Binance’s Liquidity is Unrivaled
Kaiko Factsheet: March 8, 2021
This week in cryptocurrency markets:
- Price Movements: Tether frequently exhibits positive drift from its 1-to-1 dollar peg, which could be linked to trading behavior during price crashes.
- Trading Volume: Uniswap trade volume reached record highs in February.
- Order Book Liquidity: Binance’s BTC-USDT trading pair is the most liquid spot pair in cryptocurrency markets.
- Volatility and Correlations: Last week, the U.S. Dollar Index reached a 3-month high as Bitcoin and equities suffered steep losses.
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Price Movements
Bitcoin rebounds as macro headwinds grow. Last week, both crypto and traditional financial markets experienced steep losses as expectations mounted around a strengthening dollar, rising bond yields, and the potential unwinding of monetary policy. Cryptocurrency markets rebounded over the weekend following the approval of a $1.9 trillion dollar stimulus bill in the United States, with Bitcoin closing Sunday night at $50,978 and Ethereum at $1,727. Despite the gains, trading volumes have nearly halved compared with last week, which suggests the surge in prices did not pull in new traders.
Tether exhibits positive drift from 1-to-1 peg. Stablecoins such as the dollar-pegged Tether (USDT) are designed to have minimum price movements (hence the name stablecoin), but in practice, prices exhibit frequent drift depending on the current supply and demand for the asset. We chart the frequency of hourly average prices for three stablecoins: USDC, USDT, and DAI. Stablecoins trade against the U.S. Dollar on several exchanges, allowing us to determine an accurate exchange rate influenced by supply and demand.
We can observe that USDC exhibits the most stability, with nearly every hourly average price recorded holding the 1-to-1 dollar peg. USDT, on the other hand, exhibits positive drift on Bittrex and Kraken, meaning that price movements away from $1 are more often positive than negative. DAI also experiences positive drift on Coinbase and Kraken.
Why do stablecoins experience positive drift more frequently than negative drift? One explanation could be how traders behave during a price crash. During a crash, traders will race to sell their Bitcoin in exchange for Tether, which is similar to the U.S. Dollar in that it is recognized as a temporary safe haven amidst extreme price volatility. A sudden increase in buying pressure for Tether often has the effect of causing a positive drift from the 1-to-1 peg.
Below, we chart Tether’s USD exchange rate (blue) during the most recent Bitcoin (orange) sell-off:
As Bitcoin fell from $55k to below $45k, positive drift occurred for Tether’s U.S. Dollar exchange rate. Tether’s recent settlement with the New York attorney general further bolsters its safe-haven status, and it remains the most popular quote asset for trading pairs throughout cryptocurrency markets.
Contributed by Kaiko analyst Anastasia Melachrinos.
Trading Volume
Uniswap volume reaches record high. Decentralized exchanges (DEX) enable direct, peer-to-peer transactions through automated smart contracts, and have processed more than $100 billion in trades over the past year alone. Any user can create pairs without the listing process typified by centralized exchanges, which allows more recent and innovative projects to trade with fewer barriers to entry. Uniswap has quickly grown to become the largest DEX, with a unique focus on ERC-20 tokens built on the Ethereum mainnet blockchain. In just one year, total monthly Uniswap volume grew from $146 million to $26 billion, positioning the DEX as a serious competitor to centralized financial markets. In February, Uniswap trade volume reached its highest daily amount yet which suggests DeFi markets are just getting started.
Binance’s stablecoin gains small market share against Tether. Since 2017, the vast majority of all Bitcoin volume has been denominated with the stablecoin Tether. Today, 91% of all Bitcoin stablecoin volume trades against USDT, but that percentage has decreased since 2019, when approximately 97% of volume was against Tether. Since last year, a couple of stablecoin competitors have gained market share, most notable being Binance’s BUSD which now accounts for between 6–8% of total Bitcoin stablecoin volume. USDC is the highest volume stablecoin in decentralized financial markets, but in centralized markets the coin has failed to win the same level of market share, accounting for just 2%.
