Hi all!
Those of you that took some time off for Thanksgiving, I hope you had a refreshing break.
Due to the shortened work calendar in the U.S. last week, and the fact that I’m on holiday this week (hello from the smallest of the Canary Islands), this newsletter will be much shorter than usual. You’re welcome.
In THE BRIEFING, my colleague Galen Moore looks at bitcoin's volatility and liquidity evolution over the past year. The results will surprise you.
With that, read on…
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BITCOIN VOLATILITY IS UP, LIQUIDITY STAGNANT - Lowered volatility and increased liquidity are desired in bitcoin
- Volatility has increased in 2019
- Bid-ask spreads are flat, showing little progress on liquidity
- Net bitcoin inflows on to exchanges are also flat
Bitcoin's price volatility has been a source of doubt about its narrative both as digital cash and as digital gold. How could something so volatile be a safe haven investment? How could it be a reliable unit of account or a medium of exchange? Attention to the volatility problem is apparent in the many attempts to mint "stablecoins," digital currencies pegged to fiat money.
Perhaps bitcoin itself will achieve stability over time, as its liquidity improves with growing investment in the crypto-asset category. Those who believe it will do so may feel disappointment or impatience, reading this note. In 2019, market and network data have told a different story: volatility has increased and liquidity remains stagnant.
Bid-ask spreads aren't narrowing
One reliable measure of liquidity is the bid-ask spread: the difference between the price a seller wishes to realize and the price a buyer wishes to pay. Narrow bid-ask spreads are a sign of a liquid market, in which relatively large amounts can trade without moving the price.
We looked at six BTC/USD exchanges for which bid-ask spread data were available. The data show that bitcoin/dollar markets' bid-ask spreads are wide, compared to other asset categories – and that 2019 has brought little to no relief. Half of the six exchanges ended November with a wider average monthly bid-ask spread than a year ago; the other half were narrower. The average change was a 0.14 percent widening. The two exchanges with the narrowest bid-ask spreads over the period, Bitfinex and Coinbase, both saw bid-ask spreads widen. Average monthly spreads, expressed as a percentage of the price, range from 0.045 percent on Coinbase in March, to 0.304 percent on itBit in July. For comparison, bid-ask spreads on Vanguard ETF products right now range from 0.01 percent to 0.09 percent.
Greater volatility isn't attracting liquidity providers
As the chart above shows, BTC/USD bid-ask spreads tend to widen in periods of high volatility. That's normal, as market makers seek to profit from investors' fear and greed. Compared with the second half of 2018, this year has been bumpy for bitcoin: the 30-day volatility of daily returns has topped 4 percent on 65 days in the past 12 months. It's fallen below 1 percent on just six days in the same period. The data is sourced from data.bitcoinity.org.
Liquidity providers are not rushing in. To measure market makers' enthusiasm for bitcoin, we turn to network data: the aggregate balances of exchange wallets, as a percentage of bitcoin's total supply. This measure of exchanges' bitcoin flows shows some responsiveness to volatility. Year-to-date highs were set in late May and early July, when volatility was on the rise and peaking, respectively. However, those points stand out in a flat sea: exchanges' bitcoin wallet balances haven't changed much since declining in 2018, holding around 8 percent, a point first reached in mid-November, 2017.
Labeling wallets is an inexact science. Exchanges' activities on the bitcoin network tend to follow predictable patterns, indicating net inflows. However, large balances often move in unpredictable ways and it can be difficult to distinguish flow of capital from a change in custodial practice. This wallet labeling data is provided by IntoTheBlock.
Conclusion
As the end of 2019 approaches, bitcoin appears to be in stasis. Markets are no more liquid than they were, this time in 2018 – still an order of magnitude less than bitcoin's blue-chip equivalents on the US stock market.
The path out of this stasis is murky. Bitcoin's volatility has increased, while the percentage of bitcoin engaged in the market has remained flat. If stability and liquidity are part of bitcoin's road to becoming a more mature asset, the year 2019 has been a period of arrested development.
– Galen Moore
Special thanks to Kaiko for help validating bid-ask data.
