Pricing and valuation of digital assets with Kaiko
The complexities of pricing digital assets have spurred numerous discussions within the financial industry. In a recent panel discussion at the Crypto Finance Forum (CFF) moderated by Jeff Rundlet, Head of Accounting Strategy at Cryptio, and featuring Thibaut Perney, Americas Sales Team Leader at Kaiko, the focus was on unraveling the challenges and methodologies associated with pricing crypto assets. This blog delves into the key insights shared during the discussion.
Challenges in pricing crypto assets
Thibaut highlighted the unique challenges faced in pricing digital assets compared to traditional finance. He stated,
"As opposed to traditional finance, there is no unity of one."
With over 200 exchanges, both centralized (CeFi) and decentralized (DeFi), the market experiences significant fragmentation, making it challenging to establish a market consensus.
Trustworthiness and market abuses
The lack of a unified marketplace raises questions about trust. Thibaut emphasized the need to scrutinize exchanges for factors such as governance, security, liquidity, and data quality. He also warned against persistent market abuses, stating,
"If you let people outside, they will try and push prices," underscoring the importance of a cautious approach to valuation.
Additionally, he further emphasizes the importance of trust in the market, stating,
"So you really need to be extremely careful in the way you approach valuation in also in the way you approach the prices you're being given because they look like there should be something like very decent, acceptable, and they turn out to not be when you look deeper into it.”
Volatility and data distribution
Thibaut identified the super volatile nature of crypto markets and the impact on data distribution. He highlighted the need for a tailored approach to data collection and aggregation, especially in a market characterized by heavy-tail pricing and volumes, significantly different from traditional markets.
"We are in a market that's really heavy tail when it comes to prices and volumes, which is very different from any traditional markets and that needs to be addressed as well, even from a data collection and also a data aggregation perspective.”
Current landscape and limitations
When discussing various pricing methodologies, Thibaut acknowledged the absence of a standard.
"The honest answer is today there is no standard. We are in the business of providing prices and there is no standards. It's messy.”
He outlined the limitations of common approaches, such as average prices and time-weighted average prices (tWAPs), which can be manipulated. The preferred indicators today are volume-weighted average prices (vWAPs) and volume-weighted median prices (VWM) due to their statistical centrality.
Kaiko's rigorous methodology
Kaiko has developed a new methodology tailored to the crypto market's unique challenges. Thibaut emphasized the importance of rigor and introduced the concept of reference rates and price rates based on asset liquidity. For illiquid assets, Kaiko employs a diverse pricing toolbox, incorporating different mathematical algorithms and triangulation to ensure fair value. Stating,
“We are super happy to see that the IFRS and the U.S. GAP rules are being applied to digital assets."
He further explains,
"Kaiko has been set up to serve and be able to deliver a service like what we are seeing in the capital markets.”
Ensuring accuracy and trust in pricing
Addressing concerns about the accuracy of Kaiko's prices, Thibaut explained the rigorous testing process. Kaiko employs disaggregation methodologies, conducting extensive tests on synthetic and real data samples. The emphasis is on achieving conversions and consistency, ensuring that different methodologies converge to the same values.
"The two key words that come out are conversions and consistency, especially for the liquid assets, whatever pricing methodology you use, you should always end up converging the same values eventually.”
To bolster confidence in their pricing solutions, Kaiko undergoes market validation. Regulators, banks, investment firms, and custodians recognize Kaiko as a solid pricing solution. By comparing Kaiko's prices with actual market outcomes, users can ascertain the accuracy and reliability of the provided data.
"We are being picked up as the most solid pricing solution out there for the crypto markets. So it comes with regulators, it comes with banks, it comes with investment firms or custodians.”
Distinguishing Kaiko from retail pricing services
Retail pricing services vs. Kaiko
In response to a question about the difference between retail services like CoinMarketCap and Yahoo Finance, Thibaut emphasized the limitations of using retail platforms for reliable pricing. He compared it to a trader relying on Yahoo Finance for trade execution, highlighting the need for data sources with rigorous vetting, legal support, and a clear methodology.
“Going to retail pricing services and using their prices is super helpful I think for individuals to have a quick idea of where things are. But for whoever needs something that's reliable, consistent, investment grade data quality and pricing. You simply cannot use this kind of pricing services.”
Importance of reliable partners
Thibaut stressed the critical role of selecting reliable partners with a deep understanding of data sources, thorough vetting processes, and relevant aggregation methodologies. In the evolving regulatory landscape, relying on retail services could expose businesses to legal risks.
"The core of a good price today in this market is knowing your data source and make sure you work with partners that are doing this vetting on your behalf and that understand the aggregation methodology.”
Principal markets and DEX involvement
Defining principal markets
Addressing the ambiguity around choosing principal markets, Thibaut outlined Kaiko's approach. The criteria for vetting CeFi exchanges include factors like sanctions, years in operation, regulatory status, and trading policies. Liquidity rules are also applied to portfolios to ensure a minimum number of highly vetted exchanges.
The role of DEXs
While acknowledging the challenges associated with Decentralized Exchanges (DEXs), Thibaut highlighted their increasing importance. He envisioned a future convergence where platforms like Kaiko could seamlessly aggregate prices from both CeFi and DeFi. Despite current difficulties in understanding DEX algorithms and obtaining clear data, he emphasized the necessity of DEX involvement due to their growing trading volumes and pivotal role in price discovery.
“The way we see them being involved is we think there is going to be a convergence through players like us and others as well, where already as of today we can aggregate all of the prices that are between the CeFi and the DeFi through one endpoint.”
Navigating the evolving landscape: insights into pricing digital assets with Kaiko
Pricing and valuation of digital assets present unique challenges that require innovative solutions. The insights shared by Thibaut shed light on Kaiko's commitment to providing rigorous, accurate, and reliable pricing services amidst the complexities of the crypto market. As the industry evolves, the role of trusted data sources and methodologies becomes increasingly crucial for businesses navigating the dynamic landscape of digital asset valuation.