of timestamps and sequence identification. The timestamps will be different depending on which node or nodes are being used. This means that there is no standardization when it comes to terms such as time zones and the like. This can make it extremely difficult when it comes to compare data across exchanges, as each exchange will have a different timestamp.
Sequence identification is also a tricky task when it comes to cryptocurrency. The reason for this is that there is no central authority that can confirm the sequence of events. When it comes to other asset classes, a central authority will confirm the sequence of events. For example, let’s say that a trader buys 100 shares in Company X at $10 each. The exchange will report the trade and the central authority will confirm that the trade occurred in the correct sequence. When it comes to cryptocurrency, however, there is no central authority that can confirm the events occurred in the correct sequence. This means that all parties involved in the transaction will have to confirm the sequence of events. This can be very difficult when there are thousands of transactions taking place at any given time.
As CoinAPI, we normalize and track the exact timing. Exchanges tell us when it happened and send it to us, and we further wrap it up in the time when we first received it, as quickly as possible. That way we have a clock that is common to all exchanges because we synchronize that clock. An exchange may have a slightly offset clock and then this data is not usable, but thanks to the fact that we time it additionally, we know that this clock from the exchange is wrong, exchange X has a very long delay, or something is wrong.
Identification of asset types
Another issue that needs to be addressed when normalizing cryptocurrency trade data is the identification of asset types. This is another issue that has been made more complex by the decentralized nature of cryptocurrency. There is no central authority that can confirm the type of asset being traded. As such, the data provider will have to make a call as to what the asset type is. However, when it comes to cryptocurrency, this can be very difficult, as it is such a new asset class with unique characteristics and nuances. This is one of the main reasons why some regulators and financial institutions have been hesitant to embrace cryptocurrency.
The issues surrounding the identification of asset types are further complicated by the fact that the market for cryptocurrency is still quite fragmented. There are many different exchanges and markets that have sprung up over the years. This makes it difficult to determine exactly where a particular trade has occurred.
Example? There is BTC and XBT, and they mean the same thing, but different exchanges refer to them differently. This is important, because exchanges make different choices, and there is no general standard for this industry. In order to ensure that we have the right data, we normalize our information from exchanges and unify the names of specific cryptocurrencies. Because this market is decentralized, exchanges vary in their decisions, and we don’t have a general standard, this is a problem that needs to be addressed. Data that has not been standardized in terms of its meaning is not appropriate for further processing.
There are 3 exchanges that use the same name for different currencies. If we do not normalize it, users will think they are the same currency, although in fact they are totally different currencies and they are traded at different rates.
The format of data is also altered by CoinAPI as a result of our data normalization process. For example, exchanges normally provide data in only two formats, but we publish this data in many formats (a variety of file formats, REST APIs, WebSocket FIX). Because we publish the same data via different interfaces, this is also format normalization, but in this case, the data is normalized in the opposite direction, meaning the user receives it rather than delivers it. We want our users to receive data in the format they prefer, and our goal is to normalize all data to their format of choice. To achieve this, 4% of exchanges use the FIX format, and CoinAPI will normalize this format and make it accessible to the user in the format of their choice. Normalization is achieved when data is presented in the format the user prefers.
The Case for Normalized Crypto Data in the Future
The benefits of normalized data are numerous, and the crypto industry will greatly benefit from it moving forward. For one, it will help to reduce potential market manipulation and insider trading. In a recent report, the Financial Stability Board (FSB) highlighted a number of issues regarding crypto assets, including the potential for market manipulation. Normalization can help to reduce this risk, as it ensures that all data is treated in the same way. In addition to helping to prevent market manipulation, normalized crypto data will also help to ensure that the market has greater transparency and validity. This will help to expand the customer base and attract more investors, which is essential given the current state of the crypto market.
Why is it critical to normalize cryptocurrency trade data?
Why is it critical to normalize cryptocurrency trade data? Normalizing trade data is critical, as it enables accurate and reliable analysis and measurement of cryptocurrency trading activity. It can also help to improve trust in the crypto space overall, which will allow more people to participate. This is particularly true for retail investors, who tend to be most sensitive to data quality. In addition, normalized data will also help to reduce concerns regarding potential market manipulation and insider trading, which will help to further legitimize the crypto market.
Want to check more features of a good crypto API provider? Read our blog with the top features that every API provider should have here
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