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Ethereum is Becoming More Attractive to Institutional Investors
February 1, 2021

This week in cryptocurrency markets:
  • Price Movements: Bitcoin soared double digits after Elon Musk changed his Twitter bio to #Bitcoin, highlighting the power of social media to move markets.  
  • Trading Volume: The proportion of total Ethereum trades denominated in U.S. dollars has doubled over the past 5 months, which suggests an influx of new traders. 
  • Order Book Liquidity: Price slippage for ETH-USD markets has fallen over the past year, indicating markets have become more liquid. 
  • Volatility and Correlations: Bitcoin and the U.S. Dollar Index continue to trend in opposite directions, a pattern that first emerged at the start of economic recovery efforts in March. 
Price Movements
Social media moves markets. Many advocates of decentralization consider last week's GameStop short squeeze to be a defining moment in the fight against the concentration of finance in the hands of a few Wall Street power-brokers. For those in crypto, the power of social media to move markets, frequently led by decentralized groups of traders, is nothing new. In fact, as the dust-settled on WSB-mania, Elon Musk changed his Twitter bio to #Bitcoin, which instantly triggered a 12% price jump in a single hour, a degree of volatility extreme even by Bitcoin's standards. This single word managed to crash Binance, the world's largest crypto exchange, showing the power that social media wields over masses of traders.

You will notice that XRP gained 81% since last week (which is not a typo), despite being under investigation by the SEC and de-listed from most major exchanges. The same Internet forums that powered GameStop's meteoric rise thought it was time to give XRP a pump of its own. For years, cryptocurrency markets have been deeply influenced by social media, but it seems this trend has finally gone mainstream. Ultimately, this is a story of financial populism, which took root in the decentralized protocols of crypto markets and now poses fundamental questions about traditional financial models. 

Is Ethereum having its institutional moment? ETH hit a new all time high above $1400, DeFi tokens are soaring, and there is an increasing variety of regulated ETH exchange-traded products and derivatives, which suggests that professional investors are starting to take a closer look at the second largest crypto-asset by market cap. For years, Bitcoin was the only crypto-asset that first-time traditional investors considered, but that all changed this year. CME will soon launch Ethereum options, Galaxy Digital announced new Ethereum funds for institutional investors, and Grayscale just filed several DeFi-related trusts. The more regulated investment vehicles for ETH, the more robust and efficient ETH markets become.

DeFi tokens soar with renewed calls for financial decentralization. When Robinhood shut down trading for volatile stocks last week, many in crypto saw this as an immense opportunity for decentralized finance, which does not rely on centralized intermediaries for trading such as brokers, exchanges, or banks. There is no denying that DeFi right now is one giant sandbox, with new experiments popping up every week. But buried under the hacks and casino-like activity is the infrastructural groundwork of a new type of finance that promises complete disintermediation--no centralization means no one can halt trading. Those in traditional markets seem to finally be alerted to DeFi's existence. OTC desks recently reported more interest in DeFi and Grayscale filed several DeFi-connected trusts. January DEX (decentralized exchange) volumes doubled in January, and most of the top DeFi tokens have posted triple-digit returns.
Trading Volume
Average Bitcoin trade sizes have increased on most exchanges. Our exploration of trade sizes continues this week with a more expansive look at top BTC markets. Our data reveals that trade sizes have increased considerably since September across nearly all exchanges analyzed. Although the price of BTC rose ~$20k since this Fall, this does not necessarily mean that the average value of trades executed by traders would increase. Yet, we can observe a sharp increase in the dollar value of trades starting around December, when the bull run gained momentum. This suggests that the balance of high-volume traders to retail traders increased or that a handful of high volume traders began executing large orders. The increase in average trade size may also be tied to profit-taking. In general, sell orders tend to be larger than buy orders, so if a wave of traders began selling as BTC reached all time high's, then this would result in a spike in average trade size. 

