Crypto market data can be a valuable tool for improving trading and investment strategies. It can be just as helpful in long-term investing as in short-term trading and with advanced tactics such as margin, short-selling, and derivatives trading.

In the first installment of this two-part series, we looked at how crypto market data could help improve long-term investing and short-term trading strategies. In this installment, we take a look at some of the ways crypto trading data can help you improve advanced crypto strategies and also help you stay nimble in the rapidly evolving crypto markets.

Advanced Crypto Investing Strategies

Margin Trading

“Margining” an investment account is when you borrow against the value of your portfolio. Margin trading occurs when you use the borrowed funds for trading. This is sometimes referred to as “leveraging” the account.  

In margin trading, you are required to deposit a certain amount of your own funds as collateral for the borrowed funds. The amount you can then borrow—which is lent by a cryptocurrency exchange or a peer-to-peer lending platform—varies, but can reach up to 10 to one on some platforms. 

That is, for every $1 in your account, you can trade $10 of crypto. Margining can amplify your profits as well as your losses, and so you should be judicious in your use of margin funds and also have a clear idea of your risk management strategy.

This is especially important because the complexity of digital assets makes both the risk management and margin management functions more complicated. You can lessen these complications by using clean, fast, reliable, and consistent real time market data.

What makes crypto margin more complicated than equity margin? Traditional methodologies to quantify and determine exposure don’t apply to cryptocurrencies, and with thousands of cryptocurrencies and hundreds of exchanges, the amount of data you’ll be dealing with to manage risk surpasses any other asset class by a wide margin.

For example, crypto trades on hundreds of platforms and exchanges, both centralized and decentralized. ‌Prices differ. ‌What price are you using for your margin management?

Also, accounting and settlement varies across exchanges, which makes it difficult to measure real-time risk exposure—Has your trade settled and freed up cash yet, or not? Comprehensive crypto asset data enables you to properly estimate risk exposure across exchanges.

Advanced crypto metrics are crucial here. Additionally, more traditional data metrics are valuable. Volatility, for instance. If you’re going to margin anywhere near your maximum margin ratio, you’d want to take note of the crypto’s or total portfolio’s volatility to try to leave enough buffer to avoid margin calls or forced liquidation.

Short Selling

Crypto short selling presents many of the same issues as crypto margin lending, because it involves borrowing. Short selling is selling crypto rather than buying it, because you believe its price will decline, so you’re selling it today at a high price and buying it back later at a lower price.  

To short sell a crypto, you must borrow it from someone who owns some and sell it. To close out your position, you must purchase that same amount of crypto you borrowed and return it to the lender. During the entire time your position is open, you pay interest to the crypto lender.

When shorting crypto, using most of the same data as margin trading will be valuable, but there is more data you’ll want to know. An important one is short interest. Short interest represents the total number of crypto that have been sold short but have not yet been covered or closed. 

This provides insight into market sentiment and the number of traders expecting a price decline. Higher short interest can indicate that many traders agree with your opinion that the coin’s price will decline.  

But it can also indicate a high probability of a short squeeze if the price starts to rise, and short sellers need to buy back more coins than are readily available in the market. When this happens, prices can go parabolic, leaving you no recourse but to pay far more than you’d like to obtain the coins. This is what’s known as a “short squeeze,” and if you’ve ever been on the wrong side of one, you’ll want to make sure it never happens again.

Also helpful is the long/short ratio. It measures the total amount of a crypto available for short selling vs the amount actually borrowed and sold. It is an indicator of investor sentiment (a low long-short ratio indicates that investors are bearish on the asset).

You’ll also be interested in trading volume data, such as volume, market depth, and order book. As with short interest, these will also help you determine how liquid the coin is, and how easy or difficult it will be to buy when you want to close out your short position. Besides not being able to cover, you may also have to factor in slippage if the market is shallow.

As always, there will be various technical analysis indicators that can help you identify entry and exit points. Moving averages, support/resistance levels, trend lines, RSIs, oscillators, and so on.

Derivatives Trading: Futures and Options

Derivatives trading represents a large percentage of all activity in the crypto markets. Because these instruments enable high leverage, many of the same issues we discussed with margin and short selling are also true here, and access to accurate, real time market data is important.

Again, there are a large number of exchanges and platforms on which you can trade derivatives, and they can have varying prices as well as varying collateralization and liquidation policies. Furthermore, many exchange liquidation policies are dynamic, adding to the difficulty of managing your exposure. Reliable crypto trading data can give you the visibility into the derivatives markets necessary to model and measure liquidation-related risk accurately.

Real-time Market Data Can Help You Evolve With the Crypto Markets

As money and financial instruments become more digitized, those who adapt fastest and best will reap large rewards. Complex new asset classes present enormous opportunities, but they also pose new kinds of risks. 

Having the proper kinds of deep, wide, comprehensive, and granular trade data can help you identify new kinds of measurements, indicators, and trends that will help you better understand evolving markets and instruments and give you a trading edge. It can also help you more accurately manage your cash, loan interest, and exposure, enabling you to maximize your actual, bottom-line returns. 

For all market strategies—short-term or long-term, investment or trading, swing or day or HODLing—there is one constant: you MUST have timely, reliable, accurate data. Everything else flows from there. With crypto, and its 24/7 markets across hundreds of exchanges and blockchains, finding the right data isn’t as simple as it sounds, nor is it always easy to find easy-to-use digital asset market data  APIs.

Amberdata is your lens into the entire crypto economy.  We deliver comprehensive digital asset data and insights into blockchain networks, crypto markets, and decentralized finance, empowering financial institutions with critical market or DeFi data for research, trading and analytics, risk management, derivatives analytics, and compliance.  

To learn more about Amberdata, please contact us to book a demo, hear about our products that can help your business, or receive pricing information.

DISCLAIMER: The information provided in this blog is for educational purposes only and is not investment or financial advice. Please do your own research before making any investment decisions. None of the information in this blog constitutes, or should be relied on as, a suggestion, offer, or other solicitation to engage in, or refrain from engaging in, any purchase, sale, or any other investment-related activity. Cryptocurrency investments are volatile and high risk in nature. Don't invest more than what you can afford to lose.