Binance Crackdown Threatens Regional Dominance

Kaiko Research: July 5, 2021

Clara Medalie
Kaiko

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  • Price Movements: Bitcoin suffered the worst quarterly returns since 2018, down 40% since the start of Q2.
  • Volume Dynamics: The majority of Binance trade volume occurs during the overlap between North American and European trading hours.
  • Order Book Liquidity: Two months after listing Tether, Coinbase’s BTC-USDT liquidity still lags far behind BTC-USD.
  • Macro Trends: The U.S. Dollar Index recovered slightly following the Fed’s June meeting, which resulted in the re-emergence of its inverse correlation with Bitcoin.

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Price Movements

Crypto markets rebound following dismal end to Q2. July has begun and along with it a short-term reversal of crypto’s falling fortunes. Bitcoin surged above $35k and Ethereum now trades well above $2k in a tepid sign that the worst of the market-wide sell-off has stalled for now. Global crypto adoption continued this past week with news that the world’s largest inter dealer broker TP ICAP plans to launch a crypto trading platform with Fidelity, Deutsch Bourse acquired a crypto custodian, and Robinhood revealed $88 billion in crypto trade volume.

Bitcoin ends Q2 down 40%. Bitcoin suffered its worst quarterly returns since 2018, on par with the aftermath of the 2017 bull run which saw prices crash a whopping 48%. Bitcoin’s sharp Q2 correction spread throughout other sectors of the crypto economy, but failed to cause as dramatic an effect with Ethereum, which ended the quarter up 12% despite a sharp correction from all time highs. Despite the market-wide downturn, most top crypto assets are still up year-to-date, faring better than traditional financial assets.

Volume Dynamics

Crackdown on Binance threatens global dominance. In the past week, Binance has faced an onslaught of regulatory restrictions around the world, threatening the exchange’s overwhelming global dominance. Binance has been outright banned from operating or is facing severe regulatory restrictions in Ontario (Canada), the UK, Thailand, Singapore and the Cayman Islands. The recent crackdown is linked to the exchange’s lack of headquarters and growing global efforts to reduce money laundering.

Binance was originally based in Asia but following the Chinese crackdown in 2017, it quickly spread around the globe through regional hubs that have since gained massive market share, without having any centralized base. Above, we chart average hourly trade volume for BTC-USDT, Binance’s highest volume trading pair, and can observe that volume peaks at the overlap between U.S. and E.U trading hours, not Asian hours. The Asian session runs from 23:00–8:00am UTC, and we can observe a surge in average volume at 00:00. However, the most volume occurs from 12:00–16:00 UTC, right as U.S. markets are opening and the day is coming to a close in the EU.

This suggests that Binance relies heavily on North American and European traders for a significant portion of revenues, which means a regulatory crackdown could threaten the exchange’s dominance in these regions. Huobi, one of Binance’s biggest competitors in the Asian region, also experiences a spike in volume at the overlap between EU and US trading hours, as charted below.

Okex, another strong Binance competitor, peaks at the start of Asian trading hours (00:00 UTC), a sign that the exchange caters for a more regional trader base, rather than a global base. Exchange’s like Coinbase have taken the government-friendly route, forming close relationships with various regulatory bodies to earn operating licenses. This makes it more difficult to gain a global user base but has helped them capture the majority of U.S. based institutional trade volume.

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

Coinbase USD pair is more liquid than Tether. In early May, Coinbase finally listed Tether after years of holding off due to major regulatory concerns with the stablecoin’s reserves. Coinbase’s BTC-USDT trading pair has not gained much traction on the exchange, which offers a BTC-USD trading pair that boasts the best liquidity out of all USD fiat pairs in the crypto industry. We charted the bid-ask spread for both instruments and can observe that BTC-USD spreads rarely break .4 basis points, whereas BTC-USDT spreads regularly hover above 2.5 BIPS, a sign of illiquidity. Overall, though, spreads have improved quite a bit since early May, which suggests more market makers are providing liquidity to Tether order books.

On exchanges like Binance, Huobi, and Okex, BTC-USDT markets have even better liquidity than Coinbase’s BTC-USD market. Although the Dollar remains the strongest quote asset on regulated “fiat” exchanges, there is no guarantee that this dominance will last as Tether continues to gain global legitimacy.

Bid ratio hovers above .5 for most of past month. The ratio of bid depth to total depth takes the sum of bids on BTC-USD order books aggregated across eight exchanges relative to the total market depth (the sum of both bids and asks). For most of the past month, the quantity of bids has been greater than the quantity of asks, which is determined whenever the line crosses above .5 (in green). Typically, as Bitcoin’s price falls, the quantity of bids increases relative to asks, which are filled as the price falls. Traders will place more bids on BTC-USD order books in a potential example of “buy the dip” behavior.

Macro Trends

Traditional equities surge while gold continues downtrend. The Fed’s accommodative monetary policy has pushed both traditional and crypto assets to all time highs throughout 2020–21. However, over the past few months, crypto assets have de-correlated from traditional financial equities, registering double-digit losses as the S&P 500 and Nasdaq continue to break all time highs. Despite inflation concerns, Gold still registers negative YTD returns, down 8% since the start of 2021. The Fed’s hawkish shift mid-June caused equities to briefly dip before rebounding on growing optimism around a steady economic recovery and robust corporate earnings.

The U.S. Dollar index recovered slightly following June Fed meeting. The U.S. Dollar has been on the rise since mid-June following the Fed’s decision to speed up its rate hike timeline due to growing inflation concerns. The Dollar Index, which measures the greenback’s performance against a basket of rival currencies, gained 2.9% on a monthly basis in June while Bitcoin registered negative monthly returns for a third straight month. Over the past year, the Fed’s monetary policy has benefited risk-on assets such as Bitcoin but had a negative impact on the U.S. Dollar. This temporarily created an inverse correlation between the two, which saw the DXY fall to multi-year lows as Bitcoin surged to all time highs.

From March to May, this inverse correlation evolved into a positive correlation. However, June saw the inverse correlation return with the looming possibility that the Fed will begin monetary tapering, which presents a bullish outlook for the U.S. Dollar and a bearish outlook for riskier assets like Bitcoin. Last week, a mixed U.S. jobs report pushed the DXY down from 92.59 to 92.23 while BTC increased by $1,000 over the weekend and major U.S. equities indices closed the week at record highs.

Thanks for reading and see you next week!

Written by Clara Medalie with contributions by Dessislava Aubert and Arun Vignesh

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