Alternative Data Category Description
Cryptocurrency, or "crypto" as it's become widely referred to, has been one of the quickest-moving trends in the investment space in recent years, with retail and institutional investors throwing their hats in the ring. From on-chain analysis comprising a record of every step linked to the transaction and the modification of the blockchain following it to off-chain study consisting of steps outside of the blockchain, the breadth of information available to investors is quite wide and deep.
In a 2022 article written by Eagle Alpha, Netherlands-based cryptocurrency manager hodl.nl stated, "The digital revolution is currently shaking the world to its foundations." The space has a vast stream of data. While traditional markets must get all their information from external sources - through conventional sources such as Bloomberg or via alternative sources such as satellite and geolocation, cryptocurrency gives a chance to also look at global internal data. Thanks to blockchain technology, you can get real-time statistics on anything on-chain. Hodl.nl explained that you could directly measure on-chain sentiment and combine that data with sentiment based on these external sources that traditional trading markets use. You can also closely monitor which traders are making moves during particular market sentiment, direction, and positioning. The transparency of the blockchain gives an extra dimension to market movements that can be closely followed with the right analytical tools.
Subcategory - Event Risk Data
Event risk and detection, like sentiment, can provide a predictive quality for crypto markets by forecasting a market event before it occurs. Since the crypto market is highly topical and in the line of sight for both media and regulatory organizations, being aware of risks associated with external events can be helpful when navigating a constantly evolving market.
Alternative data datasets that analyze public policy processes can help portfolio managers measure exposure to public policy risks. This type of alternative data can give users a significant informational advantage relative to the rest of the market, these risk alerts can also act as trading signals (negative and positive) for individual assets.
Subcategory - Market Data
Traders use various types of market data to make their trading decisions. Market data monitors the essential information in the market and provides information on where the currency is moving from, where it is moving to, and detail the executed prices of a given crypto. It provides timely information on volume, market volatility, historical pricing, and other details for these markets.
Crypto exchanges do not update the blockchain in real-time due to the excessive gas (mining) costs and generally update with net trading values once per day. The frequency offered here means that traders cannot gain actionable knowledge through scanning the blockchain because the market will not disclose individual transactions. This is where alternative data providers come in, these data vendors usually collect market data directly from cryptocurrency exchange APIs, and they are able to deliver data to clients immediately after each trade, with no added latency at all, allowing the clients to spot trends in client sentiment and actions.
Funds typically use this type of alternative data for backtesting, market monitoring, post-trade analysis, and more. On-chain data allows traders to monitor volume at the instrument level. The order book (off-chain) data enables traders to monitor spreads, depth, slippage across exchanges, and the liquidity of an asset. Other market data such as OHLCV, open interest, etc can help traders determine an asset’s liquidity, volatility, and any ongoing trends.
Subcategory - Sentiment Data
Using Natural Language Processing (NLP) and alternative data analysis of crypto discussions taking place on social media and other online forums, investors can get a glimpse into the mind of traders and obtain insight through sentiment.
For example, based on Twitter activity discussing Bitcoin, sentiment-based datasets can analyze bullish and bearish tweets and mentions to provide market signals to traders. Signals can point towards a higher volume of bullish tweets during the rise in Bitcoin prices and a drop in bullish tweets during the fall in price.
Given the openness, decentralization, and retail-driven natures of the crypto market, it can be said that general information like news, Social media sites like Twitter, Telegram, and Reddit, and web traffic can be significant drivers of signals. Furthermore, due to the simplicity of crypto, with much less or no fundamental data available, a social signal can be an important driver of the price movement.
Data Structure
- Most vendors offer data mapped to ticker/crypto and PIT.
- Since crypto vendors typically gather public data. History can be around 10 years for market data vendors. History varies for sentiment and event risk providers.
- Market data is usually delivered and updated at a higher frequency, usually in real-time. Frequency varies for sentiment and event risk data, but typically daily or less.
- The most common delivery method for market data is API and AWS S3. Sentiment and event risk vendors are more varied in delivery methods, platforms, API, and even email.
Compliance Considerations
Due to the transparent nature of the blockchain, compliance is generally not an issue for market data vendors. For sentiment and event risk data, since data is usually scraped from public sources and social media, common compliance issues relating to web scraping would apply. E.g., PII, MNPI, different laws under various jurisdictions, copyrighted materials, etc.