Why did the cryptocurrency market's trading volume plummet in September? How can we get out of the deep bear market?

Cryptocurrency market trading volumes continued to decline in September, reaching levels not seen in several years, causing prices of the two largest crypto assets by market value to fall early Monday.

While analysts say lower interest rates and the approval of U.S. spot crypto ETFs could reignite trading volumes, trading conditions are likely to remain subdued for the foreseeable future.

A report released by Compass Point Research and Trading analysts on September 8 showed that the average daily trading volume of centralized exchanges in August was US$8.4 billion, a decrease of 16% from the previous month and a decrease of 78% from the previous year.

The analysts added that trading volumes in the first week of September were “terrible,” at about $5.9 billion. Those numbers were down another 29% month-over-month and are on their way to their highest levels since late 2017, they wrote.

The average daily trading volume of decentralized exchanges in August was slightly over $1.8 billion, performing better than centralized exchanges, but still down about 8.5% from July.

Matteo Greco, research analyst at Fineqia International, highlighted in a research note on Monday that weekly trading volumes on centralized exchanges have recently averaged around $9 billion, the lowest level since the end of 2020.

Greco said the indicator represents a moving average of weekly trading volumes calculated between September 4 and 10.

Fineqia analysts added that trading volume on major decentralized exchanges totaled $22 billion in August, the lowest monthly volume since December 2020.

On top of that, according to Fineqia, about 75% of the total Bitcoin (BTC) supply is held by long-term holders, reflecting that BTC has not moved in more than 155 days. Greco noted that short-term holders hold only 2.5 million BTC, the lowest level since 2011.

Trading volume in cryptocurrency exchange-traded products also fell to $754 million last week (September 4-8), a 73% plunge from the previous week, CoinShares head of research James Butterfill said on Monday.

The sharp drop last week came on higher-than-usual trading volume after Grayscale Investments won a lawsuit against the U.S. Securities and Exchange Commission in the U.S. Court of Appeals for the D.C. Circuit.

Still, the $754 million in cryptocurrency ETP volume is well below the average weekly volume of $1.4 billion so far in 2023.

As of 2 p.m. ET on Monday, prices for Bitcoin and Ethereum (ETH) were down 2.1% and 3% from 24 hours ago, according to Coingecko.

What causes it and how can I recover?

Greco said on Monday that interest rate hikes by central banks over the past 18 months have greatly contributed to a decline in liquidity levels in financial markets, suggesting that investors are taking de-risking actions.

He added: “This affects the entire financial sector, but has a greater impact on the digital asset market, which is the most volatile and risky market in history.”

Chase White, senior research and policy analyst at Compass Point, said high short-term Treasury rates have particularly hurt interest in cryptocurrencies and other risky assets.

“You get a 5.5% risk-free return, which is attractive to investors given the current uncertainty in the global macroeconomic outlook,” he explained. “Outside of the macro situation, the lack of fiat on-ramps for crypto platforms seems to have impacted liquidity, as U.S. banks do no longer serve the crypto industry outside of some of the largest domestic players.”

Greco said in a report on Monday that investors are showing increasing confidence in the approval of a spot Bitcoin ETF. He noted that the discount rate of the Grayscale Bitcoin Trust (GBTC) - about 17% on Friday - hit its lowest level since early 2022.

Several companies, including financial giant BlackRock, have applied for spot Bitcoin ETFs, a product that the SEC has never allowed to be listed. In addition to seeking to launch a Bitcoin ETF, Ark Invest, 21Shares, and VanEck recently revealed plans to launch a spot Ethereum ETF.

Greco added: “The end of rate hikes, especially if combined with the approval of a spot Bitcoin ETF, could be a major driver of bringing new capital into the market and improving liquidity.”

White labeled “lower interest rates and visibility of restored economic growth” as the biggest drivers that could see cryptocurrency volumes recover. He expects this to begin to happen in early 2024.

“However, any move by the SEC to approve a spot (Bitcoin or Ethereum) ETF could provide a boost, decoupling the crypto market from the broader macro picture,” White said.

White and others said they believe a spot bitcoin ETF could be approved by the end of this year or early 2024.

“Beyond that, it looks like we’re headed for a relatively quiet trading environment over the next few months,” White said.