The Kaiko research team has extensively covered the FTX collapse. In our upcoming webinar, we will dive deep into the data we used and discuss how liquidity analysis can prevent the next black swan event. Register below:
Historically, market capitalization has been a controversial metric, as it does not consider liquidity and token inflation. Most recently, Alameda misrepresented the value of numerous tokens on their balance sheet that proved to be virtually illiquid on open markets.
To better understand the utility of this metric, we compare market depth for the top non-stablecoin cryptocurrencies relative to their ranking by market cap, as ranked by CoinMarketCap. We compute depth by taking the sum of bids and asks within 2% of the mid price for all USD and stablecoin-quoted pairs across 19 centralized exchanges.
The good news is that there seems to be a positive relationship between liquidity and market cap for the top 10 crypto assets — the larger the market cap the deeper the market depth. However, this relationship is less clear for smaller-cap altcoins.
Overall, crypto market liquidity is very concentrated, with the gap between BTC/ETH and altcoins persistently high. As of November 2022, the average depth for BTC and ETH was over $190mn and $130mn, respectively. For context, average depth for each other asset analyzed is below $30mn. Overall, the top 10 crypto assets attract 80% of total market liquidity.
Smaller altcoins also exhibit strong divergences with no consistent relationship between market cap and liquidity. For example, Chainlink’s LINK token is more liquid on CEXs than DOT, SHIB, UNI, and AVAX despite its market cap being lower by 30-50%.
These divergences could be partly explained by the fact that CEXs are not the main market for some of these smaller tokens (such as UNI or WBTC), which have higher volumes on DEXs. However, the divergences suggest that altcoin liquidity is unequally distributed and not wholly correlated to the token's market cap.
Price Movements
Markets rebound in anticipation of Fed pivot.
Markets traded up on the week to begin December as investors seem to be buying the Fed pivot story, predicting that May 2023 will be the peak in the benchmark policy rate. Binance’s BNB chain was hit by two attacks in the same week with a combined $20m in liquidity drained across two of its protocols. Meanwhile, Coinbase Wallet removed support for XRP, BCH, ETC and XLM citing low usage and disabled NFT transfers on its iOS wallet app after Apple demanded 30% of all gas fees on in-app transactions. Finally, MakerDAO voted to hike DAI rewards to 1%, Aave froze lending activities on 17 assets and SBF continued a string of media appearances attempting to rebuild his image.
Derivative DEX tokens outperform.
The tokens associated with the decentralized derivatives exchanges dYdX and GMX have outperformed both BTC and non-derivatives DEXs in recent weeks. dYdX and GMX’s tokens are up 26% and 10.3% respectively since November 1st while BTC is down 17%. Other DEX tokens are down double digits despite a shift in narrative around decentralized trading and custody following the collapse of the centralized exchange FTX.
Open interest on GMX surged to a high of nearly $200mn USD on November 26 but has since fallen to $120mn; dYdX’s open interest stands at over $300mn. So, while these decentralized alternatives have gained serious traction, they are still small compared to centralized derivatives exchanges.
APE recovers 50% from all-time lows ahead of staking roll out.
Apecoin (APE), the token associated with Bored Ape Yacht Club and Yuga Labs, surged ahead of staking going live on December 5. Currently, the token’s primary use case is governance, though it will also be used to “provide access to certain parts of the ecosystem that are otherwise unavailable.” Interestingly, Vitalik Buterin, cofounder of Ethereum, criticized governance tokens last week amidst excitement over APE staking.
Staking will begin with a pre-distribution period, during which users will be able to stake their NFTs and/or tokens before rewards are distributed. This is intended to reduce the likelihood of a “gas war”, caused by Yuga Labs’ Otherside release. APE hit all-time lows in both USD and ETH terms in the wake of FTX’s collapse, but has since surged over 50% as traders speculate and BAYC NFT holders accumulate the token to maximize their staking rewards.
Market Liquidity
Trade volumes hold steady despite record exchange outflows.
Monthly trade volume jumped by 23% to $705B for the largest exchanges in November, bolstered by FTX-related volatility. The increase was mainly driven by Binance which registered a 30% increase in trading activity. Coinbase and Kraken also saw their volume rise while smaller exchanges’ volume fell.
As discussed in our previous Deep Dive, it seems likely that both Binance and U.S.-regulated exchanges like Coinbase and Kraken could benefit from FTX’s demise. U.S.-regulated exchanges may benefit from increased volume from users and institutions who have become more wary of off-shore exchanges. Binance may benefit, despite not having an official headquarters, because it has projected an image of strength through the crisis and because it has by far the best liquidity of any centralized exchange.
