Kaiko Factsheet: December 21, 2020
This week in cryptocurrency markets
- Price Movements: Bitcoin’s new all time high above $24k ushers in an entirely new era of price discovery as the cryptoasset enters (literally) uncharted territory
- Trading Volume: The majority of all BTC-USD volume occurs during the week, and not on weekends, indicating an institutional presence in cryptocurrency markets.
- Order Book Liquidity: Bid and ask depth plunged and spreads nearly doubled on all exchanges as Bitcoin tore through sell walls holding it below $20k.
- Volatility and Correlations: Bitcoin’s correlation with the S&P 500, Nasdaq, and Gold is now negative.
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Bitcoin and beyond. For the first time ever, Bitcoin broke $20k…and then $21k…$22k…$23k…$24k. All in one week. This time around, Bitcoin reached new all time highs on every exchange, not just a select few, thrusting anyone who has ever bought the oldest crypto-asset into profitability. Ethereum benefited from the positive market sentiment and announcement that CME would list ETH futures, surpassing multi-year highs this week above $600. Yet, the 2nd largest crypto-asset still trades nearly 800 dollars below its ATH.
In the midst of Bitcoin’s record-setting rally, Coinbase announced they had filed with the S.E.C. in preparation for a public offering, the first time a cryptocurrency company of such size and prominence in the industry has done so. Coinbase is as much a success story as Bitcoin, making cryptocurrencies accessible to retail traders and institutions alike in addition to boosting professionalism and legitimacy throughout the industry. Ultimately, their IPO plans attest to the rapid growth of digital assets, but also pose questions about the industry’s strengthening ties with traditional finance.
Bitcoin’s institutional adoption quickens. Bitcoin is now in pure price discovery mode as it surpasses all prior trading levels. How did Bitcoin get here in just a few short months? This year created the perfect conditions for Bitcoin’s adoption by institutions, which have largely been credited with initiating this current bull run. The flow of institutional news is becoming more steady, and December brought a whole new wave of interest, product plans, and investments by large traditional financial actors, summarized in the chart above.
Bitcoin’s lucky Q4. Bitcoin’s YTD returns are 219%, but the majority of its price appreciation has occurred throughout Q4. Since October 1st, Bitcoin has ended the day in the green 2/3 times, gaining more than 9% on two separate occasions. The asset climbed more than $4,000 over the past week, a rally of the likes not seen since 2017.
No weekend volume for Bitcoin. Trading volume for BTC-USD trading pairs is largely concentrated during the weekdays, peaking on Thursday, according to 6 months of volume data. Average weekend trading volumes are only half of weekday volumes. These trends in volume are very similar to trends for traditional financial assets, which is notable considering crypto markets are open 24/7, while equities markets are only open for limited hours during the week. These similarities indicate an institutional presence in cryptocurrency markets, with traders transacting during weekdays and taking the weekends off.
XRP volume are more consistent. Compared with BTC-USD volumes, XRP-USD volumes are far more stable, and show similar daily averages during the week and weekend. The Tuesday surge can be attributed to an abnormally high volume day at the start of XRP’s price rally. By comparing Bitcoin and XRP, we can draw some assumptions over the types of traders transacting with each asset. If the majority of XRP traders were institutional, then we could expect volumes to be significantly higher during the weekdays.
Volume reveals Coinbase’s profits. Since its founding, Coinbase has served as the de facto USD on-ramp to cryptocurrency markets. We decided to take a look at how USD volumes have evolved since 2014, in light of the exchange’s IPO plans. Trading fees are how most exchanges make the majority of their profits, and although Coinbase has several other business arms, its trading business is its largest. Thus, trading volumes can reveal a lot about how much money Coinbase is pulling in, and what its potential valuation could be.
We can observe that monthly volumes peaked during the last bull run, and have been relatively unsteady since then. Most investors look for steady growth in recurring profits, and because trading volumes are entirely dependent on the volatility of the markets, trading fees can produce inconsistent profits month-to-month. This implies that Coinbase has found ways to make steady profits through one of its other business arms, or that it has shown consistent growth in other key metrics such as number of users.
Coinbase doubles number of pairs in 2020. Coinbase now lists 120 trading pairs, with exactly half of all pairs listed just in 2020. Coinbase’s strategy for listing new pairs has always favored strict due diligence, largely avoiding the long tail of crypto-assets. That all changed this year as the exchange pursued a new, more inclusive strategy, listing new crypto-assets in droves to the surprise of many. This new strategy is certainly a way to become more competitive against exchanges with lighter listing requirements, such as Binance or Huobi, which many traders prefer because they offer a wider selection of assets.
Order Book Liquidity
Uncharted territory. As Bitcoin climbed $4,000 in a matter of days, market makers were thrust into an unprecedented position of trying to make a market for price levels never before reached. As Bitcoin climbed, the quantity of both bids and asks on order books plunged, with a delay of nearly two days before orders surrounding the midprice began to rebuild. For an increase in price to happen, sell walls placed close to the midprice on an order book must be removed by market buy orders, which is why $20k proved difficult to break. However, once that wall collapsed, Bitcoin shot up with little resistance.
Spreads widen in response to $4k rally. The bid-ask spread on most exchanges widened to their highest levels in months after Bitcoin’s unprecedented rally to new all time highs. Spreads nearly doubled on most exchanges, which is expected behavior in times of volatility.
Volatility and Correlations
Correlation with traditional markets plummets. This week, the S&P 500’s correlation with Bitcoin fell precipitously into negative territory, indicating that the two markets have a slight inverse correlation. Bitcoin reached all time highs last week while US and EU markets sold off. Part of why Bitcoin has become more attractive to institutional investors over the past three months is because of its lack of correlation with traditional markets. When the stock market falls, investors search for uncorrelated or inversely-correlated hedges, qualities that Bitcoin currently holds. The falling dollar, aggressive fiscal stimulus, and fears of inflation have also contributed to Bitcoin’s growing attraction as a hedge in 2020.
Any redistribution of charts appearing in this Factsheet must cite Kaiko as the sole provider and creator. This Factsheet was written by Clara Medalie, developed by Anastasia Melachrinos with help from the Kaiko team. This is not financial advice.