Welcome to the Data Debrief! Bitcoin is on an absolute tear, currently trading at 9-month highs and up 30% in the past seven days. The rally kicked off after the USDC turmoil subsided, and continued throughout the week despite ongoing stress in the banking sector and uncertainty around this week's Fed meeting. Today we explore:
Crypto trade volume vs. order book liquidity
Stablecoin dominance amid fiat banking uncertainty
Bitcoin's falling correlation with equities
Also, check-out our op-ed in Coindesk about how the U.S. banking cut-off presents opportunities in Europe.
Tomorrow, join the research team for the first edition of The Current, an in-depth discussion of the most significant market events using our signature data-driven approach. We'll discuss the the banking sector crisis, USDC de-pegging, future of stablecoins and fiat currencies, liquidity trends, and much more.
Trade volume hits 4-month high as BTC rally continues.
Crypto trade volumes topped their highest level since the FTX collapse amid a broad market rally dominated by bitcoin. Market sentiment has undergone a dramatic reversal over the past week, bolstered by an ongoing banking crisis that has strengthened crypto’s original narrative among investors. On March 14, trade volumes on the 18 most liquid centralized exchanges soared to $51bn, hitting 4-month highs. During the FTX collapse, volumes topped $80bn.
Despite surging volumes, liquidity remains thin. 2% market depth for BTC-USD and BTC-USDT pairs hit 10-month lows in the aftermath of Silvergate’s collapse. Depth dropped even lower than levels seen in the immediate aftermath of FTX, likely due to the closure of major on-ramps for crypto markets, which included Silvergate’s SEN payment network.
Depth has since recovered slightly from last week’s lows as BTC trades above $28k. Overall, BTC’s rally could be exacerbated by thin liquidity, which makes it easier for market orders to both push up and push down the price of an asset.
Price
Bitcoin to ether ratio hits highest level since July 2022.
Bitcoin is largely outperforming the broader crypto market, best encapsulated by the BTC to ETH price ratio, which hit its highest level since July 2022. Since March 12, BTC is up 31% compared with ETH's 18% gains. The price ratio can be used as an indicator of BTC's dominance relative to altcoin markets and has historically served as a gauge for investor sentiment.
The regulatory outlook around ETH has worsened over the past month, introducing some uncertainty around the market impact of the upcoming Shanghai upgrade which will activate staking withdrawals. In early February, Kraken announced it will wind down its retail ETH staking business in the US as part of its settlement with the SEC. More recently, in a case against crypto exchange KuCoin, the New-York Attorney General claimed ETH is a security.
Liquidity
The future of fiat vs. stablecoin usage on CEXs.
What is the future of fiat vs. stablecoin usage on centralized cryptocurrency exchanges? With the impending end of BUSD, a temporary USDC de-pegging, an increasingly fraught banking sector in the U.S., and growing regulatory scrutiny of stablecoins, this question has never been more relevant.
Today, 78% of all trades on centralized exchanges are denominated in stablecoins while only 19% of trades are denominated in fiat currencies. The remaining volume is traded against BTC, ETH, or exchange tokens like BNB. With increasingly limited fiat on-ramps, we can expect stablecoin market share to increase on centralized exchanges, especially on off-shore platforms like Binance which are already getting cut-off from fiat payment rails.
So which stablecoins are leading the race? It’s hardly a surprise: 80% of all stablecoin-denominated trades are using USDT.
At the start of the year, Binance’s BUSD accounted for 30% of volume, but this number has since fallen to 19% and will probably continue to dwindle until the stablecoin is officially discontinued next year. As for USDC and DAI, both stablecoins have very little usage on centralized exchanges and are mostly used within the DeFi ecosystem.
But with every regulatory crackdown comes opportunity, especially for regions abroad. The big question on everyone’s mind is whether Europe or APAC can replace some of the fiat payment rails that have been dismantled in the U.S. Looking at the market share of fiat-denominated trades on exchanges, we can observe that overall, the dollar is still dominant with 47% market share.
