Kaiko Research Factsheet: January 11th, 2021
This week in cryptocurrency markets:
- Price Movements: Markets are in full-on price discovery mode with price swings now as extreme as the March market crash.
- Trading Volume: While the majority of Bitcoin trade volume occurs against Tether (USDT), the proportion of Bitcoin — U.S. Dollar volume has grown since the bull run commenced, indicating an institutional presence.
- Order Book Liquidity: There is a shortage of bids and asks on BTC-USD order books which could explain why Bitcoin has experienced little resistance on the path to record-breaking highs.
- Volatility and Correlations: Bitcoin’s correlation with gold plummeted this week while its correlation with equities strengthened.
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Price discovery causes markets to whipsaw. Soaring returns pushed the total market capitalization of crypto-assets above $1 trillion for the first time amidst one of the most turbulent weeks in U.S. political history. Bitcoin and Ethereum closed Sunday night at $38k and $1.2k respectively, before promptly crashing by double digits in the early hours of Monday morning. Even XRP gained a whopping 39% while facing a lawsuit from the SEC. It is clear that cryptocurrency markets are in price discovery mode, with zero precedents of support and resistance, making technical analysis for future price predictions a near Sisyphean endeavor.
Which fiat is leading BTC gains? Last week, Coindesk reported the return of the ‘Kimchi Premium’, a phenomenon that made headlines during the 2017 bull run which saw Bitcoin trading at a significant premium against the Korean Won. We can observe this premium start the week of January 3rd, which saw the price of BTC vs. KRW gain faster than that of other fiat currencies. In perfectly efficient markets, there would be little to no difference in the price of Bitcoin across fiat-pairs. Prices align because arbitragers profit off of the difference between market prices, which eventually settle at an equilibrium. BTC-USD markets have become more efficient since 2017, but there remain plenty of arbitrage opportunities across the array of BTC-fiat pairs, which are more difficult for arbitragers to take advantage of.
Regulatory pressure threatens privacy coins. Last week, Bittrex became the latest exchange to announce that they would delist the so-called privacy coins Monero, Dash, and Zcash, crypto-assets that have built in privacy features anonymizing user addresses and transaction amounts. Exchanges around the world are increasingly attentive to know-your-customer (KYC) and anti-money laundering (AML) regulations, which has led to a small wave of delistings over the past year. Privacy coins have failed to come close to the All Time Highs reached during the 2017 bull run and Bittrex’s announcement caused a sharp drop in prices.
Proportion of U.S. Dollar volume increases relative to Tether. While the majority of Bitcoin trade volume occurs against Tether (USDT), the proportion of Bitcoin — U.S. Dollar volume has grown since the bull run commenced. For the past year, BTC-USD volume has been about 30% compared with Tether’s 70%. Since mid-October, that percentage has grown to more than 40%, which indicates an institutional presence in cryptocurrency markets. Institutions typically prefer to transact with fiat currencies, rather than Tether, which poses more regulatory risk although markets are more liquid. (note: this chart comprises data from 17 exchanges listed here but we will be publishing a more in-depth analysis of Tether-Dollar volumes in the next couple of weeks)
The dollar is the top fiat on-ramp to Bitcoin markets. The U.S. Dollar still accounts for the majority of all Bitcoin-fiat volume, with the Japanese Yen, Korean Won, and Euro following. In early January, we can observe a slight increase in the market share of BTC-KRW trading volume, which could explain why there was a brief BTC premium on Korean exchanges around that time. Otherwise, the proportion of BTC-fiat trading volume has remained relatively unchanged over the past year and a half.
Order Book Liquidity
A shortage of bids and asks on Bitcoin order books. Our friends over at Chainalysis analyzed on-chain data and found that there is likely a shortage of Bitcoin sellers due to low volumes of exchange in-flows. By analyzing exchange market data, we can observe that there appears to in fact be a shortage of bids and asks on Bitcoin-Dollar order books. This could be one reason why the price of Bitcoin has faced little resistance over the past month, resulting in record-breaking highs. The lower the quantity of asks on an order book, the easier it is for large market buy orders to push up the price of an asset. The pace at which Bitcoin has soared to record highs has likely resulted from an influx in new buyers and a deficiency in ask-side liquidity.
Price slippage has increased on some exchanges. The percentage difference between the expected price of a $50,000 buy order and the actual price that the trade was executed — a phenomenon known as price slippage — has increased marginally on some exchanges over the past month. This indicates that there are fewer ask orders immediately surrounding the mid-price, meaning that market makers have widened spreads and/or reduced the quantity of orders on the book (which can be observed in the above chart).
Volatility and Correlations
Bitcoin’s correlation with gold plummets. Bitcoin’s 30-day rolling correlation of returns with gold is now at -.329, continuing its downward streak that began at the end of November. The crypto-asset’s correlation with equities strengthened over the week as markets soared despite Washington’s biggest political crisis in a century. The dramatic culmination of this election season ushers in a blue wave that promises to expand government spending and quantitative easing to remedy the economic effects of the pandemic, a prospect that has frayed some nerves in the finance industry. But it seems that these concerns have not yet overflowed to equities markets, which continue to post huge returns in what some are beginning to liken to a bubble, disconnected from the realities of the pandemic-shaken economy.
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.