LMAX Digital leads institutional trading. The average trade size can also reveal a lot about the make-up of exchange user bases. LMAX Digital is an exchange heavily marketed to institutional traders, which explains why average trades are nearly double the next highest exchange. On the other end of the spectrum are more retail exchanges like Binance and Huobi, which post some of the highest volumes yet have the largest number of traders. Coinbase falls somewhere in the middle, with a large retail user base but a significant number of large traders due to their highly liquid BTC-USD order books. Average trade size does not give an entirely accurate portrait of an exchange's user base because large traders will almost always break apart their orders into small sizes. 

Ethereum trade volume peaks during North American hours. Much like Bitcoin markets, North American traders seem to also be leading Ethereum markets. The chart takes the hourly average of all ETH-USD and ETH-USDT volume across 20+ exchanges. Volume peaks at 11am EST for both Dollar and Tether pairs, although it appears that European traders also contribute to the volume spike. The similarities in Dollar and Tether volumes is notable considering the majority of Tether trading occurs on Asia-based exchanges. 

Proportion of Dollar to Tether volume suggests large fiat in-flows to ETH. Since September, ETH-USD volumes have doubled relative to ETH-USDT volumes, which suggests first-time ETH traders, possibly institutional, are entering markets. New traders typically transact using fiat currencies, and the rising trend over the past few months suggests that USD spot inflows could have been driving Ethereum's upwards price pressure. This trend is nearly identical to Bitcoin, which also saw huge USD spot inflows as it reached all time highs. In its year-end report, Coinbase noted that an increasing number of institutional clients had taken positions in Ethereum, which is reflected in the data. 

Kaiko is the premier cryptocurrency market data provider for professional traders, fund managers, researchers, exchanges, and custodians. Our data services enable seamless connectivity to historical and live data feeds from 100+ spot and derivatives exchanges

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Order Book Liquidity

Ethereum's liquidity shows slight improvement. The above chart takes the average bid-ask spread across BTC-USD and ETH-USD pairs on five exchanges, which can vary considerably, but averaged together provide a market-wide comparison of the two asset's liquidity. BTC-USD spreads have historically been a lot narrower because Bitcoin market depth is considerably greater than Ethereum's. However, since the March market crash, the spread between the two spreads (!) has decreased ever so slightly. The past month's wild volatility has temporarily widened spreads for both assets, but perhaps a convergence is forthcoming should Ethereum continue to attract more institutional market makers.

Sharp reduction in price slippage for Ethereum markets. Despite the recent market volatility, price slippage for a simulated $100k sell order has fallen considerably since March. Even before the market crash, price slippage was relatively high for ETH-USD markets. Yet, over the past ~10 months, slippage has declined steadily, which suggests that Ethereum markets are more liquid than last year. Price slippage is calculated by simulating a $100k sell order through the bid-side of a raw order book snapshot. Our price slippage data takes the average slippage calculated from thousands of snapshots per day.
Volatility and Correlations

Bitcoin's inverse correlation with the DXY holds strong. Correlation is certainly not causation, but the trend is quite clear: Bitcoin's meteoric price rise (and occasional crashes) correlates closely with movements of the U.S. Dollar Index (DXY). Some consider Bitcoin's bull run as a response to liquidity-boosting monetary policy that has seen the money supply explode since March. The U.S. dollar has suffered in response, dropping to multi-year lows against a basket of foreign currencies. Bitcoin's decentralization and independence make it attractive as a hedge, but if the inverse correlation continues, then a strengthening dollar could be seen as a bearish sign. 

Thanks for reading and see you next week!

-Clara Medalie, 
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Kaiko to Work with Bloomberg and Object Management Group to Extend the FIGI Standard to Crypto Assets

We are pleased too announce that we have been selected to issue Financial Instruments Global Identifier (FIGI) starting in 2021. We will be introducing FIGI for cryptoassets at a webinar on February 24th. Register for the webinar here
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This Factsheet was written and produced by Clara Medalie, with charts developed by Anastasia Melachrinos, and help from the Kaiko team. This is not financial advice. Any redistribution of charts appearing in this Factsheet must cite Kaiko as the sole provider and creator.
Copyright © 2021, All rights reserved.

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