Tether Volumes Soar
Kaiko Factsheet: December 7, 2020
This week in cryptocurrency markets:
- Price Movements: We chart Bitcoin’s climb to its highest monthly close ever, tracking the biggest institutional events that have propelled this year’s bull run.
- Trading Volume: Bitcoin-Tether volumes are now magnitudes greater than Bitcoin-Dollar volumes.
- Volatility and Correlations: Bitcoin’s 30-day correlation with traditional financial assets plummeted to a 5-month low.
- Order Book Liquidity: Ask depth has grown steadily over the past week as traders place large sell orders, threatening to keep Bitcoin in a range below $20k.
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Price Movements
Cryptocurrency markets gain steadily as Ethereum 2.0 goes live. Bitcoin closed Sunday night at $19,388 and Ethereum at $602, marking yet another week well in the green. The biggest crypto event of the week was the launch of Ethereum 2.0, which starts the transition to the network’s new Proof of Stake system, an upgrade that promises to scale the network by 1,000x. Coinbase, Binance and OKEx announced new staking services that would provide liquidity in the form of a bond-like token, ‘BETH’, to all users staking ETH with the exchanges. Ultimately, Ethereum 2.0 improves the network’s value proposition, which could make its native token more attractive to institutional investors, a group that has historically preferred Bitcoin.
Institutions flock to Bitcoin. November was filled with positive institutional news, from improvements in usability (PayPal’s launch of crypto trading) to increased institutional investment (Grayscale’s growing AUM) to markings of a general shift in sentiment (Alliance Bernstein’s praise of Bitcoin). This past week alone, the CEO of BlackRock acknowledged that Bitcoin could “evolve” into a global asset and New York Digital Investments Group raised $150 million for two new crypto funds. These events are far from insignificant, and show a genuine transformation in how the traditional financial industry perceives Bitcoin.
Crypto-assets reign supreme. Equities and Gold have performed well YTD, but cryptocurrency returns are unmatched. Bitcoin has attracted the most attention over the past two months despite Ethereum being the real star of the show with nearly double the YTD returns at +251%. Most institutional investors stick with the oldest crypto-asset when wading into crypto, but there has been increasing interest in Ethereum’s more expansive value proposition, especially as hype builds for ETH 2.0. Yet, investors are most attracted by Bitcoin’s “digital gold” narrative, which looks increasingly promising in contrast to (real) Gold’s comparatively dismal YTD returns.
Trading Volume
Tether replaces USD. In our November monthly report, we compare this current bull run to 2017’s and found that Tether has all but replaced the Dollar in terms of total volume traded. In fact, BTC-USD volume is less than it was in 2017, despite climbing to its highest monthly level in years. What happened? Since 2017, many exchanges have de-listed Dollar trading pairs due to regulatory restrictions and high withdrawal fees. Tether can be used anywhere and is not subject to the same level of scrutiny as transactions involving the U.S. Dollar, which is why traders have shifted their preferences, particularly in Asian markets. Tether is one of the easiest on-ramps into cryptocurrency markets and has become more liquid to trade than the Dollar, but this does not ignore the fact that USDT transactions still carry their own risk and are coming under increasing regulatory pressure.
Market dominance shifts away from Bitfinex. In our November market report, we explore how market dominance has shifted significantly since 2017. Bitfinex plays less of a roll during this current bull run while Coinbase has since become the dominant market player, claiming the majority of all BTC-USD trade volume. LMAX Digital, an exchange catering to institutional traders, is the most promising newcomer, at one point this year grasping more than 20% of all BTC-USD volume. Bitstamp and Kraken’s market share has remained steady, while Gemini’s has fallen.
XRP volume soars, then falls. Over the past two weeks, Ripple’s XRP token has seen explosive growth in trading volume. The increase appears short-lived though, as volumes collapsed from a daily high above $1.5 billion to just under $500 million. XRP has surged +159% since the start of November on the tail of Bitcoin’s bull run, with a high at $.76, its highest level in two years.
Volatility and Correlations
Bitcoin’s correlation to traditional assets plummets. While equities reached new all time highs this week (in the midst of the worst days of the pandemic recorded), their growth has not matched Bitcoin’s current bull run. Gold and the S&P 500 are at their weakest correlation with Bitcoin since the summer. For a brief moment, Bitcoin’s correlation with gold and equities strengthened consistently, but this week proves what we have known for years: Bitcoin has no consistent correlation to any traditional asset, which is ultimately a good sign in times of macro uncertainty.
However, Bitcoin’s one consistent (inverse) correlation over the past few months has been with the U.S. Dollar index. The Dollar has weakened considerably against a basket of foreign currencies as inflation fears grow in the United States. A weakening Dollar has historically benefitted Bitcoin because the crypto-asset is perceived as an inflation-resistant hedge, which is attractive to investors.
Order Book Liquidity
Ask depth climbs as Bitcoin approaches $20k. Over the past two weeks, the volume of sell orders on Bitcoin’s order books has doubled. Most of the sell volume is placed between 2–6% of the midprice, near the $20,000 price level. This has effectively created a sell wall which would prevent Bitcoin from surpassing $20k unless sellers relent. Bid depth has also increased over the past week as Bitcoin consolidates in an increasingly tight range.
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.
