Vittel Lund, senior analyst at K33 Research, issued a stark assessment. warning Regarding the practices of prominent cryptocurrency exchanges regarding the reliability of liquidation data. In a post on X, Lund explains how exchanges like Binance, Bybit, and OKX have systematically modified their data reporting processes in a way that he claims significantly distorts the true extent of market liquidations.
Why cryptocurrency liquidation data is fake
The crux of Lund’s argument revolves around changes these exchanges implemented in mid-2021. For example, Binance and Bybit modified their WebSocket liquidation APIs to report only one liquidation per second, ostensibly to “provide a ‘fair trading environment’” and “improve user data flow,” respectively. Similarly, OKX implemented a cap, limiting reporting to one order per second per contract.
Lund explains that this change in data flow has a profound impact on market transparency, leading to a scenario where liquidation data, an important metric used to assess market health and trader behavior, is “seriously underestimated.” According to Lund, this has been the case for the past three years, which has implications not only for traders but also for the broader financial analysis of the cryptocurrency market.
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Historically, liquidation data has served as a measure of leverage levels in the market, and has been useful in understanding how traders react to sudden price movements and volatility. Accurate liquidation data helps gauge the market’s appetite for risk and assess whether a market downturn has effectively cleared out excessive speculative leverage positions. With this data no longer reported, Lund suggests that traders and analysts are operating blind.
Lund speculates on the motivations behind these changes, suggesting that they may be driven by a desire to control the narrative around market stability and trader success. He notes that during the first half of 2021, high-profile liquidations were a frequent topic of media and social media discourse, often painting a picture of high risk and volatility in the crypto markets. By reducing the visibility of such events, exchanges may be trying to promote a more stable and trader-friendly image in order to attract and retain users.
“I think this is a PR choice. In the first half of 2021, the issue of divestitures was Twitter, the media, and everyone’s livelihood. Being consistently at the top of divestment lists doesn’t fit with the strategy of attracting as many companies as possible to trade at as much volume as possible,” Lund says.
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Complicating matters further, Lund suggests that exchanges may be withholding filtering data to maintain a competitive advantage. “Some exchanges even have interests in investment firms that may be trading on information that is not available to the rest of the market,” he speculates.
Despite these significant challenges in accessing reliable data, Lund discusses alternative methods for estimating current liquidation volumes, such as analyzing shifts in open interest or using historical data to extrapolate current trends. However, he acknowledges that these methods have their drawbacks. They often fail to accurately reflect changes in market participant behavior over the years or may overemphasize unusual market events that are not indicative of broader trends.
In concluding his article, Lund expressed deep skepticism about the usefulness of the data currently available on liquidation. He called for a return to the levels of transparency seen in the past, although he noted pessimistically that such a change was unlikely given current trends.
“Right now, the filtering data is just a false entertainment and cannot be acted upon. I would welcome a return to the previous transparency, but I think we have already crossed the finish line,” Lund concluded.
At the time of publishing this report, BTC was trading at $59,540.
Featured image created using DALL.E, chart from TradingView.com