Why is it critical to normalize cryptocurrency trade data?

How to normalize cryptocurrency trade data? Data drives modern industries, especially the crypto space. However, the crypto world faces unique challenges. Firstly, it’s new, so data lacks standardization. Secondly, its global nature requires diverse data collection. Fortunately, data normalization solves these issues. Let’s explore why normalizing crypto trade data matters.

What is data normalization in cryptocurrency?

Essentially, data normalization converts information into a single format. It creates a universal structure for data. For instance, exchanges present transactions differently. In contrast, CoinAPI shows exactly what each transaction means.

Without normalized data, understanding the crypto market becomes tough. Moreover, many factors affect data normalization in cryptocurrencies. Therefore, we’ll examine these factors and their importance for users.

The dual importance of normalizing crypto data

Normalizing crypto data serves two key purposes:

1. It boosts market transparency and accuracy.
2. Additionally, it builds trust as more people enter the crypto space.

New markets often lack data standards, consequently increasing error potential. Furthermore, exchanges report data differently to suit their business models. Thus, normalization addresses these issues.

Complexities in normalizing cryptocurrency trade data

Decentralization challenges

Crypto’s decentralized nature complicates data normalization. Additionally, the market’s fragmented structure adds difficulty. Identifying asset types and market participants poses challenges too. Nevertheless, CoinAPI works to simplify this process.

CoinAPI’s approach

We match received data to predefined variables using exchange documentation. However, many exchanges don’t publish trades or respond slowly to inquiries. To overcome this, we evaluate order books and executed trades to determine reporting direction. Although this method can be inaccurate with high-frequency traders, we always seek confirmation.

Data normalization vs. data cleansing

The metadata problem

Decentralized systems spread information across nodes and networks. Consequently, this complicates metadata location. Each node may store data differently. While manual identification takes time, AI could help streamline this process in the future.

CoinAPI’s normalization philosophy

We don’t clean or remove data. Instead, our goal is to ensure data legitimacy and accurate communication from exchanges. Now, let’s explore what we standardize.

Key aspects of cryptocurrency data normalization

Format normalization: Unifying data presentation

CoinAPI collects data from various sources and presents it through one interface. As a result, we offer easy data operation and specify important information. Importantly, we never alter data or values. Moreover, we don’t hide or remove errors. Market events, even unusual ones, remain in our data.

Preserving market realities

Sometimes, market anomalies occur. Nevertheless, we keep this data because some users need it for investigations or analysis. In other words, CoinAPI maintains all data without changes or deletions.

Time normalization: Addressing timestamp challenges

Cryptocurrency trade data faces timestamp and sequence identification issues. Different nodes use different timestamps. Consequently, this lack of standardization complicates cross-exchange comparisons.

Sequence identification challenges

Crypto lacks a central authority to confirm event sequences. In contrast, traditional markets have central authorities that verify trade sequences. As a result, all transaction parties in crypto must confirm the sequence. This becomes complex with thousands of simultaneous transactions.

CoinAPI’s time normalization approach

We track exact timing. Specifically, we record when exchanges report events and when we receive the data. This creates a common clock for all exchanges. Therefore, we can identify incorrect exchange clocks or delays through this method.

Asset type identification: Navigating a decentralized landscape

Identifying asset types in crypto presents another challenge. Unlike traditional markets, no central authority confirms traded asset types. Hence, data providers must determine asset types themselves. Given crypto’s unique characteristics, this task becomes particularly difficult. Consequently, some regulators hesitate to embrace cryptocurrency.

Market fragmentation issues

The fragmented crypto market further complicates asset identification. Numerous exchanges and markets exist. As a result, pinpointing trade locations becomes challenging.

Standardizing asset names

Different exchanges use different names for the same asset. For example, BTC and XBT both refer to Bitcoin. To address this, we normalize exchange information to unify cryptocurrency names. This standardization ensures data accuracy and usability.

Avoiding confusion

Some exchanges use identical names for different currencies. Without normalization, users might confuse distinct currencies with different trade rates. Therefore, our normalization process is crucial for clarity.

Format normalization for user accessibility

CoinAPI adapts data formats for users. Although exchanges typically use only two formats, we publish data in various formats (file formats, REST APIs, WebSocket FIX). We normalize data to suit user preferences. For instance, we convert the 4% of exchanges using FIX format to user-preferred formats.

The future impact of normalized crypto data

Normalized data benefits the crypto industry in several ways:

1. Firstly, it reduces potential market manipulation and insider trading.
2. Secondly, it enhances market transparency and validity.
3. Lastly, it helps expand the customer base and attract investors.

The Financial Stability Board (FSB) has highlighted manipulation risks in crypto assets. However, data normalization mitigates these risks by ensuring consistent data treatment.

Conclusion: Why normalizing cryptocurrency trade data is critical

In conclusion, normalizing trade data enables accurate analysis of crypto trading activity. It builds trust, thereby encouraging wider participation, especially among retail investors. Furthermore, normalized data addresses concerns about market manipulation and insider trading, further legitimizing the crypto market.

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