Quick Kaiko Updates!
Citi’s recent 100-page report on cryptocurrency markets recognized Kaiko as an industry leader in the market data space.
Kaiko’s Sacha Ghebali is currently participating in the New York Department of Financial Service’s first-of-a-kind tech sprint for crypto, building a regulatory monitoring product to identify fraud using market data.
Kaiko CEO Ambre Soubiran was awarded start-up professional of the year by Waters Technology.
Order Book Liquidity
Binance’s liquidity is unrivaled. Coinbase and Binance are the two exchanges most frequently compared to one another due to their growth and ambition in the industry. While institutional traders still prefer Coinbase (for regulatory and compliance reasons), Binance’s liquidity is unrivaled in the industry. When analyzing the bid-ask spread and price slippage for Coinbase’s BTC-USD and Binance’s BTC-USDT trading pairs, we can observe that Binance leads Coinbase in terms of market liquidity, with tighter spreads and less slippage on average over time.
Spread and slippage are common indicators used to asses the liquidity of a market. Tighter spreads and low slippage indicate that price discovery and market efficiency is strong and that market orders will not significantly impact the price of an asset. Binance’s BTC-USDT market is the most liquid spot Bitcoin pair in all of crypto markets and accounts for nearly 40% of all Bitcoin volume (against USD and USDT).
Where did Bitcoin’s market depth go? Since Bitcoin’s monumental bull run commenced in November, market depth on BTC-USD order books has fallen on most exchanges analyzed. Market depth, measured as the quantity of bids and asks placed at +/-10% of the mid price, is an indicator of overall market liquidity. The higher the measure for market depth, the more resilient and efficient markets are when faced with large market buy or sell orders.
While common indicators of market liquidity derived from depth, such as spreads and slippage, show evidence of improvement over the past year, the past few months suggests that liquidity has not evolved at the pace of demand for Bitcoin. There have been whisperings of a supply shortage, as crypto sinkholes like Grayscale suck up Bitcoin without a means for redistribution back to the market. What could also be happening is that market makers, who often operate like businesses, have not increased their USD budgets, which would result in a relative fall in depth (in BTC) as its price reached record highs.
The problem, though, is that volumes are now magnitudes greater than they were months ago, while depth has not adjusted accordingly (even when priced in USD). Late February, a price crash decimated market depth which caused billions in liquidations. Market depth is not entirely to blame, but when depth cannot support market orders during a crash, cascading prices can wreak havoc.
Volatility and Correlations
All eyes on the Federal Reserve. Since March 2020, Bitcoin and equities have for the most part moved in opposite directions as the U.S. Dollar Index (DXY), which has depreciated to multi-year lows amidst the monetary and fiscal stimulus measures used to counter the economic effects of the pandemic. Yet, rising yields on U.S. treasury bonds suggests a rebound is forthcoming for the U.S. Dollar, which last week reached a 3-month high against a basket of foreign currencies. In a Federal Reserve speech given last Thursday, Jerome Powell raised little concern over rising yields, but the possibility remains that an unwinding of monetary policy could occur if economic conditions continue to improve earlier than expected.
Both Bitcoin and the S&P 500 suffered big losses last week as traders priced in the potential effects of unwinding, rising bond yields, and inflation. However, Bitcoin recovered over the weekend after the much-anticipated approval of a $1.9 trillion stimulus package in the United States.
Bitcoin was briefly more volatile than Ethereum. For most of crypto market history, Ethereum has been the more volatile of the two top assets. Yet, for a few days at the end of February, Bitcoin’s 20D volatility curve crossed above Ethereum’s for the first time since last May. Both assets recently reached their highest volatility since last March’s market crash. The past few months have been extremely volatile for both crypto asset, and the price action does not appear to be slowing down.
Thanks for reading and see you next week!
Clara Medalie, clara@kaiko.com (email me for any feedback or suggestions!)
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