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: Binance's Euro markets diverged sharply from global crypto-to-fiat markets following the latest wave of regulator restrictions.
- Volume Dynamics: The average trade size on decentralized exchanges is magnitudes greater than trade size on centralized exchanges.
- Order Book Liquidity: USDC's liquidity is improving across exchanges although its usage as a quote asset remains far behind Tether.
- Macro Trends: Historical volatility and implied volatility as measured by the VIX continue to fall for traditional equities.
Regulatory crackdown disrupts Binance fiat markets
Over the past few weeks, a wave of regulatory restrictions on Binance has caused their British Pound and Euro markets to diverge from global crypto-to-fiat markets. To observe the impact of the European crackdown on Binance, we charted the premium / discount of BTC-GBP and BTC-EUR markets relative to BTC-USD markets. We take the average of this same measure on Coinbase, Kraken, and Bitstamp to demonstrate the divergence that has occurred across cryptocurrency exchanges.
In late June, we first observed the emergence of a GBP discount following the suspension of payments by Barclays and Santander, with the discount at one point dipping as low as -4%. The latest wave of disruptions came last week, with Binance halting deposits through EU SEPA, Italy banning the exchange from operating, and a popular UK payments network suspending withdrawals of the British Pound.
Since early July, a premium on BTC-EUR markets has emerged relative to BTC-USD, although not as extreme as the GBP discount.
Coinbase, Kraken, and Bitstamp have not undergone a similar surge of their BTC-EUR pairs. What is curious to note is that the crackdown on Euro and GBP payment pathways has affected Bitcoin markets on Binance differently, with GBP markets trading at a discount and Euro markets at a premium. This could be explained by the asymmetrical regulations on each payment method. For example, Binance still enables Euro withdrawals, while GBP banks and payment processors have imposed harsher restrictions.
DEX vs. CEX - Diving into the Data
The average trade size on decentralized exchanges is magnitudes greater than trade sizes on centralized exchanges. At its peak, the highest volume pair on Sushiswap saw an average trade size of more than $80,000, compared with just $2,000 on Coinbase. What explains this massive difference? The answer involves a combination of transaction fees on Ethereum, the front running problem, and low trade counts overall. Watch last week's EthCC presentation for an explanation as to why trade sizes, volumes, and counts on DEXs diverge so sharply compared with CEXs.
Analyzing stablecoin liquidity on Coinbase and Binance
USDC has had a stellar year, inking a landmark partnership with Mastercard, raising a record $400 million investment, and earning praise for being transparent around its reserves. However, USDC has historically remained far behind USDT in terms of liquidity on both regulated fiat-to-crypto and crypto-to-crypto exchanges. We analyse market liquidity for BTC-USDT and BTC-USDC trading pairs on Binance and Coinbase using the bid-ask spread to identify how liquidity has evolved over the past few months. The narrower the spread for a trading pair, the more liquid the market. We can observe that USDC’s liquidity is improving on Coinbase, which has recently embraced stablecoins as an alternative to their highly liquid fiat pairs. The spread for the BTC-USDC pair equalled 2.42 bips on July 20 on Coinbase and was actually .05bips lower than the spread for BTC-USDT.
Binance's BTC-USDT market has considerably tighter spreads and is therefore more liquid than its regulated counterpart Coinbase. However, spreads for BTC-USDC are lower on Coinbase, equaling 2.46bips as of end July as compared to 3.55bips on Binance. We observe a significant discrepancy between BTC-USDT and BTC-USDC spreads on Binance, which offers consistently low spreads for Tether of just .01bips as of the end of July.
Binance and Coinbase have some of the most liquid markets in crypto, but how do USDC and USDT compete across all exchanges in the industry? Below, we chart the number of trading pairs that use either USDT or USDC as a quote currency. Stablecoins, which are pegged to national currencies such as the U.S. Dollar, are a key source of liquidity for cryptocurrency exchanges.
We can observe that a growing number of instruments using stablecoins as the quote asset have been listed on exchanges since 2018. Tether remains by far the dominant stablecoin, with USDT serving as the quote assets for over 70% of major stablecoin-quoted instruments listed on exchanges. Exchanges seem reluctant to list pairs denominated in Circle’s USD coin (USDC), Tether’s main competitor. USDC-quoted assets account for only 6% of stablecoin quoted instruments.
Traditional equity volatility continues to fall
Over the past few months, we have seen a growing divergence in volatilities of crypto assets compared with equities. Volatility is a good indicator of fear or greed tendencies gripping the market. The VIX Index is a forward looking measure that captures the implied volatilities of the S&P 500 over the next 30 days. We charted the historical volatilities of Bitcoin, Ethereum and the S&P500 versus the VIX to understand the general fear or greed tendencies of market participants towards risk-on assets such as equities and crypto. The VIX and S&P500 have fallen gradually throughout 2021 despite continued uncertainty surrounding inflation, accommodative monetary policy, and virus variants.