Order Book Analysis for Crypto Assets in a Few Fascinating Metrics
Limited order books(LOB) is one of the most important data sources in the analysis of crypto assets. Similarly to other asset classes, LOBs capture the trader sentiment and momentum in a specific exchange. In the case of crypto-assets, LOBs are a very important complement to on-chain metrics in order to provide a 3600 view of a specific cryptocurrency or token. Furthermore, the combination of on-chain and LOB factors can produce unique signals for crypto-assets that are simply impossible to model in other asset classes. The IntoTheBlock platform recently launched a new chapter focused on LOB analysis that follows some of these principles. Today, I would like to show some really fascinating metrics that combine on-chain and LOB data to produce unique intelligence about the behavior of crypto assets and exchanges.
Intuitively, we all know that LOB data is extremely relevant for the analysis of crypto assets. But how relevant is relevant? 😉 There is one metric that can help us quantify the importance of LOB data in the context of crypto asset analytics: the ratio between the volume traded in centralized crypto exchanges and what is reported on-chain:
Fà(exchange traded volume)/(on-chain reported volume by exchange)
Recent metrics indicates that there is over 33x more volume traded on exchanges than what is reported on-chain. Even in top exchanges like Binance or Bittrex, the difference is still significant.
This metric clearly illustrates how much we might be missing by ignoring LOB data.
Every crypto exchange supports two basic LOB analytics:
1) Bid-Ask Spread: Measures the difference between the bid price and ask prices for a particular security
2) Market Depth: A window that shows the number of open buy and sell orders for a security or currency at different prices
Those two metrics are fairly well adopted by most crypto exchanges. However, there are decades of quantitative finance research that has created some super interesting indicators about LOBs that expand beyond the spread and market depth analysis. Let’s look at a few ideas:
Trader Per Side
Also known as the “Trade Sign” in quant literature, this indicator measures the number (or volume) of trades where the buyers “crossed the spread” and bought at the Ask price vs the number (or volume) of trades where sellers “crossed the spread” and sold at the Bid price, per minute. IntoTheBlock’s Trader Per Side analysis provides a clear momentum signals of whether the bid or the ask side are dominating the LOB dynamics. The following figure, shows that analysis for the BitStamp and Coinbase exchanges.
Smart Price
Also known as “Micro Price” in quant theory, this indicator represents a variation of mid-price where the average of bid and ask prices is weighted according to their inverse volume. The IntoTheBlock Smart Price analysis provides a bullish or bearish momentum indicator based on the minute by minute fluctuations of the smart price.
On-Chain Correlated Market Depth
As mentioned before, market depth is one of the best known metrics for LOB analysis. But what would happen if we combine LOB and on-chain data. That’s the goal of IntoTheBlock’s On-Chain Correlated Market Depth. The signal displays the number of tokens on-chain bought or sold at the corresponding levels of the market depth analysis.
Another fascinating idea of LOB analysis is to correlate some of its metrics with the funds exchange flowing in and out of exchanges. There are some fascinating indicators that can help us understand how does the behavior of a LOB correlates with the on-chain positions of the exchange. Of course, we are able to do this because IntoTheBlock spent months training machine learning models to classify exchanges based on their blockchain data.
Bid-Ask Spread vs. On-Chain Flows
Typically, gaps in the bid-ask spread increase indirectly proportionally to the liquidity in the exchange. That dynamic is very clear in the following analysis that shows IntoTheBlock’s netflows correlated with the Binance bid-ask spread. You can see that as the netflows decreases(signaling an increasing in money flowing out of the exchange) the spread increases.
Bid-Ask Spread vs. On-Chain Invectory
Another interesting analysis is to compare the inventory held in the exchange compared to the spread. A larger gap between the spread and the number of tokens held by the exchange could be a sign of risk. The correlation for Bittrex is shown in the following graph.
Reported Volume — On-Chain Volume Ration
Centralized exchanges have been often accused of reporting fake volume numbers and wash trading. A solid mechanism to track that behavior is to monitor the reported volume against the on-chain volume. If those numbers deviate drastically, it could be a sign of wash trading.
These are just some of the fascinating metrics we can explore when combining limited order book and on-chain data. As mentioned before, incorporate LOB datasets in your analysis provides a more complete view of crypto assets that often escapes an on-chain only analysis.
Published at Thu, 19 Dec 2019 15:14:29 +0000
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