BlockChatter #1: ‘Do Your Own Research’
Is the cryptocurrency market manipulated? Is CoinMarketCap broken? What is Twitter sentiment data and how does it affect the price of cryptocurrencies? We talked with Joshua Frank, the TIE’s CEO, to find out.
We are launching our new series of interviews with experts and influencers of the cryptocurrency and blockchain world. It is called: “BlockChatter”.
We could not start with a better guest. Today, we talk with Joshua Frank, the CEO of the TIE. It is the same data website, which made headlines for publishing an extensive report of exchanges’ fake trading volumes.
Dawid Paluch: Why do exchanges fake their trading volume?
Joshua Frank: There are a few reasons why exchanges manipulate their trading volumes. The first reason is to extort listing fees from individual coins. The message is: ‘hey, we have one, two, three billion dollars in trading volume on our platform. If you list your coin on our exchange and pay us 50, 100 thousand dollars, we can drive liquidity and trading volume to your coin.’
The second reason is that exchanges are trying to drive traffic to their sites. We released a report some time ago. We found that there is a very strong correlation between the percentage of a referral traffic an exchange gets from CoinMarketCap and other data sites and the percentage of their trading volume, which is fake. There is an incentive for them to move up to the top of exchange rankings by volume on CoinMarketCap. The higher they move up, the higher the number of referrals they get to the website.
D.P.: Is the whole market manipulated, or is it only a percentage of it?
J.F.: I wouldn’t say the entire market is manipulated. There are a lot of exchanges which are good actors in the space. If you look at exchanges like Gemini or Poloniex, which are US-based, regulated exchanges, you tend to find that they are good actors. The issues lie in a different field.
If there is nothing in their T&C, the message is simple: ‘hey, you can manipulate the market.’
There are a few steps that cryptocurrency investors can take to identify which markets are more legitimate than others . We made all of the transparency data available on The TIE.
What are the most popular manipulative practices?
One of them is wash trading. Another one is order book spoofing. You look at the order books of these exchanges, and you see a bunch of bids and asks. Those are never actually executed. You see fake orders being listed in market trades history. Those are the most common that we’ve seen. However, it doesn’t mean that the exchanges don’t do other tricks as well.
Let’s talk about CoinMarketCap. It is the biggest data site, and everybody from the industry goes there to check prices, and trading volumes. After your published report a few months ago, there were many voices that CoinMarketCap is broken, that it doesn’t work.
I don’t want to comment on individual websites. I do think that CoinMarketCap is doing a bit to clean up their act. They’ve launched the Data Accountability & Transparency Alliance (DATA). What is interesting to me, is that some exchanges affiliated with DATA appear to be potentially manipulating their trading volumes. So, CoinMarketCap is potentially looking towards platforms with manipulative practices to clean up the market. Regardless, we believe that this is a great first step and I am glad that you are working to clean up the manipulation in the space.
On the TIEwe provide two volume metrics. We have CoinMarketCap’s volume metric (reported volume). We also have our own metric, which is called the TIE volume. In our volume metrics we aggregate across 11 exchanges that we think are the most legitimate and trustworthy within the space. You can compare that volume to the reported volume of CoinMarketCap.
Obviously, our metric doesn’t include every trade because even on those manipulated exchanges not all trading is faked. There is still real volume on those platforms, just not as much as many are reporting. Our metric isn’t perfect, it doesn’t account for all volume. But it gives you a better understanding of what is going on the market.
Last week, Forbes made a story of Alameda Research’s report, which claims that 95% of all transactions are faked. Do you think that number is correct?
We believe that this number may be too high. We have found 87% to be a more accurate measurement in our last report.
Still, 87% is a large number. It means that only 13% of all transactions are real. There is something wrong with the cryptocurrency market.
It is still the Wild West right now. It is very difficult for traders to trade. That is one of the biggest issues for the market right now. You may place an order on an exchange that doesn’t have real trading volume and incur significant slippage on that trade.
There are a lot of ventures who are trying to change that.
When you place an order through our website, we execute it on your behalf across all of the largest exchanges using smart-order routing technology. When you place an order on The TIE, 25% may get executed on exchange A, 40% on exchange B, and 35% on exchange C. This ensures that our users have access to the largest liquidity pool in crypto, so that their order don’t slip as much. We can help users get the best price.
In traditional asset class, like US equity markets, the SEC mandates that brokers have to go out and get the best price execution for their clients. Whenever you trade your assets, they are mandated to get you the best price possible. We are trying to bring that practice to the crypto industry. By using a lot of different technology we’ve built in parallel with our awesome partners, we are able to give users the ability to execute at better prices than on individual exchanges.
It doesn’t make any sense. Liquidity has to be aggregated into one pool. There are a few other platforms working to develop the technology to achieve this and we are among them.
You are one of the first data websites that use the Twitter sentiment.
One of our co-founders is the CEO of a company called Social Market Analytics (SMA). They are the leading provider of Twitter sentiment data to traditional quantitative hedge funds. SMA is one of five Twitter partners worldwide with access to the Twitter Firehose, 850 million tweets per day directly from Twitter. Anyone in the crypto industry, who tries to analyze Twitter, doesn’t have access to all of those conversations.
We look at every single tweet individually and score sentiment on them. Firstly: a tweet gets sent on Twitter. The first step is to identify what the tweet is actually about. For example, at first glance when seeing an #ETH tweet you may assume it about Ethereum, but it could also be regarding Ethan Allen Interiors, a US-based furniture company.
Secondly: we look at where the account is coming from, how long it has been around for. We check out the follows to followers ratio. We break down who is behind the tweet. Then we have natural language processor which scores every single world in every tweet.
What we were able to do is to get a really good sense of what is going on the market.
