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Market Depth Evaporates as Prices Tumble
February 22, 2021

This week in cryptocurrency markets:
  • Price Movements: Following historic all time highs and declining intraday volatility, Bitcoin and Ethereum crashed precipitously Monday morning.
  • Trading Volume: The falling ratio of U.S. Dollar to Tether volume suggests institutional traders have taken a step back in February. 
  • Order Book Liquidity: Market depth plummeted during this morning's crash, briefly causing a flash crash for ETH-USD on Kraken. 
  • Volatility and Correlations: Bitcoin's correlation with Gold has been mostly positive over the past 2 years.

In case you missed it: Check out our opinion article in Coindesk on how traditional exchanges are boosting crypto adoption by listing exchange-traded products, particularly relevant as North America's first Bitcoin ETF began trading last week on the Toronto Stock Exchange.
Price Movements

7-day returns
A historic milestone followed by a sharp correction. Going to press, BTC and ETH plummeted, but the past week's noteworthy events are worth mentioning. A series of seemingly endless new all time highs propelled Bitcoin's market cap past the $1 trillion milestone, up from $178 billion a year ago. The bull run continued its spread to all sectors of the crypto industry, with Binance's BNB token experiencing the week's best returns at 107%, catapulting the exchange token to a new ranking of third largest by market cap. The question on everyone's mind is whether this historic rally can keep up, especially considering trading volumes seem to be tapering off despite the highs. This morning suggests that a correction is in the works. 

February's intraday price movements are less extreme. Despite Bitcoin's record highs, intraday price movements are less extreme compared with January. We can observe that hourly returns in January regularly reached +/- 4%. Throughout February, average hourly returns have mostly stayed within a 1-2% range. While Bitcoin's price has climbed steadily upwards, the consistency may be pushing volatility traders into alternative assets. Editor's note: this was written before the Monday morning whipsaw--intraday volatility is back. 

Fiat exchanges list fewer trading pairs. As Coinbase prepares to go public at an implied valuation of $100 billion, we take a look at how crypto exchanges across the industry attract traders through the pairs they list. We find that fiat exchanges such as LMAX Digital, Coinbase, and Bitstamp are historically more cautious when selecting the crypto assets they list compared with crypto-only exchanges like Binance.

However, the more listed pairs, the more attractive the exchange becomes to a wider range of crypto participants. Binance currently takes the lead at 1,247 spot trading pairs, and its strategy of rapid listings across a range of assets has paid off, as the exchange boasts the highest volume and user base by a longshot. Coinbase has taken note, having more than doubled the number of instruments offered in the past year alone. 

Looking at the data: Kaiko's Instrument Explorer is a free public tool for browsing exchange reference data, and includes information such as the first (and last) trade date, the trade count, and asset type for more than 80,000 instruments across 75+ spot and derivatives exchanges. 
Trading Volume
Dollar volume as an indicator of institutional inflows. The ratio of Dollar (USD) volume to Tether (USDT) volume can be used as a signal of institutional participation in crypto, assuming that most institutional traders prefer to transact with fiat currencies on regulated exchange platforms. Since last year, Dollar volumes have doubled from 15% of the total Bitcoin traded to 30%. This rise corresponds closely with the wave of institutional announcements made over the past few months. USD volume peaked mid-January at more than 40% of the total.  

We can also use this volume ratio on shorter timescales to determine how institutional traders are behaving. Below, we charted USD and USDT volumes over the past two months, and can observe a different trend compared with the chart above.

In the short term, the volume ratio suggests that institutional buyers have taken a pause in February, with a 5% decline in BTC-USD volume relative to BTC-USDT. Interestingly, prices have continued to rise to new all time highs despite the shift in the volume ratio towards more retail, crypto-only exchanges such as Binance. This suggests that institutional traders have played less of a role in Bitcoin's rally over the past few weeks. 

Bitcoin trading volume is less than expected. Volumes are still near record highs, but they have declined considerably compared with last month, despite Bitcoin reaching multiple new all time highs above $50k. The reduction in volumes could be due to declining intraday volatility, which often attracts volatility traders. Traders may also be taking a "wait and see" approaches as Bitcoin moves further into uncharted territory. 

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

Browse our data dictionary to learn more about our extensive data offerings here. If you are interested in trialing our API, email us at 

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Order Book Liquidity

Market depth dissolves during a crash. This morning, prices went haywire. From one minute to the next, Bitcoin bounced between $48k, $52k, and back to $48k. It seemed that price feeds were broken, but what was actually happening was that a complete decimation of order book depth made the process of price discovery near impossible. When there is no market depth remaining on an order book, there is nothing stopping large market orders from whipsawing the price of Bitcoin. In extreme scenarios, this can cause what is known as a flash crash, which is when the withdrawal of orders amplifies price declines.

A flash crash actually occurred briefly on Kraken this morning for ETH-USD markets, which saw the price of ETH plummet below $1k (it had traded at $1600 moments earlier). We can observe above a complete decimation of market depth, as market makers quickly pulled orders from the book. This temporarily caused prices to plummet, only to rebound once market makers adjusted their positions. 

Price slippage for Tether trading pairs on-par with USD pairs. In the above chart, we compare the average price slippage when placing a simulated 100,000 sell order, in either USD or USDT depending on the exchange. The lower the price slippage, the more liquid the trading pair. We can observe that Binance, which offers a BTC-USDT trading pair, and Coinbase, a BTC-USD pair, have nearly the same levels of slippage. This suggests that liquidity for the two markets is similar, and that both can easily support large market sell orders. 

Slippage is calculated by running a sell order, in this case for 100,000 units of the quote asset, through the bid side of an order book snapshot, and calculating the difference in price levels from the start to completion. Kaiko order book snapshots are taken twice per minute, and slippage data is averaged across thousands of snapshots. 
Our January 2021 report looks at the month’s BTC and ETH volume and volatility surge, liquidity shortage, DeFi token performance, and shifts in trading patterns that suggest growing institutional involvement. Download the report here or view it on Coindesk's Research Hub.
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Volatility and Correlations

Bitcoin's correlation with gold has been mostly positive over the past 2 years. On the other hand, Bitcoin's correlation with the S&P 500 has only been consistently positive over the past year, likely due to pandemic-induced economic shocks. No matter, both correlation charts show that nearly all financial assets (gold, equities, and crypto) have benefitted over the past year, for different reasons. Bitcoin and gold are often considered hedges against economic shocks and inflation, which could explain their growth, while many believe equities have soared as a result of business-friendly fiscal and monetary policy.
Thanks for reading and see you next week!

-Clara Medalie, 
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Join the Kaiko Team This Week at the Following Events:

FIGI (Financial Global Identifiers) for Cryptoassets - February 24th, 11am EST: Hosted by the Object Management Group, with Kaiko CEO Ambre Soubiran, Bloomberg's Rich Robinson and Richard Beech. Register for the webinar here

What the Data Tells Us About Bitcoin's 2020 RallyFebruary 24th, 12pm EST:  Hosted by Blockworks, with Kaiko CEO Ambre Soubiran, Chainalysis Chief Economist Philip Gradwell, and  Lantern Ventures CEO Tara MacAulay. Register for the event here
This Factsheet was written by Clara Medalie, with help from Anastasia Melachrinos and 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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