Bitcoin Discount Emerges on U.K. Markets Following Binance Ban
Kaiko Research: July 12, 2021
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- Price Movements: Following the UK’s Binance ban, Bitcoin pairs denominated in the British Pound have traded at a steep discount to the U.S. Dollar.
- Volume Dynamics: Average weekend trading volume has increased relative to weekday volumes over the past year.
- Order Book Liquidity: The bid-ask spread for BTC-USD pairs has widened on all exchanges analyzed throughout this recent sell-off.
- Macro Trends: Bitcoin’s correlation with the S&P 500 turned negative for the first time in 2021.
Price Movements
Bitcoin is thoroughly range-bound. For the fourth week in a row, Bitcoin closed Sunday night in the mid-$30k range, failing yet again to break any significant levels of resistance. The after-effects of China’s miner crackdown were felt strongly this week as Bitcoin underwent its largest drop in mining difficulty ever, which suggests a large number of miners have been forced offline. Ethereum network fundamentals also made headlines this week as gas prices dropped to their lowest levels in more than a year, a result of falling prices and network usage. Ethereum will soon undergo a new hard fork set to improve transaction fee volatility and help the network handle congestion.
In other news, USDC backer Circle is going public via a SPAC, Bank of America launched a crypto research team, and traditional markets sold-off amid global recovery concerns.
Binance ban causes GBP discount. On June 28th, market regulators banned Binance from operating in the U.K. which instantly created a steep discount for BTC-GBP markets relative to BTC-USD. Bitcoin actively trades against the British Pound on 13 exchanges, of which Binance accounts for a significant portion of total volume. The ban likely spooked traders who sought to quickly cash out their Bitcoin, resulting in a discount relative to BTC-USD markets. Never before has such a steep drop been observed for the British Pound, which normally trades within maximum .1% of USD markets. We chart BTC-EUR for context, which today trades within .02% of USD markets. Following the ban, Barclays and Santander UK banned clients from transferring funds to the exchange. Binance also temporarily stopped payments from the EU’s Sepa platform.
Should we cancel our weekends? Throughout 2021, Sunday’s have by far been the most volatile day of the week, posting on average -1% returns, a greater absolute return than any other day. This is a sharp divergence from 2020’s relatively quiet weekends, where Sundays saw on average just .2% in absolute returns. Even more interesting is that Sunday returns are overwhelmingly negative in 2021. What could explain this shift in market activity? The recent sell-off certainly contributed to this trend, but it is difficult to identify why bearish behavior is concentrated on Sundays, the least liquid day of the week.
Volume Dynamics
Average weekend volumes are growing. Sunday’s volatility could be explained by trends in trading volume on the leading crypto-to-fiat exchanges. The average volume of Bitcoin traded over the weekend is growing relative to average weekday volumes. The ratio between weekend and weekly BTC-USD volumes has doubled since March 2020 on Coinbase, Kraken and Gemini. The ratio takes the average weekend volume divided by the average weekday volume, and when this ratio is above 1, the average weekend volume is greater than during the week. We can observe a clear trend over the past year, with average weekday volume still higher than weekend volumes, but weekend volumes quickly catching up.
This trend is interesting because it conflicts with Bitcoin’s institutional narrative. Growing weekend volume suggests a higher retail presence relative to institutions, which we assume concentrate trading during the weekdays. However, the data could also suggests an increasing prevalence of bot trading, with high-volume traders breaking apart large orders to execute over the weekend.
Below, we chart the same ratio for BTC-USDT markets on the three major crypto-to-crypto exchanges: Binance, Okex, and Huobi.
These exchanges have a more retail reputation, and the data confirms that average weekend volume is nearly equal to average weekday volume (1:1). There has been little change in the ratio on crypto-to-crypto exchanges over the past year. Overall, liquidity remains lower and is replenished more slowly outside of traditional trading hours, which could explain why growing weekend volumes has generated negative Sunday returns.
Tokenized equities on FTX are off to a slow start. Tokenized equities are digital representations of a company’s equity shares issued on a blockchain. This novel type of financial instrument requires regulatory approval and partnerships with traditional issuers, and since 2019 only four exchanges have launched these products: FTX, Binance, Bittrex, and Currency.com.
We analyzed total monthly volume for 10 of the top tokenized equities on FTX, and can observe that these products still have a ways to go before gaining mainstream acceptance. In June, only $10 million in volume was executed throughout the whole month. For reference, FTX’s Bitcoin perpetual future processes nearly $1 billion a day in volume. While volumes remain low overall, tokenized equities have the potential to shake up the traditional financial industry. They enable investors outside of the U.S. to gain exposure to blue-chip U.S. stocks such as Apple, Tesla and Amazon, and can be issued fractionally with 24/7 trading.
Crypto markets continued their downtrend into June as China’s crackdown on mining activities and general bearish sentiment at the macro level weighed on prices. In our latest market report, we explore the scale of the market-wide sell-off, regional growth in South Korea and South America, the stablecoin premium, traditional financial indicators, and much more.
You can download the full report here. All reports are also available on Refinitiv, S&P Capital IQ, Dow Jones Factiva, and Factset.
Order Book Liquidity
Bitcoin liquidity has worsened during sell-off. Over the past three months, the average bid-ask spread has increased ever-so slightly for BTC-USD pairs on the leading crypto-to-fiat exchanges. The increase has been most notable on Bitstamp, which has seen average spreads grow from 3 basis points to 4.8 basis points. Coinbase has experienced only a slight increase from .11 basis points to .14. Jitters over the previous month’s sell-off could explain the trend, with market makers taking a step back waiting for markets to recalibrate.
Average price slippage, which measures the difference between the expected price of a trade and the price level required to fully execute an order, has also increased. Below, we chart average price slippage for a simulated $50k market sell order, averaged across the same six exchanges charted above.
We can observe that slippage has grown slightly from the .02-.03% range to .03 -.04% over the past three months. Higher measures for price slippage mean it is costlier to trade large quantities of Bitcoin.
Macro Trends
Bitcoin’s correlation with S&P 500 shifts negative. For the first time this year, Bitcoin’s correlation with the largest equity index has flipped negative, meaning the two financial instruments now have a slight negative correlation. For the first six months of 2021, Bitcoin and the S&P 500 were loosely correlated as both repeatedly broke all time highs amid a record-setting bull run. However, Bitcoin has since crashed while the S&P 500 continues to soar, resulting in a sharp divergence between the two. Bitcoin’s correlation to Gold remains negative, but rose by 20% over the past month and is now slightly higher than the S&P 500, a first this year.
Thanks for reading and see you next week!
Written by Clara Medalie with contributions by Dessislava Aubert and Arun Vignesh