This is the most valuable data point that exists in the crypto industry.
Cryptocurrencies are unlike any other asset class. In crypto, the only thing that influences the price is the wisdom of the crowd or what people think. And we have the best tools and the technology to measure that.
So, the cryptocurrency market is still very speculative. There is the voice of the people, which suggests the prices.
Yes, it is largely a market based on speculation, on the wisdom of the crowd. That is the best way to put it.
We can look at Chain Link for example. In October 2018, Chain Link was basically nothing. Nobody knew about it. All of a sudden, we saw an absolute massive growth of conversations and positive sentiment around Chain Link in January and February. Since then, the price has gone up 12x. We were able to catch that right away because the tweet volume on Chain Link exploded. Conversations became so much more positive. It is not a rule, but almost always, when that happens, it leads to a massive spike in prices. We saw the same thing with Raven Coin a couple of years ago, and with a bunch of other coins.
You process a lot of data day by day. It seems that it should require a lot of people involved. How many people work in the TIE?
We have 8 full-time employees. But we have absurd Amazon web servers costs as you can expect. That is our biggest expense.
Let’s talk about your funding. This is the thing, I don’t understand. You put a lot of work to gather and process the data. And then you publish it on Twitter for free. Where is the revenue from it?
In terms of capital, we’ve taken in external funding. We also have very well capitalized founders.
Our main revenue source right now is data licensing. We go out and license the data we publish and the technology. But our main and core business which we are going to release is similar to a traditional brokerage platform. We’ve been building that quietly for 2 years, and it is going live in September. It is going to be the best trading platform in the cryptocurrency industry. Without question.
What we have been trying to do for the last couple of years, is to build a brand based on trust and transparency. That is one thing that is missing in the space. We have a rule in our company that our employees are not allowed to hold or trade any coins. There is a massive conflict of interest that exists within the market. Places like data sites and exchanges especially are the most vulnerable. When employees hold particular coins, they have an incentive to pump or manipulate that coin.
The idea is: let’s push it all for free, let’s build the brand.
We do not have advertisements. We’ve never planned on having ads. We don’t take money from any cryptocurrency company. We are playing a very long-term game here. We believe that we can build the most trusted and transparent brand in the space. And we can go from there and monetize it.
About that geographical report. One thing struck me: the comparison of Libra tweets to Bitcoin tweets in the United States.
What we observed in the past, when Facebook announced its coin, that there were more tweets about Libra worldwide than about Bitcoin for a few days. Substantially more. There were more tweets on Libra than on any other coin that we saw in the past 3 years.
That impacted the tweet volume of every other coin. When we saw Bitcoin tweets, we noticed that Libra was mentioned in almost every single one of them. We saw that the top three most used words in Bitcoin tweets were: “Libra”, “Bitcoin” and “LibraCoin”. Since then, it has gone down. It seems like the hype around Libra has cooled.
This is the percentage of tweets on crypto Twitter for the top 5 largest coins coming from the US. 49% of Litecoin tweets come from the US. 42% of XRP come from there, etc.
Can Libra become more popular than Bitcoin, at least in the United States?
I can say that Facebook has a ridiculous number of users. And if its users use Libra, Libra will have more users than Bitcoin. I don’t know if that necessarily will be the case.
I found that statistics on your site, that only 1% of the population use cryptocurrencies. What has to be done to make digital coins widespread?
One of the biggest issues, which is starting to improve, is the user experience. Within crypto, it is terrible. There are platforms which tend to be far better in that department. Coinbase, for example, does a pretty good job.
The biggest challenge, though, is education. Cryptocurrency is just not easy to understand. I’ve been in the space for a few years now, and I don’t understand everything. I don’t know how every blockchain works. It is really scary when you first learn about crypto and you hear about wallets, exchanges, tokens, blockchains, and all of that stuff. When you enter the crypto, waves of information are massive. There is so much going on, that it is hard to digest all of it.
It is much simpler for people to create an account with a traditional brokerage and begin trading stocks.
What will happen next? Will exchanges continue to fake their trading volume?
Things have already started to change. We’ve seen a lot of altcoins washed away. Now, we will see exchanges washed away. There is no reason at all to have 500 different platforms to trade crypto. It just doesn’t make any sense.
In the short term, exchanges manipulating their markets may earn a lot of revenue. But in the long run, they are going to be washed away. Users will demand trust and transparency. The market will grow up. It may not be the next year, it may not be the year after that, but over time, the market will mature.
If a friend of yours asked you right now, what is the best exchange, you would answer…
I wouldn’t, honestly. I wouldn’t pick an exchange. I would refer him to the transparency section on our website, which has 11 exchanges that we believe to be better actors in the space. I really do believe in the ‘do your own research’ approach. I don’t like to give any individual recommendation. The best thing, somebody can do, is to do their own research. Figure things out for yourself. Learn about the market. Just get a grasp of it. Our ‘transparency’ section is a really great starting point. There isn’t one exchange that is necessarily better than the others, but there are a lot of great places to start.
Where will the TIE be in two, three years?
We are creating a very diversified business. We are building kind of two things at the same time. The first one is the TIE, a trading platform combining proprietary analytics, cross-exchange trading, and portfolio management/tax accounting. The second is our technology and data licensing business.
We want to license our trading technology, we want to license our data. We want to license all the tools that we’ve built. We want to emerge as a company that is respected industry-wide. Respected for its trust and transparency.
Joshua Frank: Identifying a lack of trusted and transparent data and technology for cryptocurrency, Joshua decided to leave his role in post-trade settlement technology to build The TIE full-time in March of 2018. The TIE provides data, analytics, order-routing, and financial management tools to enable traders to make faster and smarter decisions and enterprises to overcome technological and regulatory challenges.
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