In July Binance removed trading fees for 13 Bitcoin pairs which considerably boosted trading activity on its platforms. Zero-fee BTC trading accounted for half of all trading volumes on the exchange in November up from 25% in June.
The U.S. Dollar loses crypto market share.
BTC-USDT trading volume relative to BTC-USD hit its highest level in over two years last week, reaching 84% of market share. Historically, BTC-USD vs. BTC-USDT trading volume could be considered an indicator of institutional inflows into crypto. During the 2021 bull market, institutional traders poured funds into crypto markets via U.S. platforms, boosting market share for BTC-USD relative to BTC-USDT. This trend has since reversed.
The trend has been exacerbated by the rising dominance of Binance on spot markets. The outsized influence of USDT markets on BTC's price discovery has raised concerns amid renewed rumors that Tether’s parent company is lending its own token against crypto collateral and could experience liquidity issues.
Derivatives
Negative sentiment surrounds BNB perps.
BNB perpetual futures activity on Binance is showing clear signs of uncertainty surrounding the exchange’s native token. As was the case for most tokens, open interest measured in USD plummeted following the collapse of FTX. However, BNB’s open interest rose over 70% in the following weeks. Interestingly, this rally in open interest coincided with BNB's lowest funding rates of the year.
Negative funding combined with a rise in open interest indicates more short positions were being taken up. While funding has bounced back to neutral to start December, there are clear shades of negativity regarding BNB from the perpetual futures markets as exchange tokens and their purpose come under more scrutiny than ever.
ETH open interest unwinds over weekend.
Over the weekend we observed quite a drastic shift in open interest for ETH perpetual futures, particularly on Binance. On Friday, open interest across exchanges climbed to $4.2bn, up from $3.5bn a week prior. The move was accompanied by positive ETH funding rates until an unwind began on Saturday morning, which flipped funding rates negative and saw over $500m worth of ETH open interest being wiped from the market. That unwind looked to have stopped as funding rates turned positive to close out the weekend, but as of Monday morning funding has dipped negative again, so it remains to be seen if this unwind will continue.
BTC implied volatility structure signals panic.
Implied volatility is a measure of the expected volatility of an asset over a specified time period. Implied volatility is derived from the market price of the options contract, using an option pricing model. It is called "implied" because it is derived from market prices rather than being directly observed from historical data. This means it is a forward looking metric, making it an extremely useful tool in forecasting future risk.
An inverted structure, in which short-term implied volatility is greater than the longer-term gauges, signals panic in the markets. We saw this happen on November 28 as the 2 week implied volatility was greater than the 3, 2, and 1 month implied volatility. An inverted structure would mark a good time for a risk manager to reduce their market exposure and de-risk positions. A normal market structure for implied volatility would see the longer dated expiries have higher IV as more volatility should be expected over a longer timeframe.
Macro Trends
U.S. inflation gauges show signs of easing.
The Fed’s preferred inflation gauge – the Personal Consumption Expenditures (PCE) – rose less than expected in October, adding to hopes that price pressures in the U.S. are easing. The reading comes after two other widely followed inflation indicators – the consumer and producer price index – also slowed in October. The U.S. central bank is expected to slow down the pace of monetary tightening this month after an unprecedented series of four consecutive 75bps increases. However, the Fed has also signalled that the level of interest rates will likely stay higher for longer, fueling recession fears. This is bad news for risk assets which tend to suffer during periods of recession, with equities losing on average between 20-30% of their value.
BTC's correlation with equities rebounds.
While BTC's correlation with equities fell to a yearly low after the collapse of FTX, it has rebounded over the past few weeks. Interestingly, BTC has been mostly uncorrelated with Chinese markets over the past year. However, its correlation with China’s equity benchmark (the CSI 300) has been on the rise in November and currently hovers around .2, double the 2022 average.
Hopes that China will relax its stringent zero-covid policy – after the largest wave of protests in decades – have been among the main narratives driving markets over the past week. Overall, research suggests that China’s reopening will have a significant impact on global risk sentiment despite the country’s limited integration in the global financial system.
Kaiko's research newsletter is written by the Kaiko research team: Clara Medalie, Dessislava Aubert, Riyad Carey, and Conor Ryder, CFA. This content is the property of Kaiko, its affiliates and licensors. Any use, reproduction or distribution is permitted only if ownership and source are expressly attributed to Kaiko. This content is for informational purposes only, does not constitute investment advice, and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. For any questions, please email research@kaiko.com.
.png?width=1116&upscale=true&name=image%20(15).png)
