Crypto Liquidations Data From Exchanges Likely Underreported: Researchers

The volume of crypto liquidations from exchanges could be vastly underreported, a senior researcher from K33Research noted on X.

According to a series of posts on X by Vetle Lunde, a senior researcher at K33 Research, liquidation volume data shared by leading digital assets exchange might be severely underreported. 

Lunde stated:

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

Referring to crypto exchanges such as Binance, Bybit, and OKX, Lunde said that in 2021, these exchanges changed their liquidation WebSocket API to push only one liquidation per second instead of reporting all liquidations.

The move was initiated to provide a “fair trading environment” and “optimize user data stream”, Lunde notes. As a result, cryptocurrency liquidation data from exchanges has been severely suppressed over the past three years. 

Assuming there is merit to Lunde’s claim, it could mean that crypto liquidation data might not be the most reliable indicator on which traders can base their decisions.

Lunde highlighted the significance of accurate liquidation data, stating that it helps investors better estimate the current market risk appetite and understand leverage ratios on exchanges. E exchanges’ Clean liquidation data helps traders and investors understand the full effects of sudden market volatility on open positions and whether it cleansed the market of unhealthy amounts of leveraged trades during large liquidation events.

The senior researcher suspects that the move to limit liquidation data might be a “PR choice.” Lunde added:

By limiting liquidation transparency, exchanges also withhold meaningful information, gaining a stronger understanding of the market’s overall risk profile than any other entity. Some exchanges even have interests in investment firms that may trade on information that the rest of the market does not have.

One of the ways to reliably measure the liquidation volume is by monitoring changes to open interest in notional terms compared to open interest from the previous day. Although this method makes it easier to juxtapose past leverage events with current ones, it doesn’t consider new positions opened by traders during the market-wide selloff. 

For the uninitiated, open interest refers to the total number of outstanding derivative contracts, such as futures or options, that have not been settled.

While concerns remain regarding the authenticity of liquidation data shared by top exchanges, it’s important to understand why this data matters in the first place.

Liquidation data can provide insights into market sentiment and trends to traders. For instance, during the COVID-induced crash in March 2020, Bitcoin plunged below $4,000. The sell-off saw $750 million in BTC liquidated in minutes, allowing traders to manage risk more efficiently and adjust their positions to minimize loss or maximize gains.

In addition, the presence of high-leverage trades in the crypto market makes the role of liquidation data all the more important. Liquidation data helps traders understand the potential for margin calls, which can trigger cascades of liquidations and further impact the underlying asset prices.