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* with a shorter-than-usual list of curated links, you'd think that indicating a few key articles with a star wouldn't be necessary... but habit dies hard
BIG IDEAS
Stop Blaming Miners for Falling BTC Prices (Paradigma) – A fascinating use of data to show that miners don’t have as much an influence in network movements as many think.
*Is Technical Analysis Prophetic or Preposterous? We Asked 7 Crypto Traders (CoinDesk) – It seems the jury’s out: some believe in it, some don’t, but all recognize that it is a significant feature of crypto trading.
*WATCH: Thiel Capital’s Eric Weinstein Talks About the Nature of Money (CoinDesk, video) – “The most interesting economics is the economics that we haven’t built… I don’t think we’ve seen a mature economics yet, and the possibility is that it will be born here.”
WATCH: Chainalysis Chief Economist Wants Crypto to Move Past ‘Buying Drugs on the Silk Road’ (CoinDesk, video) – Philip Gradwell explains the importance of watching blockchain data to understand how markets are evolving.
MARKETS
Barbarians on the Blockchain (TokenData) – A forward-looking overview of recent M&A activity involving crypto companies.
Former head of Circle OTC says there's more to the Tether narrative (The Block) – Dan Matuszewski spoke on Castle Island Ventures’ podcast (link below) about the role of tether in crypto markets, explaining that the creation of large amounts of tether in 2017 was due to a unique arbitrage opportunity.
The Mechanics of Market Manipulation (CoinDesk) – Galen Moore shows how the crypto market's fragmented and decentralized structure can make it more vulnerable to manipulation.
Charles Schwab's $26B takeover of TDAmeritrade casts uncertainty over crypto trading ambitions (The Block, paywall) – Frank Chaparro highlights the difference in crypto approaches of the two financial giants, and hints that the merger could set back the expansion plans of ErisX, in which TDAmeritrade is a shareholder and trading partner.
Digital assets custody: The key to digital assets (Funds Europe) – An overview of the evolving crypto custody sector in Europe.
What the Fed Reserve’s Balance Sheet Expansion Means for Bitcoin (CoinDesk) – Why crypto traders should keep an eye on U.S. Federal Reserve actions.
Bridging the gap to tokenised markets: It’s about time (TabbFORUM) – Olaf Ransome of Fnality talks about the opportunities and conflicts inherent in applying blockchain technology to capital markets.
Another Crypto Exchange is Dropping Privacy Coin Monero Over Compliance Risk (CoinDesk) – Estonia-based BitBay has ceased taking deposits of monero (XML), and will de-list the privacy token on Feb. 19, 2020.
Sam Bankman-Fried pointed out some of the pricing incongruities of bitcoin markets.
Alex Kruger shared some data on Bakkt volumes, including the non-existent take-up of the daily futures.
Galaxy Digital saw first three quarter net income surge by 133% in 2019 (The Block) – In spite of that, it recorded a net loss of $68.2 million in Q3, largely due to the OTC business.
Larry Sukernik tweeted some eye-opening detail on Galaxy’s investments.
NEW PRODUCTS
Canadian Fund Manager 3iQ Files Prospectus for Bitcoin Fund IPO (CoinDesk) – The fund is expected to list on the Toronto Stock Exchange and begin trading in late December or early January.
CRUNCHING NUMBERS
*Blockchain Analytics of a Price Recovery (IntoTheBlock) – A closer look at blockchain data reveals much about how investors behave when prices move.
*Rollback or Reimbursement: An Analysis (Deribit) – Analysts Su Zhu and Hasu crunch some numbers on exchange rollbacks and their consequences, and offer more insight into what happened with the trading glitch on Nov. 1.
Timothy Peterson incorporated lost bitcoins into Metcalfe’s Law.
Michael Goldstein plotted the stock-to-flow model price against the bitcoin price, with interesting results.
REGULATORS AT WORK
Dutch Crypto Startups Brawl with Regulators Over Scope of EU Money Laundering Rule (CoinDesk) – According to multiple Dutch crypto businesses and a former regulator, the Dutch Ministry of Finance and National Bank are pushing ahead with stringent additions to the EU’s AMLD5 legislation without disclosing them to the Dutch parliament.
