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Coin Metrics’ State of the Network: Issue 207
Reviewing the liquidity landscape of the digital assets market
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Market Liquidity Review
The current market environment for digital assets is characterized by complexity, owing to the presence of regulatory uncertainty, an onslaught of exogenous macro events, and continued shifts in the preferred exchange venues among traders. In this edition of State of the Network, we zoom in on essential trading volume and market data trends to contextualize the current market environment for digital asset participants.
Trusted Spot Volume
Coin Metrics’ trusted spot volume (calculated through our trusted market framework) sheds light on the state of market conditions by aggregating spot volume at the highest quality markets. Looking at bitcoin (BTC), spot volume surged around the collapse of Silicon Valley Bank in March, but has since tapered in recent weeks, averaging just around $4B per day in the last week compared to $20B in March.
Meanwhile, spot trading volume of the second-largest cryptoasset ether (ETH) has also trended downward, to $2B per day over the last week. This compares to $17B per day just two years ago in 2021. However, trusted ETH spot volume has moved higher since the beginning of this year.
Market Makers Scale Back, For Now
As pivotal mechanisms in the financial ecosystem, market-making firms have been instrumental in ensuring liquidity and price stability in the volatile crypto markets. However, some firms' recent indications to pull back from the U.S. market, spurred by rising regulatory scrutiny, signifies a noteworthy shift in their strategic approaches.
Adding a complex layer to this narrative is the CFTC's recent lawsuit against Binance Holdings Ltd., one of the largest crypto exchanges globally. Despite some recent declines, Binance still maintains the lion’s share of spot trading volume globally.
While the regulator did not implicate trading firms in any wrongdoing, a citation in the lawsuit elucidates the convoluted dynamics among regulatory bodies, crypto exchanges, and market makers. The retreat of significant market makers from the U.S. crypto market emphasizes the profound impact of regulatory scrutiny on these entities' strategic maneuvers. In the nascent and rapidly evolving cryptocurrency industry, regulatory clarity is paramount for fostering a stable and compliant market ecosystem. The strategic decisions of some market makers to retract from the U.S. crypto market are reflective of an industry-wide trend grappling with regulatory ambiguities.
One of the consequences of retrenching market makers has been particularly visible on Binance US, which saw a substantial deviation in the prices compared with other venues. The chart below highlights the difference particularly clearly, showing ETH trading around $35 over the consensus prices on Coinbase, Kraken and other exchanges, which were tracking their own price. This difference is partially due to arbitrageurs weighing the regulatory uncertainty against the profit from arbitrage, as well as the frictions caused by alleged limitations in USD withdrawals.
The volatility of Bitcoin has been considerably less dramatic relative to the activities seen in the previous year. Nonetheless, since March, there has been a noticeable increase in volatility coinciding with the bullish price action and increasing price of BTC and ETH, primarily attributed to the withdrawal of market makers, leading to a decline in liquidity provision. By employing our Reference Rate data, we have computed a 30-day realized volatility metric for BTC, which is illustrated in the chart below.
Order Book Depth
A liquid market order book (the collection of outstanding bids and asks for a market) is a necessary component of a mature financial asset. The ability to quickly enter and exit large positions with a small degree of price impact, or slippage, is a desirable feature for institutional market participants. Coin Metrics has been collecting order book snapshots for major crypto assets since 2019, and recently launched new liquidity metrics to further enhance institutions’ view of the crypto markets.
The following chart shows the depth of BTC order books for bids and asks within 1% of the mid-market price for a collection of markets which Coin Metrics tracks (see availability here). One of the first clear trends is a slight contraction over the course of the year, though with a clear rebound in the last few weeks.
Also evident is the collapse of Silicon Valley Bank in March of this year, which sent crypto markets through a wild ride of uncertainty including the depegging of the USDC stablecoin. Just before the FDIC, Federal Reserve, and US Treasury issued a joint statement assuring the soundness of deposits at the bank, crypto liquidity retracted markedly, with BTC liquidity within 1% of mid-price dipping below $30M on both sides of the order book. The banking crisis also impacted crypto asset liquidity by impairing real-time payment systems used to move funds around. First, the closure of crypto-friendly Silvergate Bank in early March meant the end of the Silvergate Exchange Network (SEN), which offered crypto exchanges instant settlement services. Before Silvergate’s closure, SEN facilitated $1.3B of volume per day in the fourth quarter of 2022. Then, the closure of Signature Bank in March ended institutional crypto customers’ access to Signet—a money transfer system that served as a vital linkage for traditional banking infrastructure and crypto-market participants. Greater frictions between crypto exchanges and traditional banking infrastructure remains a headwind for market liquidity. However, despite these challenges bid/ask liquidity has remained relatively stable, with 1% depth holding steady near $45–$50M even as major market makers exit the ecosystem.
In reviewing the liquidity landscape of the digital assets market, a number of pertinent factors emerge. First, the presence of regulatory uncertainty looms, casting a shadow of unpredictability and potential impediments to sustained liquidity. Moreover, the decrease in market makers, a critical component of vibrant trading activity, has raised concerns about the overall robustness of the market in the short term.
The repercussions of this decline in market makers may potentially manifest in larger price aberrations between markets for the same underlying asset, as participants fail to fully capitalize on arbitrage opportunities. Furthermore, the struggle of exchanges to maintain banking relationships has raised apprehensions about the potential for a decline in order book market depth. As the industry grapples with these challenges, it becomes increasingly imperative to foster an environment that addresses regulatory concerns, incentivizes market maker participation, and ensures the stability of exchange-banking relationships—especially in the U.S. Thankfully, market structure experts continue to help lay the pipings so that digital assets can fortify their position in the global financial landscape.
Network Data Insights
Rising fee pressure on BTC have driven an increase in LTC use, which saw an increase in active addresses of over 70%, lending more evidence to the spillway theory as users find alternatives to send value on-chain on low-fee chains. However, much of the activity came as the long-time Bitcoin fork introduced the LTC-20 token standard, after BRC-20 tokens took off on Bitcoin.
Coin Metrics Updates
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Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.