Trading Volume Plummets Despite Record Volatility
Kaiko Research: June 14, 2021
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- Price Movements: Markets trended downwards last week following several volatility-inducing macro events. Bitcoin is currently the only top 10 asset with positive returns since the start of June.
- Volume Dynamics: June trade volume is but a fraction of May’s all time highs despite persistent volatility.
- Order Book Liquidity: Price slippage for Ethereum and Bitcoin markets is now nearly equal.
- Macro Trends: Inflation expectations have fallen slightly despite rising consumer prices, with all eyes now on the Fed’s upcoming June meeting.
Price Movements
Macro events (and Elon) shake markets. Crypto markets registered strong volatility in a week filled with significant macro news events. El Salvador officially adopted bitcoin as legal tender, the Basel Committee released recommendations for banks engaging in crypto-related activities, China continued its crackdown on crypto mining and trading activities, and the U.S. Justice Department recovered the bulk of the crypto ransom paid by Colonial Pipeline.
These market-moving events came against the backdrop of high inflation figures out of the U.S. and China, which has caused global financial markets to jitter at the prospect of an early unwinding of liquidity-boosting monetary policy.
Bitcoin closed the week up 7% in a Sunday turnaround sparked by bullish tweets from Elon Musk. Ethereum’s recovery seems to have slowed, with the second largest crypto asset falling 9% on a weekly basis. Thus far, June appears to be a continuation of May’s steep sell-off.
Overall, Bitcoin is the only top 10 crypto asset up in June. Most assets are down double digits for the month, with Chainlink faring worst at -28%. Uniswap, the largest DeFi asset by marketcap, is down 19% MTD, a similar range as other top DeFi assets.
Volume Dynamics
Trade volume sees steep decline. Trade volume for the top four currency pairs has plummeted since May 19th, the highest volume day ever recorded. Volumes aggregated across the top 20 exchanges have hovered around $20 billion daily since the end of May, despite several large volatility-inducing events. Overall, markets are calmer with less liquidity than May, which saw record-breaking price movements which triggered billions in forced liquidations.
Average trade size for Bitcoin is falling. The average Bitcoin trade size for BTC-USD trading pairs has undergone a slight but noticeable drop over the past few months. On Coinbase, the average trade size fell by 33% YTD from ~$3.0k in January to ~2.0k in early June, on Kraken from ~$5.0k to ~$4.9k over the same period and on Gemini from ~$2.6k to ~$2.3k. LMAX Digital recorded a decline of 24% YTD from ~$10.3k to ~$7.9k per trade.
The decline suggests that the number of high volume traders has fallen over the past few months. Most institutional traders break apart their orders into smaller trades, thus average trade size only accounts for individual orders and is not indicative of total volume traded by an individual. However, average trade size is a useful measure for observing overall trends in individual order sizes, which often fluctuate during times of volatility and during bull/bear markets. On-chain data from Chainalysis shows that outflows from exchanges to self-hosted wallets has fallen since mid-March, which supports the idea that investor accumulation has declined since early 2021, when crypto markets were at peak euphoria.
Latin American trade volume reaches new all time high. El Salvador’s symbolic move to allow bitcoin as legal tender is the latest of several positive developments in the rapidly-growing Latin American crypto industry. In early May, leading Mexico-based cryptocurrency platform Bitso closed a $250m Series C funding round, valuing the exchange at more than $2.2 billion. Bitso’s monthly trade volume exceeded $1bn in May for the first time ever, up from just $92 million in May 2019.
The platform’s growth is supported in large part by their popular crypto remittance service, which boasts lower fees and quicker transfers than traditional remittance venues like Western Union. Today, Bitso processes around 3% of yearly remittance volumes between Mexico and the United States (over $1bn annually). The bulk of those transfers are powered by Ripple’s On-Demand Liquidity service which provides cross-border payments through Ripple’s XRP cryptocurrency. XRP trade volume currently accounts for around 20% of all transactions on Bitso, and the XRP-MXN trading pair is the second highest volume on the exchange.
Growing acceptance of crypto in the Latin American region could ultimately pave the way for a more diverse range of crypto service providers and financial use cases. Shortly after El Salvador’s initial announcement, several Latin American politicians signalled their support for the initiative on Twitter.
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
Bitcoin and Ethereum liquidity is now nearly equal. Over the past year, price slippage for Bitcoin and Ethereum on Coinbase and Binance has converged and is now nearly equal. Above, we chart the average price slippage for a $100k sell order for BTC-USD and ETH-USD on Coinbase and BTC-USDT and ETH-USDT on Binance, the top traded pairs on both exchanges. The data shows that liquidity for Ethereum has improved drastically over the past year, with measures for slippage now nearly equal for the two assets. This suggests that market makers have improved the provision of liquidity for Ethereum order books for both USD pairs on Coinbase and Tether pairs on Binance.
Price slippage measures the difference between the expected price of a trade and the price at which the trade is executed. Large market orders will often experience higher slippage, which is why the market depth for a currency pair is crucial for maintaining price stability. Slippage often increases during times of volatility, which is why there is a spike last March during the market collapse.
Measures for bid-ask spread have improved at a slower rate compared with price slippage:
While the spread on both exchanges has fallen since March 2020, they have experienced more volatility than measures for price slippage. Ethereum spreads are still slightly higher than Bitcoin spreads.
Macro Trends
We have renamed this section from ‘Volatility and Correlations’ to reflect its focus on traditional finance and macro crypto trends.
Inflation expectations have fallen in June despite global jitters. The breakeven inflation expectation, a market based measure of expected inflation over the next 5 years has declined slightly after reaching a record high in May. All eyes are now on this Wednesday’s upcoming meeting of the Fed for clues as to which direction the agency will take. Over the past year, all asset classes, including crypto markets, have benefited from increased global liquidity.
Despite global restlessness over monetary tightening, the ECB dismissed concerns last Thursday over rising inflation which provided a bullish signal to equity markets. The S&P 500 closed at an all time high last Friday, yet crypto markets’ recovery appears hesitant in June. Bitcoin’s correlation with the S&P 500 is currently at .37, relatively weak, while its correlation with gold has turned negative, reversing a covid-era trend that saw most global asset classes closely correlated.
Ethereum’s longterm volatility reaches 2-year high. Ethereum’s 180D volatility has hit a two-year high, higher even than the period of time following March 2020’s market collapse. Bitcoin’s 180D volatility has surged, but still remains lower than last March’s prolonged stretch of volatility. The spread between the two asset’s volatility curves has also widened over the past few months to levels not seen in years. 180D volatility is a lagging indicator that encompasses the previous 180 days of returns, thus this measure shows just how extreme the previous 6 months have been.
Thanks for reading and see you next week!
-Clara Medalie, Strategic Initiatives and Research Lead
clara@kaiko.com
Kaiko’s research newsletter was written by Clara Medalie, with help from Dessislava Aubert, Anastasia Melachrinos and the Kaiko team. This is not financial advice. Any redistribution of charts and content appearing in this Factsheet must cite Kaiko as the sole provider and creator.
