Bearish Sentiment Persists Amid Regulatory Scrutiny
Kaiko Research: July 19, 2021
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- 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.
The Ethereum Community Conference is back this week in Paris! Three Kaiko-ers are speakers and we are proudly hosting the second annual EthVC, the venture capital track designed to pair blockchain startups with qualified investors. This year, we have 35 venture capital funds in attendance and 20 pitching startups. Follow us on twitter for full coverage of the event.
Price Movements
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.
Bearish sentiment persists. The summer months are frequently stagnant and this year proves no different. Buyers are taking a break and prices are suffering — every top 10 crypto asset is down for the month. In early July, Uniswap’s UNI token surged 20% following news that V3 of the exchange captured a majority of DEX market share. However, prices quickly plummeted and the token is now down 9% for the month. Chainlink is the worst performer, down 14%, while Bitcoin has suffered the least, down just 6%.
Volume Dynamics
What’s going on on 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.
We charted the buy/sell ratio for these two spikes in market share. The first spike occurred June 25–27 and the second spike this past weekend:
We can observe that during the first spike, sell volume as a percentage of buy volume climbed from just 24% on Friday to 70% throughout the weekend. During the second spike, this ratio was more even, but still favored sellers nearly 60/40. It is necessary to note that on Bitfinex, the buy/sell ratio frequently fluxuates and it is normal to also see buy volume surge sharply above 50%. However, it is interesting to analyze this ratio in the context of Bitfinex’s larger-than-average market share. It is clear that over the weekend, sellers were firmly in control for the third largest Bitcoin pair by volume (as of this morning).
XRP’s volatile year. Last week, the SEC’s lawsuit against Ripple took a turn with a judge ruling that the embattled cryptocurrency company may depose a former SEC official. The SEC filed suit in December 2020 arguing that Ripple’s XRP token was an unregistered security, which caused a wave of de-listings and prices to plummet. However, one could argue that XRP has emerged largely unscathed, posting record high volumes and undergoing a mini bull run in April (although prices have since spiralled along with the rest of crypto). The biggest change in XRP market structure has been the rise of Binance, which now claims more than 40% of market share following de-listings on Coinbase, Binance.US, OkCoin, and Crypto.com. While Ripple earned a small win last week, the company still faces an uphill battle in its lawsuit which could ultimately re-shape how regulators classify crypto tokens.
Order Book Liquidity
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.
Macro Trends
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.
Thanks for reading and see you next week!
Written by Clara Medalie with contributions by Dessislava Aubert and Arun Vignesh
