Decentralized Exchange Volume Plunges
Kaiko Research: June 28, 2021
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- Price Movements: Volatility is predicted ahead of the Grayscale Bitcoin Trust ‘unlockings’.
- Volume Dynamics: The number of trades executed on decentralized exchanges is de-correlated from the total volume traded, which has dropped sharply in June.
- Order Book Liquidity: Bitfinex’s market share of order book depth has increased over the past year relative to other fiat exchanges.
- Macro Trends: China’s mining crackdown creates an opportunity for North American mining companies, whose share prices have trended with Bitcoin’s price over the past year.
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Price Movements
Bitcoin and the Grayscale unlockings. June’s market-wide correction has spread throughout all sectors of crypto, but on the horizon looms another potentially pivotal market event: the Grayscale “unlockings.” The Grayscale Bitcoin Trust is a closed-end fund that enables accredited investors to purchase shares of the trust at NAV. After a mandatory 6-month lock up period, shares are “unlocked,” giving investors the option to sell their holdings on secondary markets to retail traders. For much of the past year, secondary shares have traded at a steep premium to NAV, which created a popular carry trade in which investors would purchase shares and profit off of the premium 6 months later. This type of trade helped fuel Grayscale’s growth into the single largest holder of Bitcoin, with billions in AUM accounting for approximately 3% of total supply.
However, since February, the Grayscale premium — which at one point was greater than 40% — has transformed into a persistent discount. This bodes poorly for July’s “unlockings,” in which more than 140,000 BTC worth of shares will become available for liquidation. Many fear that falling crypto prices along with the discount could cause investors to flood secondary markets, which could place further downward pressure on Bitcoin spot markets.
Selling shares is very different from selling Bitcoin on spot markets, and the unlockings don’t necessarily mean Bitcoin will suffer. However, it is the uncertainty surrounding the event and the types of strategies GBTC traders have employed that is resulting in bearish speculation. For the past month, Bitcoin has failed to consistently trade above $40k and recently underwent a “death cross.” However, positive crypto developments continued this week with news that A16Z launched a $2.2 billion crypto venture fund and CitiGroup’s digital asset unit is now live.
DeFi markets reset ahead of Ethereum upgrade. The recent market-wide downturn has affected the returns of Ethereum and the majority of DeFi tokens operating on the blockchain network. Ethereum’s YTD returns fell from a high of +467% in May to +153%, still high by traditional finance standards but considered a very sharp turnaround in crypto-land. Most DeFi tokens — crypto assets powering decentralized finance applications — are still well in the green YTD, although most have seen their value plummet since May.
Despite the downturn, there is still plenty of innovation in the space with a seemingly continuous rollout of new DeFi products. Ethereum is also undergoing a series of upgrades designed to improve the throughput of the network and bring more stability to its notoriously-high transaction fees. EIP 1559, an Ethereum Improvement Proposal designed as a fix for Ethereum’s scaling issues, is planned to rollout this Thursday, generating both enthusiasm and hesitancy for users of the network.
Order Book Liquidity
Bitfinex boasts deepest Bitcoin order books. Market depth measures the total quantity of Bitcoin on an order book. Above, we chart average market depth within 2% of the mid price for BTC-USD on eight exchanges. We can observe that Bitfinex has gained market share since last year, and now accounts for more than 50% of USD spot market liquidity. Kraken accounts for 18% and Coinbase 11%. Over time, we can observe that Bitstamp has lost market share and now accounts for around 6% of spot market liquidity. Typically, the deeper a pair’s order book, the easier it is to place large market orders without significantly moving the price the asset. Exchanges incentivize market makers to supply liquidity to order books, which overall improves market efficiency.
Macro Trends
Public blockchain mining companies trend with Bitcoin’s price. China’s sudden crackdown on miners has created one of the largest migrations of Bitcoin computing power in the network’s history. Bitcoin mining is big business and for years the majority of all hash power has been concentrated in China. However, over the past year, other regions of the world have stepped up; in particular, North American miners are increasingly grabbing market share, according to The Block. A handful of blockchain mining companies are listed publicly on Nasdaq, the Toronto Stock Exchange, and London Stock Exchange, and above we chart their share price compared with Bitcoin.
We can observe that the two are closely correlated: as Bitcoin goes up, so do blockchain miner share prices. Since March of 2021, mining companies have suffered along with Bitcoin’s price, which stands in contrast to the record-breaking gains of the S&P 500. China’s recent clampdown could be seen as a good omen for these mining companies, though, which could translate to their share prices in the long run.
Thanks for reading and see you next week!
Written by Clara Medalie, Strategic Initiatives and Research Lead
Contributions by Arun Vignesh, Research Analyst
