Highest Daily Spot Volumes Ever Recorded
Kaiko Research: May 24, 2021
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- Price Movements: Despite the market-wide correction, most crypto assets still have positive YTD returns.
- Volume Dynamics: May 19th had the highest daily spot volumes ever recorded. Following the initial sell-off, whale traders aggressively bought the dip.
- Order Book Liquidity: Price slippage for BTC-USD and ETH-USD markets has fallen consistently since last March’s market collapse.
- Volatility and Correlations: Ethereum’s 30D volatility surged to its highest level in more than a year.
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Price Movements
A sea of red. It’s been a tough week in crypto markets with nearly every top asset down double digits. There is never one simple reason explaining the cause of a market-wide conflagration, but Elon Musk’s tweets were likely the match that struck the fuse at exactly the right moment. For month’s, we have noticed several trends that caused markets to finally reach a tipping point: over-leveraging in derivatives markets, a sharp reduction in order book liquidity in spot markets, exchange infrastructure issues, and the meme-ification of trading. Combined, these market-wide inefficiencies were bound to force a correction with the right trigger. It appears that whale traders bought the dip last Wednesday, but the buying pressure wasn’t enough to prevent further losses over the weekend.
Crypto markets are still very green. The recent sell-off may have erased month’s of gains, but crypto markets are still well in the green for the year. Most of the top altcoin assets are up triple digits YTD, with Cardano up 600% and many DeFi tokens in the +200% range. Over the past few moths, Bitcoin and Ethereum have been comparatively calm compared with the altcoin frenzy, with a mere +17% and +176% returns, respectively. Meanwhile, the S&P 500 market index is up only 10% YTD.
Tether continues to trade at a premium. In previous newsletter’s, we identified Tether’s tendency to trade at a premium during Bitcoin sell-offs. Last week’s market-wide correction further demonstrated this phenomenon. When markets crash, traders will race to sell their holdings in exchange for Tether, the largest stablecoin which is designed to trade at exactly 1-to-1 with the U.S. Dollar. However, an increase in demand for Tether generates an imbalance in buying pressure which can cause the stablecoin to de-peg. For the past few months, Tether has for the most part traded at a premium to the dollar, but during a crash we can observe temporary spikes in the exchange rate. This suggests that Tether is considered a safe-haven amidst extreme volatility.
Volume Dynamics
Trade volume breaks new record. Across the top Bitcoin and Ethereum spot markets, more than $70 billion in trades were executed throughout May 19th’s sell-off, nearly double the next highest volume day (recorded on January 11th). Previous sell-offs have been linked to forced liquidations in derivatives markets, but last Wednesday’s liquidations did not surpass April’s record which suggests that the selling pressure originated in spot markets. However, this does not mean that the many billions in liquidations did not contribute to Bitcoin’s spiralling price.
Throughout the day, nearly every large exchange suffered some form of downtime or delays. The best metric to look at when analyzing exchange infrastructure is trade count, which refers to the number of trades executed for a trading pair. Trade count gives an idea about the raw number of transactions that an exchange’s matching engine is able to process before suffering delays, lagging interfaces, or downtime. We charted the number of trades per day for the top BTC-USD pairs and can observe that May 19th’s trade count was magnitudes higher on Coinbase than on any other exchange.
Coinbase processed 1.7 million trades for their highest volume pair, nearly double the number of trades on the next highest day. Most other exchanges saw only a marginal increase in the number of trades processed compared with similarly high-volume days. While crypto exchange infrastructure still lacks maturity, most exchanges were able to resolve their issues quickly on a day that caught many by surprise. Just one year ago, the ‘Black Thursday’ price crash caused exchange infrastructure to collapse. Today, with nearly quadruple the number of daily trades, downtime was far less severe which shows the pace at which exchanges have scaled their infrastructure over the past year.
Whale traders influenced markets during sell-off. Raw transaction data can reveal a lot more about micro market movements than aggregated volume data. Above, we chart individual trades made by “whale traders” on May 19th before and after Bitcoin’s price crash. We define a whale trade as any market order greater than 5 BTC (5 BTC = around $200,000 at the time of the sell-off). Large trades give an idea of the sentiment and behavior of institutional traders during pivotal market events. Typically, institutional traders will break apart large market orders into smaller orders to prevent price slippage. However, Coinbase’s order books are often liquid enough to support large market orders which is why we specifically analyze the BTC-USD pair.
We can observe that around 4am UTC, whale traders began placing large market sell orders as Bitcoin dipped below $40k, many valued at higher than $500k. Nothing much happened until around 1pm UTC, when the price began to plummet and the quantity of large sell orders surged. Around this time, Coinbase began experiencing intermittent downtime. In the aftermath of the sell-off, we can observe that whale traders began buying the dip in large numbers. This caused Bitcoin’s price to surge above $40k, only to plummet once again as buying pressure dried up.
What is interesting to note is that the initial 4am sell orders were executed around midnight EST, an unusual time for large market movements. This suggests that these orders were not U.S.-based or they were algorithmically executed.
Order Book Liquidity
Order book liquidity shows long-term decline. We have shown a variation of this chart many times, but it is always interesting to re-analyze following a price crash. Market depth shows the quantity of bids and asks within 2% of the mid price, aggregated across all top exchanges. This gives an idea of the total market-wide liquidity for a given asset, which fluctuates daily but often has observable long term trends. With the start of the bull market, we noticed a sharp decline in the quantity of Bitcoin on BTC-USD order books. This is understandable given the rapid rise in the price of Bitcoin. However, the volume of Bitcoin traded is increasing faster than market depth valued in USD (not pictured). As long as the quantity of depth on an order book is enough to support large market orders, then this is fine. However, we notice that during times of volatility, trade volume increases a lot faster than market depth, and this ultimately can contribute to price crashes.
We noticed a similar phenomenon for ETH-USD order books:
As the price of Ethereum rose rapidly, the quantity of ETH on ETH-USD order books declined sharply, which again is understandable. However, ETH trade volume is increasing faster than the USD value of market depth on ETH-USD order books (not pictured). Ultimately, this can lead to liquidity issues during a price crash and higher overall price volatility.
Despite falling market depth, price slippage — the difference between the expected price of a trade and the average price the full trade is filled — is decreasing. Below, we chart price slippage for a $100k market sell order averaged across Coinbase, Bitstamp, Bitfinex, Gemini, and Kraken. Since April of last year, we can observe a notable decline for both BTC-USD and ETH-USD trading pairs:
In particular, price slippage for ETH-USD trading pairs has plummeted as Ethereum becomes a more liquid asset. Price slippage for BTC-USD pairs has fallen slightly but has recently increased throughout 2021. Price slippage is a good indicator for measuring liquidity immediately surrounding the mid price, while aggregated market depth is better for analyzing liquidity at different ranges from the mid price.
Volatility and Correlations
Ethereum volatility surges to highest level in a year. In just 2 weeks, Ethereum’s value has dropped from $4k to $2k causing daily volatility to surge. 30D volatility hasn’t been this high since last year’s March market collapse. Bitcoin’s 30D volatility also spiked to one of its highest levels of the year. Of particular note is the spread between Bitcoin and Ethereum’s volatility curve, which has soared over the past week. In the past, when this spread widens we see a re-calibration of market structure towards altcoins, which is what occurred last September during the last time the spread widened considerably. Once volatility peaks for Ethereum, we could see value transferred to Bitcoin and a repeat of the altcoin cycle.
Thanks for reading and see you next week!
-Clara Medalie, Strategic Initiatives and Research Lead
clara@kaiko.com
