Bitcoin Trade Volume Hits New All Time High
Kaiko Research Factsheet: January 18th, 2021
This week in cryptocurrency markets:
- Price Movements: Intraday Bitcoin price movements are becoming more extreme and constant, with hourly returns of +/- 2% occurring nearly every day since mid-December.
- Trading Volume: The average trade size on Coinbase has doubled since March. Also, Bitcoin markets recorded their highest daily volume ever.
- Order Book Liquidity: Market depth and spreads recovered more quickly after the January 11th price crash compared with the March crash, suggesting markets have become more resilient. Nonetheless, there still appears to be an overall shortage of bids and asks on Bitcoin order books.
- Volatility and Correlations: Measures for BTC volatility have not come close to all time highs despite the past few months’ extreme price movements.
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Price Movements
Markets recover quickly following price crash. Bitcoin suffered its biggest daily drop in price ever last week, falling from $40k to $31k over the course of one day. Many compared the crash on January 11th to last March’s Black Thursday event, which was largely perpetuated by mass liquidations resulting from over-leveraged positions in derivatives markets. When analyzing data from the two crashes, we can observe that the March crash had a far more lasting effect on liquidity, with wide spreads persisting for weeks. This time around, markets quickly absorbed and recovered from the price crash, with little lasting effect on overall market liquidity (more charts on this below). This is further evidence that cryptocurrency markets have matured considerably over the past year.
Intraday price movements are becoming more extreme. Bitcoin’s record-breaking rally has resulted in one of the longest sustained periods of extreme intraday volatility ever recorded. Nearly every day since mid-December has seen at least one hourly price movement of +/-2%, a rare occurrence over the previous five months. In general, Bitcoin’s positive price movements have been less extreme and more consistent than its negative movements, observable in the chart above.
Trading Volume
Average trade size (in $) has doubled since March. Typically, the more traders transacting on an exchange, the smaller the average trade size (which we observed in a research piece analyzing trade size on 11 exchanges). Although trade count and volumes have soared on Coinbase over the past few months, average trade sizes have nearly doubled since March. In the above chart, we compare the average trade size measured in $ and in BTC on March 12 and January 11, two days where large price crashes occurred. We analyzed the days surrounding the price crash (not shown), and found that the average trade size showed similar trends.
While the average trade size as measured in Bitcoin has dropped precipitously (which is expected as the price climbed), the dollar value of these trades has nearly doubled, which was a surprising observation. The data could indicate that the proportion of institutional traders to retail traders on Coinbase has increased since March. Many institutional traders break apart their large trades into smaller trades, which has likely influenced the overall average trade size.
Is PayPal influencing Bitcoin markets? The Financial Times recently wrote an article speculating that PayPal’s entrance into cryptocurrency markets through its partnership with Paxos’ itBit exchange has contributed to Bitcoin’s bull run. The huge increase in itBit trading volumes over the past few months has led to speculation that these trades came from PayPal users (which is not possible to prove given the anonymity of transactions).
To determine whether this increase in volume has impacted cryptocurrency markets, we compared itBit’s market share of volume to other Bitcoin exchanges. We can observe that the market share has remained steady over the past few months, which means that volumes on other exchanges have risen proportionally in response to the bull run. While it is difficult to determine if PayPal is contributing to the spike in volume, their entrance into cryptocurrency markets has made it easier for millions of users to buy crypto, which could lead to an increase in market share as the feature increases in popularity.
Bitcoin-Tether volume reaches new daily high. The majority of our weekly analysis covers Bitcoin-Dollar markets, but this week we take a look at Bitcoin-Tether markets. We can observe that Tether volumes reached new highs over the past few months, topping 150 billion in January (and the month is not even over yet). We can also observe that competition is heating up between the largest Tether exchanges. Binance, OKEx, and Huobi are currently the top three Bitcoin-Tether markets, controlling more than 60% of all volume (shown in chart below).
Exchange competition heats up. Binance launched in 2017 and following a brief drop in market share, has increased its percentage of total volume steadily throughout 2020. Binance is by far the largest BTC-USDT market, now averaging 40% of total volume per month. Competition between exchanges is growing more fierce, specifically between the “big three” in Asia — Binance, OKEx, and Huobi — which attract traders with their extremely liquid Tether markets.
Order Book Liquidity
Markets have become more resilient since March. On January 11th, the price of Bitcoin fell more than $9k over the course of a day, resulting in the single highest daily trading volume in Bitcoin’s history. During a typical extreme price movement, market makers adjust their positions to hedge for increased risk which can result in a temporary fall in market depth. During the March market crash, market depth all but dried up as the price of Bitcoin plummeted, observable in the chart above. During the most recent price crash, we can barely observe a dent in market depth, which is quite remarkable considering the sheer volume of trades that were executed. This suggests that markets have evolved since March and are better able to absorb extreme price movements without significant disruption to overall market liquidity.
Shortage of bids and asks persists. Although the price crash did not severely disrupt market liquidity, there still appears to be a longterm downturn in market depth. This trend has grown stronger over the past couple of months, which can be observed in the chart above starting around November.
Spreads are more stable amidst extreme price movements. Although spreads widened significantly last week in response to the price crash, the reaction of market makers was notably less extreme compared with the March market crash. Spreads recovered quickly following the January crash, whereas in March it took several weeks for spreads to return to pre-crash levels.
Volatility and Correlations
Bitcoin’s volatility is well below all time highs. Despite extreme price movements over the past few months, Bitcoin’s 20D and 180D volatility curves are still well below all time highs. One reason why volatility measures haven’t increased as much as expected is because they are calculated using daily returns. Bitcoin has undergone extreme intraday price movements but has often ended the day close to where it began, which is why these price movements would not be reflected in volatility calculations. You can read a more in-depth analysis of the various methodologies for calculating volatility here.
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.
