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 cryptocurrency markets:
- Price Movements: May was one of crypto's worst performing months on record, with Bitcoin down 37% and most top crypto assets in the red.
- Volume Dynamics: For the first time ever, the volume of Ethereum traded throughout the month was greater than the volume of Bitcoin.
- Order Book Liquidity: Market depth and spreads have made a full recovery following a tumultuous month.
- Volatility and Correlations: On average, Circle's USDC stablecoin is less volatile than Tether.
May volatility spares no asset
May was one of the most volatile months in crypto market history. In a matter of days, Bitcoin lost nearly half of its value and most of the top crypto assets closed the month down double digits. May's sell-off was in large part perpetuated by over-leveraging in derivatives markets, which triggered billions of forced liquidations as prices dipped below key support levels. Cardano was the only top 10 asset that ended the month up, closing +21%. The good news, though, is that markets are still very much in the green year-to-date, faring better than most traditional assets.
Ethereum surpasses Bitcoin in volume
For the first time ever, the volume of Ethereum traded throughout the month was greater than the volume of Bitcoin. 51% of total volume was executed for ETH-USD trading pairs on the top fiat exchanges. In May 2020, ETH-USD accounted for just 14% of total volume. This marks a monumental shift in crypto market structure and suggests that traders increasingly view Ethereum as an investible asset comparable to Bitcoin. Despite scalability concerns, Ethereum's potential has been on full display this year with surging interest in decentralized finance (DeFi) and NFTs, of which the blockchain network serves as the infrastructural base layer.
Market depth makes rapid recovery
Market makers supply liquidity to order books and when spooked by volatility, they will often pull limit orders en masse. This is almost always done algorithmically which is why from one second to the next, market depth can evaporate which causes spreads to widen. Spreads temporarily spiked 10x on nearly every exchange analyzed during the May 13th and May 19th sell-offs. On Coinbase, spreads surged from .15 to 15 basis points as liquidity evaporated on May 13th. Following the volatility, spreads remained higher on average compared with the first half of the month. However, over the past week, spreads have for the most part returned to pre-crash levels.
The average quantity of Bitcoin on BTC-USD order books within 2% of the mid price is now higher than pre-crash levels, a sign that market makers were not overly spooked by May's volatility. This trend suggests markets have stabilized and that volatility will have less of an impact on spot order books should another market-shaking even occur.
USDC is becoming a formidable competitor to Tether
Last week, Circle, the backer of the stablecoin USDC, raised a $440 million funding round, the largest in crypto history. USDC is issued in partnership with Coinbase and is generally seen as the safer stablecoin compared with Tether, which has undergone a series of regulatory problems over the past few years. Overall, USDC is more stable than USDT when looking at 30-day volatility for the two stablecoins.
Despite Circle's record-setting fundraising round, the majority of stablecoin activity is still dominated by Tether. One reason may be Circle's emphasis on real-world use cases over cryptocurrency exchange partnerships. Circle has invested significant resources into securing institutional partnerships over the past year, most notably with Visa. However, right now stablecoins are only as useful as the ability to trade with them, and if exchange's don't list trading pairs denominated in USDC, then the stablecoin will not be as relevant to crypto markets. Circle's new partnership with FTX could be the start of a trend within crypto markets that sees USDC gain dominance.
