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North American Traders Dominate Bitcoin Markets
January 25th, 2021

This week in cryptocurrency markets:
  • Price Movements: As Bitcoin suffered steep losses, Ethereum and several altcoins reached new all time highs, a divergence from typical market behavior.  
  • Trading Volume: Bitcoin volumes dominated in both Tether and the Dollar peak during North American trading hours, notable considering the majority of Tether trades occur on Asia-based exchanges. 
  • Order Book Liquidity: The shortage of bids and asks on Bitcoin order books is correlated with an increase in long-term holders, identified using on-chain data. 
  • Volatility and Correlations: Ethereum is consistently more volatile than Bitcoin, but intraday volatility for both assets is on the rise. 

Looking at the data: There are three recent trends that have stood out to us which suggest a strengthening U.S.-based institutional presence. The first is that average trade sizes have increased on Coinbase, the largest North American exchange, which suggests an increase in the number of high-volume traders. The second is that global BTC-USD volumes have grown relative to BTC-USDT volumes. Finally, and most telling, is that trade volume peaks during North American trading hours. We explore these three trends in today's Research Factsheet. 
Price Movements

7-Day Price Change
Is a correction coming? Cryptocurrency markets seem unsure of how to price in the steady flow of macro news events, from President Biden's new financial appointees to the uncertainty of Covid-19 measures on the economy. Bitcoin suffered steep losses this week, briefly plunging below $30k in its largest single day percentage drop since March, just two weeks after hitting an all time high above $41k. 

Historically, Bitcoin's price rallies have initiated altcoin rallies as investors diversify their portfolios, expand their risk profiles, and/or seek faster returns. However, this week a divergence in this behavior occurred. As Bitcoin crashed, Ethereum reached a new all time high above $1400, ushering in a brief period of price discovery before the crypto-asset re-traced to close the week at $1.3k. The altcoins LINK, the token native to Chainlink's decentralized oracle network, and DOT, the token native to the Polkadot network, also reached new all time highs. 

Ethereum's intraday price swings are more extreme than Bitcoin's. A key characteristic of this bull run is the extreme intraday price movements that have whipsawed markets. ETH has suffered extreme price swings more so than its counterparts, regularly experiencing hourly movements of +/-3%, and at one point dropping 7% in a single hour. Leading up to its new all time high, ETH has been buoyed by quite a few positive developments over the past few months, from the launch of the Ethereum network’s biggest upgrade ever to the announcement of CME ETH futures to the continued growth and development of the DeFi ecosystem. 
Trading Volume
Average trade size increased sharply as the bull run commenced. Last week, we found that the average trade size during the January 11th price crash was double that of the March crash. When taking a closer look at trade sizes throughout 2020-21, we can observe a sharp increase occurred in December, which was right when the Bitcoin bull run picked up momentum. Hundreds of thousands of trades are executed every day on Coinbase, so an increase in the average trade size suggests that there was a significant shift in the behavior or profile of traders around this time.

Institutional traders will typically break up a large order into many smaller ones and execute them over the course of several days or weeks to prevent market movements and avoid price slippage. The increase in trade size is likely a result of these types of traders breaking apart large trades, rather than a shift in behavior of retail/mid-level traders. 

Bitcoin trading volume peaks during North American hours. The majority of all Bitcoin traded against both Tether and the Dollar occur during North American trading hours, peaking at 16:00 UTC (11 a.m. EST). While BTC-USD volume is largely concentrated on U.S.-based exchanges such as Coinbase, BTC-USDT volume is concentrated on Asian exchanges such as Binance, Okex, and Huobi. Thus, it is surprising that volumes peak for both BTC-USD and BTC-USDT at the exact same hour. This data reveals the outsized influence that North American traders hold in cryptocurrency markets. In fact, a recent report by NYDIG found that North American trading hours have driven returns in 2020, a shift from previous years which saw Asian markets driving returns. 

Dollar trading volumes are increasing relative to Tether. While the change has been slight, we can observe an increase in the percentage of total BTC-USD vs. BTC-USDT volume, a trend which first emerged in early December. There are several possibilities for why this is occurring. When Bitcoin broke all time high's in December, traders likely began taking profit in USD, which would lead to a relative increase in volume as traders rotated funds out of non-fiat pairs. Another likely contributing factor is an increase in first-time traders purchasing Bitcoin using fiat currencies, which is common on U.S.-based exchanges like Coinbase. 

The list of all traded instruments aggregated in the above two charts can be found here.

Ethereum trading volume was briefly greater than Bitcoin volume. On January 19th, ETH reached a new All Time High above $1400, a historic milestone that saw traders temporarily rotate funds into the second largest crypto-asset by market cap. BTC-USD typically commands approximately 70% of total volume compared with ETH-USD. ETH-USD volume has only crossed the 50% threshold a handful of times since 2017, and one of those days was January 19th, which saw volumes amount to 51.49% of the total. Bitcoin's volume dominance fluctuates depending on the price movements of altcoins, and traders chasing returns will often temporarily rotate funds out of Bitcoin. However, after a price movement ends, we can observe a return to the norm.

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
What is causing Bitcoin's liquidity shortage? We keep coming back to this chart of average daily Bitcoin market depth because the trend has rarely been this strong. Order book liquidity frequently fluctuates based on market movements, but there are few historical instances of such a consistent long term downtrend.  

Last week, eToro became the first exchange to warn their customers that Bitcoin buyers on weekends could face limitations due to a liquidity shortage. The exchange cited a higher risk of volatility linked to the lack of liquidity and urged traders to understand the trading risks. 

One possible factor contributing to the drop in liquidity is the increasing presence of long-term holders. When institutions buy large amounts of Bitcoin, they typically hold it, and don't actively trade it. The best example of this is Grayscale’s Bitcoin Trust, which purchased nearly 260k BTC in the second half of 2020. These Bitcoin are not being actively traded or moved—they are held in custody. Glassnode recently reported an increase in the number of Bitcoin in "accumulation addresses", addresses identified as belonging to entities who hold. Chainalysis data also shows an increase in the number of "illiquid" BTC held. 

The data suggests that Bitcoin is overwhelmingly being used as a store of value right now, and the more institutions that take an interest in the crypto-asset, the bigger this shortage could become.
Ethereum order book liquidity has also declined. We can observe a fairly consistent fall in the 7-day moving average of market depth, more so for Ethereum-Tether trading pairs compared with Ethereum-Dollar pairs. Over the past few months, institutions have paid closer attention to Ethereum as an investable asset, which suggests similar patterns of holding behavior (as opposed too trading behavior), which could contribute to a shortage in exchange liquidity. 
Volatility and Correlations

Ethereum volatility is consistently higher than Bitcoin's. Although BTC is famous for its price swings, ETH is actually the more volatile of the two. Since 2018, Ethereum's 90 day volatility curve has almost always hovered well-above Bitcoin's. Volatility for both asset's has climbed since December, but is still well below the peak reached during the March market crash. Daily price volatility does not take into account intraday price swings, which is one reason why the measures appear lower than expected.
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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 FIGI identifiers starting in 2021. Financial Instruments Global Identifier® (FIGI®) is an open standard for the issuance of unique identifiers that can be assigned to financial instruments. The inclusion of crypto assets into this standard is a huge step for the institutionalization of the industry. FIGIs for crypto assets will enable interoperability, transparency, and greater efficiency between industry participants such as digital asset exchanges, data aggregators, custodians of digital assets, service providers, and regulators.

We will be introducing FIGI for cryptoassets at a webinar on February 8th. Register for the webinar here
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.
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