Russian Central Bank Says It Would Support Crypto Ban (CoinDesk) – When asked by state-operated news agency RIA, the central bank offered the opinion that "private cryptocurrencies cannot be equated with fiat money and cannot be legal tender."
SECURITY TOKENS
Tokenized Real Estate Falters as Another Hyped Deal Falls Apart (CoinDesk) – The structural hurdles, the small print in the real world contracts and the lack of significant demand are encouraging some security token platform pivots.
STABLECOINS
Utility Settlement Coin: A project the banks can get behind (The Trade) – A stablecoin based on central bank money appears to be making solid progress toward launch.
PODCASTS
*ON THE BRINK: The Castle Island Ventures team talks to Dan Matuszewski, former head of OTC trading at Circle and currently principal and co-founder of CMS Holdings, about the origins of Circle, the role of tether in crypto markets and emerging volatility products.
STATE OF CRYPTO: The Amun team chat about active vs. passive investing in crypto markets – which is more expensive and why, which outperforms and why, and how the split is likely to evolve.
UNCHAINED: Laura Shin talks to Carylyne Chan and Gerald Chee of CoinMarketCap about the difficulty of and trade-offs in measuring liquidity
VENTURE STORIES: Erik Torenberg chats with Joel Monegro of Placeholder Ventures about the role of capital in crypto, and where crypto is in the arc of technological revolution.
A-HA!
*A Clear Bright Future (Meaning Conference) – Paul Mason on whether or not humans have the right to control algorithms – the question is much more complicated and compelling than it sounds.
The World's Biggest Banknote Printer Is Running Short of Money (Bloomberg, paywall) – We tend to forget that cash is a business; and that there is growing real-world demand for authentication services.
Tyler Cowen questions the role of economic growth in our society.
Big Reads on Economics: Central Bankers Ponder Easy Money Risks (Bloomberg, paywall) – Links and colorful charts that shed insight on where money is flowing to. |
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FUNDING
Japanese financial services conglomerate SBI Holdings has invested a seven-figure sum in security token platform Securitize.
FIRMS
Binance, one of the largest crypto exchanges in the world in terms of volume, has acquired DappReview, a decentralized application data platform.
Cryptocurrency exchange Kraken has joined the Silvergate Exchange Network to offer its clients around-the-clock deposits and withdrawals.
According to reports, crypto asset manager CoinShares has obtained a broker-dealer license from FINRA.
Digital bank SEBA has launched the SEBA Crypto Asset Select Index (SEBAX), with broad exposure to the crypto asset market.
PEOPLE
Crypto derivatives exchange Bakkt’s chief executive Kelly Loeffler has reportedly been picked by Governor Brian Kemp to serve in the U.S. Senate until the special election in November 2020.
Former CFTC chairman J. Christopher Giancarlo has joined law firm Willkie Farr & Gallagher as senior counsel, to work on public policy positions, including advocating for the creation of a blockchain-based digital dollar.
The SEC has appointed Kristina Littman as the new chief of its cyber unit, which targets misconduct involving ICOs and distributed ledger or blockchain technology.
Claude Waelchli, formerly head of portfolio advisory for institutional and HNW clients at UBS, is setting up a digital assets platform for security tokens called Tokenyz.
Have a tip? Drop me a line at noelle@coindesk.com. |
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CRYPTO WEBINARS
Crypto podcasts have long been a staple of market education (see links above, for example), but I’ve noticed that there is a growing stable of informative webinars out there that don’t get enough air time in my opinion.
Here you have the crypto market webinars that I know about and that I think you might find interesting. If you’d like your webinar listed here, let me know at noelle@coindesk.com (no guarantee of inclusion, though).
Crypto Market Data 101 – Nomics – Every weekday, 3pm ET
Patterns, Predictions and Fascinating Metrics from Cryptocurrency Order Books – IntoTheBlock – December 11, 2019, 12pmET.
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Previous newsletters: 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61
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CoinDesk is not an investment advisor. This newsletter is for informational purposes only, and any comments here do not constitute investment advice. |
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Institutional Crypto - Bitcoin volatility is up, liquidity stagnant