Altcoin Dominance at All Time High
Kaiko Research: June 7, 2021
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- 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.
Price Movements
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.
Bitcoin crashed 11% in a single hour. When looking at hourly returns since 2018, we can observe that on May 19th, both Bitcoin and Ethereum underwent their second largest hourly drop ever recorded. Bitcoin crashed 11% and Ethereum crashed 14% over the course of a single hour during the worst of the sell-off. However, nothing compares to the March 2020 sell-off which roiled both traditional and crypto markets, with Bitcoin crashing 16% and Ethereum 20%. While there are still instances of extreme hourly returns, markets are more stable today than they were pre-2019, with far fewer spikes in hourly returns and more consistent volatility regimes.
Volume Dynamics
Ethereum surpasses Bitcoin. 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 and NFTs, of which the blockchain network serves as the infrastructural base layer.
It is more than just Ethereum that is gaining market dominance, though. On nearly every exchange analyzed, the proportion of Bitcoin traded is falling relative to altcoin pairs. This isn’t the first “altcoin season”, a period of time when altcoin markets gain market share to Bitcoin. However, none has ever resulted in such a dramatic shift in market structure as what we can observe today. This trend has emerged on both crypto-to-fiat exchanges like Coinbase and crypto-to-crypto exchanges like Binance.
Below, we chart the percentage of total volume for Binance and Coinbase’s top Bitcoin pair (BTC-USDT and BTC-USD, respectively), compared with total exchange volume.
On Binance, 2019 marked the last “altcoin season”, which saw altcoins capture 88% of total volume. Today, altcoins capture more than 90% of total volume, a new record. The trend is even sharper on Coinbase, which has historically catered for more institutional traders that typically favor Bitcoin. Today, altcoin pairs account for 85% of total volume, the highest percentage yet.
The difference in market structure between Coinbase and Binance is quite notable. Binance has undergone several waves of altcoin dominance over the years, while Coinbase is only under-going its first altcoin season right now. Coinbase is perhaps the best gauge for understanding institutional market sentiment, and this shift suggests diverse markets are increasingly the norm.
We can look at the top 10 pairs ranked by cumulative volume since 01/01/2019 to get an idea of just how different each exchange’s market structure is:
Binance’s top 10 pairs skew towards altcoin markets, while Coinbase’s top 10 contain various combinations of Bitcoin and Ethereum fiat pairs, with exceptions for Litecoin, Link, Stellar, and Bitcoin Cash. Overall, traders are moving away from the most popular BTC-USD(T) markets and into altcoin/alternative BTC markets.
May was one of the most volatile months in crypto market history. In our latest market report, we explore the massive sell-off, record high trade volumes, surging volatility, Ethereum’s growing dominance, liquidity during a price crash, and much more.
You can download the report here or view the report on Coindesk’s Research Hub. All reports are also available on Refinitiv, S&P Capital IQ, Dow Jones Factiva, and Factset.
Order Book Liquidity
Volatility spooked market makers throughout May. 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.
Market depth makes rapid recovery. 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.
Volatility and Correlations
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.
Thanks for reading and see you next week!
-Clara Medalie, Strategic Initiatives and Research Lead
clara@kaiko.com
