A summarizing review of what has been happening at the crypto markets of the past week. A look at trending sectors, liquidity, volatility, spreads and more. The weekly report in cooperation with market data provider Kaiko.
The last 7 days in the cryptomarkets:
- Price Movements: Tether frequently exhibits positive drift from its 1-to-1 dollar peg, which could be linked to trading behavior during price crashes.
- Trading Volume: Uniswap trade volume reached record highs in February.
- Order Book Liquidity: Binance's BTC-USDT trading pair is the most liquid spot pair in cryptocurrency markets.
- Volatility and Correlations: Last week, the U.S. Dollar Index reached a 3-month high as Bitcoin and equities suffered steep losses.
Tether exhibits positive drift from 1-to-1 peg
Stablecoins such as the dollar-pegged Tether (USDT) are designed to have minimum price movements (hence the name stablecoin), but in practice, prices exhibit frequent drift depending on the current supply and demand for the asset. We chart the frequency of hourly average prices for three stablecoins: USDC, USDT, and DAI. Stablecoins trade against the U.S. Dollar on several exchanges, allowing us to determine an accurate exchange rate influenced by supply and demand.
We can observe that USDC exhibits the most stability, with nearly every hourly average price recorded holding the 1-to-1 dollar peg. USDT, on the other hand, exhibits positive drift on Bittrex and Kraken, meaning that price movements away from $1 are more often positive than negative. DAI also experiences positive drift on Coinbase and Kraken.
Why do stablecoins experience positive drift more frequently than negative drift? One explanation could be how traders behave during a price crash. During a crash, traders will race to sell their Bitcoin in exchange for Tether, which is similar to the U.S. Dollar in that it is recognized as a temporary safe haven amidst extreme price volatility. A sudden increase in buying pressure for Tether often has the effect of causing a positive drift from the 1-to-1 peg.
Below, we chart Tether's USD exchange rate (blue) during the most recent Bitcoin (orange) sell-off:
As Bitcoin fell from $55k to below $45k, positive drift occurred for Tether's U.S. Dollar exchange rate. Tether's recent settlement with the New York attorney general further bolsters its safe-haven status, and it remains the most popular quote asset for trading pairs throughout cryptocurrency markets.
Uniswap volume reaches record high
Decentralized exchanges (DEX) enable direct, peer-to-peer transactions through automated smart contracts, and have processed more than $100 billion in trades over the past year alone. Any user can create pairs without the listing process typified by centralized exchanges, which allows more recent and innovative projects to trade with fewer barriers to entry. Uniswap has quickly grown to become the largest DEX, with a unique focus on ERC-20 tokens built on the Ethereum mainnet blockchain. In just one year, total monthly Uniswap volume grew from $146 million to $26 billion, positioning the DEX as a serious competitor to centralized financial markets. In February, Uniswap trade volume reached its highest daily amount yet which suggests DeFi markets are just getting started.
Binance's liquidity is unrivaled
Coinbase and Binance are the two exchanges most frequently compared to one another due to their growth and ambition in the industry. While institutional traders still prefer Coinbase (for regulatory and compliance reasons), Binance's liquidity is unrivaled in the industry. When analyzing the bid-ask spread and price slippage for Coinbase's BTC-USD and Binance's BTC-USDT trading pairs, we can observe that Binance leads Coinbase in terms of market liquidity, with tighter spreads and less slippage on average over time.
Spread and slippage are common indicators used to asses the liquidity of a market. Tighter spreads and low slippage indicate that price discovery and market efficiency is strong and that market orders will not significantly impact the price of an asset. Binance's BTC-USDT market is the most liquid spot Bitcoin pair in all of crypto markets and accounts for nearly 40% of all Bitcoin volume (against USD and USDT).
All eyes on the Federal Reserve
Since March 2020, Bitcoin and equities have for the most part moved in opposite directions as the U.S. Dollar Index (DXY), which has depreciated to multi-year lows amidst the monetary and fiscal stimulus measures used to counter the economic effects of the pandemic. Yet, rising yields on U.S. treasury bonds suggests a rebound is forthcoming for the U.S. Dollar, which last week reached a 3-month high against a basket of foreign currencies. In a Federal Reserve speech given last Thursday, Jerome Powell raised little concern over rising yields, but the possibility remains that an unwinding of monetary policy could occur if economic conditions continue to improve earlier than expected.
Both Bitcoin and the S&P 500 suffered big losses last week as traders priced in the potential effects of unwinding, rising bond yields, and inflation. However, Bitcoin recovered over the weekend after the much-anticipated approval of a $1.9 trillion stimulus package in the United States.
