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 react to bullish Ethereum "London" hard fork.
- Volume Dynamics: Trade volume for perpetual futures markets peaks during US/EU trading hours which suggests a flouting of geographic restrictions.
- Order Book Liquidity: On average, bid-ask spreads for Bitcoin-Dollar pairs has improved since January.
- Macro Trends: Treasury bond yields are falling around the world despite strong economic data.
- Derivatives Markets: Open interest has recovered more quickly than trade volumes following the late-July short squeeze.
On August 5th, the Ethereum network finally underwent its long-awaited “London” hard fork. The change implemented several EIPs (Ethereum Improvement Proposals) designed to improve and optimize the network’s processing times and transaction fee mechanisms. One of the proposals could transform Ethereum into a deflationary asset, which in the long term is bullish from an investor’s perspective. Immediately following the upgrade, Bitcoin shot up above 40'000 USD and bullish bets on Ethereum options markets surged. Bitcoin closed the week 11% higher. The second largest cryptocurrency asset was up 20% trading above 3'000 USD for the first time since May.
Bitcoin and Ethereum’s price rally overflowed into DeFi markets with most tokens powering decentralized finance platforms up double digits. Uniswap’s UNI token was up 23% last week and Compound’s COMP token rose 18%. On the regulatory front, controversy around the introduction of new cryptocurrency reporting requirements under the U.S. bipartisan Infrastructure bill dominated the week. The crypto-tax measures, which will help fund the new round of spending generating an estimated 28tn USD for the U.S. Treasury, could potentially hobble the nascent crypto industry.
Geographic restrictions are flouted on derivatives exchanges
The recent regulatory crackdown has highlighted the difficulties that exchanges face in restricting users by geography. Derivatives exchanges in particular are subject to stringent regulations in the United States, thus historically have been unable to serve American clients. Analyzing patterns in trade volume can throw light on the geographic location of an exchange’s users.
We chart average hourly trade volume for Bitcoin perpetual futures contracts on Binance and FTX, two of the largest derivatives exchanges in the world. We can observe that trade volumes surge around 16:00 UTC (12pm EST) on both exchanges and that the highest hourly volumes are recorded during the overlap between European and U.S. trading hours. The average is derived from 1.5 years of hourly market data, which suggests that the majority of derivatives traders are likely to be domiciled on either side of the Atlantic (assuming that traders trade during daylight hours).
To bypass geographic bans, traders frequently resort to using Virtual Private Networks (VPNs) to access exchange interfaces. Recently, Binance announced its intentions to wind down its derivative operations in Europe following an outright ban in the U.K. European investors could soon follow their American counterparts in using VPNs to bypass geographic restrictions.
Bitcoin-fiat spreads decline on major exchanges
Following a period of strong volatility from January-March, BTC-USD spreads have fallen since January across the most liquid fiat exchanges. The bid-ask spread is one of the most common indicators of liquidity - typically, the wider the spread the less liquid the trading pair. Above, we chart the average hourly spread for the most liquid BTC-USD pairs aggregated across 10 exchanges (visualized below), and can observe that spreads have dropped to 1.42bps as of early August, down from yearly highs of 9.4bps in January. This trend suggests that efficiency on BTC-USD markets has improved over the past months, which have been less volatile than Q1 of 2021. Despite the steady downward trend, Bitcoin-fiat spreads remain higher than lows reached in April.
Breaking apart the above measure, we can observe the range in liquidity across some of the most liquid BTC-USD markets:
Coinbase and Kraken have the narrowest BTC-USD spreads by far, on average less than 1 basis point, while Bittrex and Bitstamp have the widest spreads ranging from 3-5 basis points. On Binance US, OkCoin and Gemini, bid-ask spreads hover between 2 and 4bps.
Bond yields are falling around the world
Last week, U.S. 10-Year Treasury yields fell to their lowest levels since February following growing concerns surrounding the Delta variant and vaccination rates. A similar trend has emerged around the world: Germany’s 10-year Bund yields decreased by more than 3 bps this week to -0.485, British yields dropped 2bps, and Japanese yields decreased to a yearly low of 0.004. Falling yields generally indicate that markets are predicting a sharp slowdown in growth or a recession. Yields and bond prices are inversely correlated, and investors have recently rushed to buy bonds despite the relatively strong economic comeback. This suggests that bond prices and yields are disconnected from macro fundamentals.
For much of 2021, Bitcoin moved in tandem with 10-year Treasury yields up until the crypto asset’s most recent July rally. The trend in yields suggests investor demand for safe-havens could be strengthening, while demand for risk-on assets like equities is falling. However, July’s crypto comeback appears divergent from global macro trends.
Open interest recovers more quickly than volumes
Since the late-July short squeeze, open interest aggregated across 7 exchanges has steadily increased while trading volumes have fallen. Together with decelerating spot prices, this suggests that the recovery remains fragile. After increasing to 85bn USD immediately following the short squeeze, aggregated 24-hour trade volumes have been trending downwards and remain well below their end-June levels. Overall, bitcoin perpetuals trading activity appears significantly lower than in June.
The diverging trend between open interest in trade volume suggests that new capital continues to flow into these markets and that leverage is increasing. If funding rates remain positive and volumes recover, this could be a healthy sign for the market.