The Korean Won comes in second place at 39% suggesting continued interest in this region. APAC has largely been preserved from the banking troubles rippling through the West. The Euro also presents a strong opportunity, but today has very limited use on centralized exchanges, with fiat-denominated volumes at just 6%. The next 10 largest fiat currencies account for a tiny fraction of total crypto volume. Overall, there remain few strong options in a crypto ecosystem without the dollar based on patterns in trade volume, but only time will tell.
Weekend liquidity is consistently lower.
Weekend and overnight liquidity management has always been a challenge for crypto markets, which operate 24x7x365 and struggle to match their needs with traditional financial institutions.
In 2023, volumes were on average 33% lower on weekends relative to weekdays. This gap varies significantly between exchanges, ranging from 40% on Gemini and Kraken to 30% on Coinbase and 24% on Binance.US. The recent closure of two of the main crypto-friendly banks in the US - Signature Bank and Silvergate - will likely exacerbate market fragmentation between exchanges.
To execute OTC deals and stablecoin redemptions smoothly outside regular banking hours, the industry was heavily reliant on real-time payment networks such as Silvergate’s Exchange Network (SEN) and Signature’s SigNet. With these networks gone many traders may choose to stay away from the market on weekends. This will result in even thinner weekend markets and worsened price discovery.
Overall liquidity improving thanks to USDC repeg.
Taking the 1% market depth of the top 10 assets in crypto gives us a useful gauge of the liquidity in the overall crypto market. After the incidents with Signature, Silvergate and Silicon Valley Bank led to a market-wide panic and a de-peg of USDC, liquidity in crypto markets halved in a few days as market makers pulled money out of the market. Since then, liquidity has vastly improved in markets largely thanks to USDC re-pegging.
As we explained last week, the majority of the spike was driven by a $100mn increase in USDC liquidity. Since then, there has been a gradual move upwards in overall liquidity as a result of the rally in crypto prices in the last week. With more liquidity comes less volatility as prices tend to have more support to both the upside and the downside.
Derivatives
BTC open interest surges while BNB flips bearish.
A rotation to BTC isn’t just occurring in spot markets, with perpetual futures investors also shifting their bets towards crypto’s flagship asset. Using open interest as a gauge for new investment flows, there is $2.6bn more of open positions in BTC than there were at the start of the week, indicating a significant new wave of flows in derivative markets. It wasn’t all price effects either, as open interest measured in BTC rose over 50k in a week, meaning a big driver of the increase was a new batch of contracts being opened. Interestingly, ETH open interest only rose by $600mn as it struggled to catch as much momentum as BTC, with an increase in open interest of just 18% compared to BTC’s 51% increase.
BNB open interest picked up by 40%, however looking closer at funding rates we can see that this move was primarily short-biased.
Using aggregated funding rates, BNB rates fell deeply negative during last week, down as low as -0.19% while BTC and ETH moved into positive territory. The reasons for the negative sentiment surrounding BNB are unclear, but it could be due to the fact that the $985mn Binance was supposed to convert into into BTC, ETH and BNB was instead supposedly converted into TUSD and USDT.
Macro
Bitcoin's correlation with equities continues to fall.
Bitcoin's 30-day rolling correlation with tech equities hovered around 30% last week, retreating slightly from its lowest level since the collapse of FTX reached earlier this month. Over the past year, BTC has been moving in sync with the Nasdaq with an average correlation between the two assets of 60%. However, the trend appears to be shifting with BTC outperforming equities in both absolute and risk-adjusted terms.
In contrast, BTC correlation with safe-have gold has surged to its highest level since January. Gold prices jumped by 7.2% in March as traders scrambled for safe-havens amid global banking turmoil.
Improving global liquidity outlook boosts crypto markets.
Last week data showed that the U.S. Fed assets jumped by $297bn, boosted by increased demand for liquidity by banks suggesting that stress in the financial system remains elevated.
The increase is seen by some as a step back in the process of balance sheet reduction or quantitative tightening (QT). Between June 2022 and early March, the Fed has reduced its balance sheet by $575bn.
The banking crisis has significantly increased probabilities for a hard landing (i.e. sharp economic downturn) in the U.S. as banks are expected to tighten their lending standard more rapidly, choking consumption. This has led to a sharp repricing in interest rate expectations with markets now pricing in rate cuts as early as June.
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.
