Bitcoin dominance continues to climb amid volatility

• Price action. Bitcoin is now trading at a significant discount to the Russian ruble.

• Trading volume. Bitcoin’s trading volume has been climbing over the past month as traders rotate out of altcoins.

• Liquidity of order books. The spreads of BTC-RUB and BTC-UAH remain volatile, in line with the global FX market.

• Derivatives. The put-call ratio for BTC and ETH options has stabilized.

• Macro trends: Commodity prices are surging as U.S. inflation hits a 40-year high.

Price Trends

Volatility in global financial markets persists.

Investors continue to reduce risk in their portfolios, with both Bitcoin and Ethereum ending the week in the green, while the tech-focused Nasdaq 100 entered its first bear market since the pandemic (down 20% from its recent peak). Commodity markets remain in full price discovery mode, exhibiting strong volatility as traders struggle to price the consequences of the ongoing geopolitical crisis. Despite growing concerns about stagflation (defined as a period of slowing growth and high inflation), most major central banks are continuing to pursue hawkish monetary policies. Markets this week increased bets on a Fed rate hike as U.S. inflation hit a multi-decade high again in February.

In crypto news, President Biden issued his long-awaited executive order on crypto, FTX is expanding into Europe, and Binance is launching its own fiat-to-crypto payments processor.

DeFi tokens suffer after developers leave.

DeFi tokens continued their downward trend last week after developer Andre Cronje announced his permanent exit from the industry. Cronje has contributed to around 25 projects in the space, including Yearn Finance, Fantom, Keep3r, and Solidly. Yearn Finance’s YFI took a hit following the news, plunging 7% between March 5 and 7. Fantom — a high-throughput blockchain network comparable to Ethereum — saw its total value locked plummet by +20%.

In general, most DeFi tokens have underperformed Ethereum in March, with the notable exception of SNX, the native token of the Synthetix protocol. SNX, one of the worst performing DeFi tokens in 2021, saw a strong rebound last week amid several upcoming network upgrades and increased staking demand. Despite the surge, the token remains more than 80% below its all-time high. Recent declines in Ethereum gas fees and the total value locked in Ethereum-based DeFi protocols indicate low investor interest in the sector.

Bitcoin is trading at a steep discount against the Russian ruble.

Bitcoin continues to trade at a premium on the Ukrainian Hryvnia (UAH) market, while it is trading at a significant discount on the Russian Ruble (RUB) market. The premium (or discount) for buying Bitcoin with fiat currency is calculated by taking the difference between the BTC price traded in the local market (converted to USD using the fiat exchange rate) and the Bitcoin price in the USD market. The large discount observed in the Russian market is likely due to the strong selling pressure generated by Russians seeking to liquidate their crypto assets in the face of sanctions risk. So far, centralized crypto asset trading service platforms have complied with official sanctions against Russia by stopping payments from sanctioned Russian banks and restricting accounts.

It is noteworthy that despite the huge discount, Bitcoin is trading at historical highs relative to the ruble, highlighting the extent of market inefficiencies. This suggests that the discount may also be due to a significant disruption in the price discovery process and uncertainty about the value of the ruble relative to other currencies amid low liquidity, foreign currency restrictions, and delayed market adjustments. It is also interesting to note that the discount mirrors the oil market, with traders shunning Russia’s flagship Urals crude, resulting in a 24% discount relative to Brent in early March.

Trading Volume

Trading activity in the ruble and Silvania diverged.

The most direct way to understand trader sentiment is to look at the buy-sell ratio, which is calculated using Kaiko's tick-level transaction data. When exploring this metric for Bitcoin markets denominated in Ukrainian hryvnia and Russian rubles, we noticed several interesting trends. Buy volume on Binance's BTC-UAH market surged to 79% after the entry event, indicating that traders are indeed flocking to crypto assets amid great financial uncertainty. The trend in the Russian market was much more gradual, with buy volume only briefly exceeding sell volume.

For the ruble-denominated markets, we can observe a slight increase in selling volumes since the sanctions were imposed, even though the ruble experienced a 60% loss in value. Cryptocurrency trading service platforms must comply with the sanctions, but there has not been a blanket ban on cryptocurrencies in Russia. Instead, the bans affect the underlying payment systems that allow Russians to trade cryptocurrencies, including SWIFT, Visa, and Mastercard. On March 9, Binance announced that Visa and Mastercard credit cards issued in Russia would not be able to be traded on Binance. After this date, we can observe a sharp drop in ruble-denominated trading volumes, which reached an all-time high on March 7.

The volume is now at pre-entry levels. This is not the case for the volume of crypto assets denominated in dinars, which remains at elevated levels. This suggests that the sanctions have impacted trading activity on Binance. However, as the Binance CEO noted, there are many ways to access crypto assets outside of global trading service platforms, including OTC desks, regional platforms, and interacting directly with the technology (rather than through a third party).

Bitcoin’s dominance grows during a market downtrend.

