TL;DR

Vetle Lunde claims that liquidation data reported by cryptocurrency exchanges such as Binance, Bybit and OKX is underestimated.

Platforms have modified their APIs to limit reporting to one settlement per second, distorting the true magnitude of settlements.

Lunde suggests that these changes could be motivated by public relations reasons and to maintain a competitive advantage in the market.

Vetle Lunde, a senior analyst at K33 Research, has made an alarming revelation regarding the authenticity of liquidation data reported by major cryptocurrency exchanges.

In his analysis, Lunde details how Binance, Bybit, and OKX have modified their liquidation reporting processes, resulting in a significant underestimation of the true magnitudes of liquidations in the market.

Did you know?

Liquidation data from exchanges are bogus and a vast underrepresentation of actual liquidation volumes in the market.

To provide a “fair trading environment” (Bybit, Sep 2021) and to “optimize user data stream” (Binance, Apr 2021), Binance and Bybit changed their… pic.twitter.com/QeGsSVdT0a

— Vetle Lunde (@VetleLunde) August 29, 2024

These changes have affected the ability of traders and analysts to get an accurate picture of the health of the cryptocurrency market.

Starting in mid-2021, Binance and Bybit adjusted their WebSocket APIs to report only one settlement per second, rather than reflecting all settlements that occurred.

Binance justified this change as a measure to provide a “fairer trading environment,” while Bybit presented it as an optimization of data flow.

OKX, for its part, also limited reporting to one order per second per contract.

These changes have led to a serious underestimation of settlement data over the last three years, creating a scenario in which the available data do not reflect market reality.

The value of settlement data lies in its ability to provide clear insight into risk appetite and leverage ratios across exchanges.

Historically, this data has been crucial to understanding the impact of volatility on markets and whether price declines have eliminated excessive leverage.

With data now understated, analysts and traders are faced with great difficulty in assessing the true dynamics of the market.

Lunde suggests the changes could be motivated by a desire to control the narrative about market stability and attract more traders.

During the first half of 2021, high-profile liquidations were widely covered in the media and on social media, reflecting a picture of high volatility and risk in cryptocurrency markets.

By limiting the visibility of these events, exchanges may be attempting to create a more stable image to attract and retain users.

Additionally, Lunde speculates that exchanges could be retaining settlement data to maintain a competitive advantage.

Some exchanges have interests in investment firms that may be trading on information that is not available to the broader market.

Despite the difficulties in obtaining reliable data, Lunde suggests alternative methods for estimating current settlement volumes, although these methods also have limitations and may not accurately reflect changes in the behavior of market participants.

Transparency and the Future of Exchange Settlement Data

Lunde concludes that current settlement data is largely inaccurate and of little use for market analysis.

The ability of settlement engines to handle large volumes of orders during cascading events is vital, but currently, transparency into this data is almost non-existent.

Although Lunde advocates a return to past levels of transparency, he admits that the current trend is unlikely to be reversed.

The impact of a lack of transparency in settlement data not only affects individual traders, but also has broader implications for the stability and analysis of the cryptocurrency market.

As exchanges continue to operate with limited visibility into liquidations, the ability to understand and manage risk in these markets is severely compromised.

The cryptocurrency community will need to find new ways to address these challenges and advocate for greater transparency to ensure accurate market assessments in the future.