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Exploring the Aftermath of a Price Crash
March 1st, 2021

This week in cryptocurrency markets:
  • Price Movements: Immense selling pressure contributed to ETH's flash crash on Kraken.
  • Trading Volume: Last week's sell-off resulted in the second highest daily volumes ever recorded. 
  • Order Book Liquidity: Rising bid depth for BTC-USD markets suggests traders predict a continuing downtrend.
  • Volatility and Correlations: Optimism for the U.S. economy could be a bearish signal for crypto. 

Also: We explore Uniswap market data from our just-launched DeFi data offering.
Price Movements

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Price crash shakes markets. A lot has changed over the past year, but last week's market-wide price crash was a stark reminder that crypto has a long way to go before reaching maturity. For one, markets are still highly-leveraged, which makes the magnitude of price crashes extreme and unpredictable. Last week saw the highest volume of futures liquidations ever, more so than even last March's Black Thursday market spiral. The good news, though, is that there is increasing evidence that overall market liquidity has improved, with spreads and market depth recovering more quickly following extreme volatility than one year ago. 

Analyzing the Kraken flash crash. Last week, Ethereum's price on Kraken underwent a sudden 50% crash, falling well below market price. Kraken's CEO says the crash was linked to selling pressure, not a glitch in the system, so we decided to analyze tick-by-tick trade data to explore the cause of this crash. In the one hour proceeding the flash crash, a vast majority of all trades executed were sell orders.

In the chart above, we can observe the minute-by-minute breakdown in volume, and corresponding average price on Kraken. Of the approximately 10,000 trades made in the hour proceeding the crash, 7,600 were sell orders accounting for approximately 75% of the total volume traded. The immense selling pressure depleted order book depth on the bid side, resulting in ETH's downward spiral to $700, well below the market price of $1600.

By looking at the data, we can confirm that the crash was likely linked to selling pressure, but the bigger question is who was the seller? The flash crash would have resulted in huge amounts of price slippage for whoever was executing these sell orders, resulting in unfavorable fills well below market value that no rational trader would make. Ultimately, the data does not rule out an issue on Kraken's end. 
Trading Volume

Volumes surge during a price crash. At the time, March's Black Thursday price crash saw the highest daily volume executed over the past year, topping $2 billion across seven of the most liquid BTC-USD pairs. Since the start of the latest bull run, volumes have surged and are now magnitudes greater than the 2020 daily average. The most recent price crash saw volumes upwards of $8 billion, one of the highest daily volumes ever (second only to the January 11 price crash), which demonstrates the immense growth of markets over the past year. 


Trends in average trade size correspond with Coinbase's growth. The release of Coinbase's S-1 filing sparked a tsunami of analysis across crypto media. The filing was filled with a goldmine of information linked to the exchange's growth, profits, and institutional user base over time. One of the most fascinating bits of data concerned the growth of their institutional clientele, which now accounts for more than 60% of total volume. When looking at average trade sizes on Coinbase, we can observe that trends in the data correspond closely with Coinbase's reported growth. The three observable peaks for average trade size correspond to spikes in transacting users, volume, and institutional growth.

With the exponential growth of the decentralized finance industry, Kaiko is thrilled to officially launch our DeFi data offering, which will unify decentralized market data feeds through an accessible platform. The first decentralized exchange (DEX) to be integrated into our coverage is Uniswap.

To celebrate the launch, we take a look at data from the world's highest volume DEX: 

Tether has competition on decentralized exchanges. Stablecoins play a huge role on DEX's, serving as the base or quote asset for thousands of traded pairs. While Tether has the biggest market share by a long shot on centralized exchanges, USD Coin is the leading stablecoin in DeFi, and boasts the highest volume on Uniswap. Dai also poses a considerable challenge to Tether's supremacy. The growing popularity of DeFi has caused the supply of most stablecoins to skyrocket over the past few months. 

75% of volume is concentrated on 7 traded pairs. The majority of all trades are executed using a wrapped version of ETH as either the base or quote asset. Most transactions beyond ETH and stablecoins involve DeFi tokens, such as Yearn Finance or Uniswap's UNI token. Unlike centralized exchanges, DEXs enable anyone to list a pair through the creation of smart contracts, which is why there are far more listed pairs in comparison.

Order Book Liquidity

Order book liquidity has improved over the past year. In the chart above, we compare the bid-ask spread on Binance and Coinbase for three different price crashes. We can observe that since the March market crash, spreads are narrower and recover more quickly following extreme volatility. The data suggests that market makers have become more efficient and are better able to absorb risk. Rather than pulling out of markets symmetrically on both sides of the book, which happened following the March crash, market makers continue supplying liquidity which keeps spreads from widening drastically during and immediately following a crash. 

Of particular note: spreads are tighter on Binance's BTC-USDT pair compared with Coinbase's BTC-USD pair, a trend that became consistent starting around June of 2020. 

Rising bid depth suggests longer downturn expected. Since last week's price crash, the quantity of bids on BTC-USD order books has soared relative to the quantity of asks, creating a large imbalance in market depth. Kaiko's measures for bid depth and ask depth are derived from order book snapshots containing all bids and asks placed within 10% of the mid price. When 10% bid depth increases, this suggests that market makers are placing more orders at price levels further away from the mid price, likely in anticipation of further price declines. 

When looking at 2% market depth (the quantity of bids and asks placed within 2% of the mid price), we can observe that the imbalance is less severe. 2% market depth is more reflective of current market conditions, and shifts in the balance of bids and asks immediately surrounding the mid price can be used to predict short term price movements.

In fact, compared with 10% depth, we can observe a very different trend in 2% market depth in the days leading up to the crash. The quantity of asks was greater than the quantity of bids, which suggests a sell wall could have prevented further price movements as traders took profit amidst Bitcoin's record highs.  
Volatility and Correlations

Economic conditions could be bearish for crypto. The biggest story in financial markets over the past week has been the rising yields on U.S. treasury bonds, likely in response to fears over inflation. Rising yields suggest that traders predict tighter fiscal policy may be on the horizon as the economy recovers faster than expected, which is a bearish sign for equities. Over the past year, equities have benefitted heavily from aggressive fiscal and monetary policy, with markets reaching all time highs despite dismal economic growth. Any change to these policies have been interpreted as bearish, despite the good news that the economy seems on track for a V-shaped recovery. 

Both crypto, equities, and gold suffered heavily last week as traders de-risked across markets. Bitcoin's correlation with equities has plateaued over the past month, but its correlation with gold has risen steadily into positive territory. 

Thanks for reading and see you next week!

-Clara Medalie, 
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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.
Copyright © 2021, All rights reserved.

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