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: Crypto markets continued to take a beating this week as regulators turn an eye to cryptocurrency exchanges.
- Volume Dynamics: Bitfinex's market share surged over the weekend due to higher-than-average Bitcoin volume.
- Order Book Liquidity: Liquidity has plummeted on Binance's British Pound markets following the UK's regulatory ban.
- Macro Trends: U.S. measures for inflation registered their highest increase since 2008.
Regulators target cryptocurrency exchanges
Selling pressure strengthened this week following a wave of regulatory action towards cryptocurrency exchanges. Bitcoin closed Sunday down 6% and Ethereum down 11% in one of the worst weekly performances this year.
Cryptocurrency exchanges facilitate billions in transactions a day but have largely operated in a murky global regulatory environment. However, the recent wave of cybercrime and cryptocurrency ransoms has caused regulators and politicians around the world to target exchanges as culprits. Last week, U.S. Senator Elizabeth Warren stated that exchanges pose a regulatory risk to consumers, which comes on the tail of a global crackdown on Binance. Binance is still the world's largest exchange (by many magnitudes), but this dominance could be threatened should more jurisdictions establish regulatory frameworks and enforce KYC / AML rules for traders. There is a growing divide between regulated and unregulated exchanges and it seems that playing by the rules pays off.
What's going on over at Bitfinex?
Over the past 2 days, Bitfinex's BTC-USD pair has undergone a surge in volume and now ranks in the top three Bitcoin pairs across all cryptocurrency markets. The market share of exchanges almost always stays the same day-to-day, with only gradual changes over time as exchanges ebb and flow in popularity. Over the weekend, Bitfinex's market share surged from ~20% to 49%. A similar surge happened three weeks ago, also over the weekend. We analyzed Bitfinex's market share for BTC-USDT and ETH-USD pairs, and no such surge occurred. Bitfinex plays an important role in cryptocurrency markets because their BTC-USD price feed is leveraged in most indices used on derivatives exchanges. This gives the exchange an outsized influence in the price discovery process.
Slippage surges on Binance as volumes plummet
The UK's regulatory ban on Binance has caused volumes and liquidity for BTC-GBP to plummet compared to its peers. The average daily traded volume of BTC-GBP has dropped from £85 Million to £7 Million over the last month, which has caused Binance to lose its position as the top GBP market. Almost 50% of total BTC-GBP volumes were executed on Binance before the ban. Today, Binance accounts for only 20% of total BTC-GBP volume, with Coinbase, Kraken and Bitfinex gaining market share.
The drop in trade volume and market depth has caused price slippage to surge over the past few weeks. We charted price slippage for a simulated £50k sell order, and can observe that slippage has risen from 10 bps to 30 bps. On Coinbase, Kraken, and Bitfinex, slippage hovers between 1-5 bps.
U.S. inflation registers its highest increase since 2008
U.S. inflation as measured by the Consumer Price Index (CPI) accelerated to 5.4% y/y in June (up 0.9 m/m) as global semiconductor shortages and surging travel related services put upward pressure on prices. The Producer Price Index (PPI), which is often seen as an early measure of inflation because it takes into account the change in prices producers receive at the factory gate, also accelerated to a ten-year high in June (up 7.3% y/y). This suggests that inflation could persist in the following months as producer prices are passed on to consumers.
Following the reports, Bitcoin plummeted more than $1'000 between July 12-14 while tech heavy equities rose and the U.S. Dollar strengthened. Since the March 2020 pandemic-related sell-off, Bitcoin has surged in value, moving in line with rising inflation. However, this trend has sharply reversed over the past few months. Today, Bitcoin is increasingly aligned with U.S. 10-year Treasury yields, which are seen as an indicator of broader investor confidence and economic growth.
10-year Treasury yields have been on a downward trend since reaching a yearly high in March. This has fueled fears that reflation might be losing steam amid rising COVID-19 cases and slower than expected growth in China. Reflation refers to the uptick in growth and inflation typically following an economic downturn such as the March 2020 pandemic. Bitcoin, industrial commodities and cyclical growth stocks have benefited most from reflation but the latest CPI data forewarns early tapering, which could put downward pressure on prices.