A popular metric for understanding market structure is to look at Bitcoin’s dominance relative to Ethereum’s. The idea is that during bull markets, Ethereum’s market share increases relative to Bitcoin as traders invest in altcoins and alternative networks. In times of uncertainty, traders rotate funds back into Bitcoin, considered a “safe haven” for crypto assets. Since 2020, during the biggest bull run in crypto asset history, Ethereum’s trading volume has surged relative to Bitcoin. However, over the past month, the percentage of total trading volume on Bitcoin has surged to 66%, the highest level in nearly a year.

This trend suggests that Bitcoin is more resilient than Ethereum to geopolitical tensions and global risk aversion. Since the beginning of the year, BTC has fallen 20%, while Ethereum has lost 32% of its value. Overall, Ethereum's market share remains significantly higher than its 2020 average, indicating that the market structure has changed over the past two years.

The number of privacy tokens has surged.

Last week, privacy tokens — crypto assets with features that enhance anonymity — saw double-digit returns and a surge in trading volume as traders anticipated rising demand following increased U.S. regulation of crypto assets. Trading volume on Binance for the three largest privacy tokens by market cap — Monero (XMR), Zcash (ZEC) and Oasis Network’s ROSE token — surged threefold to $245 million, the highest level since January. The surge in trading came after the U.S. president signed a long-awaited executive order requiring U.S. agencies to assess the benefits and risks of digital assets. ZEC and XRM have risen 51% and 42%, respectively, since Russia entered Ukraine. However, it remains unlikely that the tokens are being used to evade sanctions, and the surge is likely driven by speculation.

February proved to be one of the most volatile months in recent memory for global financial markets, with equities entering correction territory and crypto assets plunging before staging an almost miraculous rebound. In our February report, we covered the market’s reaction to Russia’s entry and the wider impact of the geopolitical crisis.

Liquidity of orders

The spread between the ruble and UAH remains volatile.

After Russia entered Ukraine, the spreads of the BTC-RUB and BTC-UAH pairs on Binance increased significantly. The bid-ask spread represents the transaction cost and is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. Typically, a widening spread is a sign of deteriorating liquidity for a trading pair. We observed that the spreads of the BTC-RUB and BTC-UAH pairs surged more than 5 times during February 27-28.

The BTC-UAH spread surged to over 100 basis points, and the BTC-RUB spread exceeded 40. For context, the BTC-USDT spread is less than 1 basis point. This trend mirrors traditional currency markets, where the ruble spread widened significantly as the market priced in illiquidity and sanctions.

Derivatives

The put-call ratio is stabilizing.

The put-call ratio for Bitcoin and Ethereum has stabilized over the past few weeks after rising steadily for about two months. Typically, a rise in the put-call ratio indicates that put demand is strengthening relative to call demand (bearish bets) and is seen as a bearish sign. Ethereum's put-call ratio has risen faster than Bitcoin's, rising from 0.66 in late January to 0.98 in February before falling back slightly in early March. Ethereum's put-call skew, which measures the cost of puts relative to calls, has also increased.

Overall, the put-call ratio remains significantly higher than in previous months, suggesting that traders are more cautious amid geopolitical and macro headwinds. We do not expect a strong improvement in sentiment until the Fed starts tightening and progress is made in the Russia-Ukraine peace talks.

Macro Trends

The dollar is strengthening and demand for cash is increasing.

Global demand for US dollar liquidity remains strong after the recent Russia-Ukraine peace talks made little progress. The US Dollar Index (DXY) - a measure of the performance of the greenback relative to a basket of foreign currencies - strengthened for the third consecutive week. Hot inflation data from the United States for February also provided support to the greenback, confirming market expectations that the Federal Reserve will raise interest rates at this week's meeting despite growing concerns about the outlook for global economic growth. Above, we put the price of DXY and Bitcoin side by side, and it can be observed that they have followed different trends since the beginning of the year, with BTC trading in a tight range while DXY has surged.

Rising commodity prices have boosted inflation expectations.

Driven by a surge in commodity prices, U.S. inflation expectations reached their highest level since 2003 last week. Above is a comparison of U.S. 10-year inflation expectations with the iShares S&P GSCI Commodity-Index Trust (GSG). GSG tracks a broad range of commodity futures, including energy, precious metals, and agricultural markets. We observe that commodities have already rallied sharply following the start of the war between Russia and Ukraine, two major commodity exporters, as concerns over supply disruptions grow, coupled with low global inventories. Margin calls have also heightened volatility in commodity markets as traders struggle to price the consequences of the conflict. Last week, the London Metal Exchange (LME) halted trading in nickel after the price of the industrial metal jumped 250% in two days following a massive short squeeze.

Source: https://blog.kaiko.com

Original article by: Clara Medalie and Dessislava Aubert

Original link: https://blog.kaiko.com/bitcoin-dominance-climbs-amid-persistent-volatility-7c6c13827f54