Kaiko Analysis: Market recovery falters, Coinbase global market share surges

Since entering 2022, the crypto market has been turbulent. After a period of downturn at the beginning of the year, the crypto market finally won a period of recovery with the help of the Super Bowl, but as time went on, the public's rising geopolitical uncertainty and concerns about monetary tightening caused the crypto market to begin to sluggish again.

Looking at the entire market, although the overall price of cryptocurrencies is not satisfactory, the use of stablecoins in the entire industry is increasing, and their volatility is getting smaller and smaller. At the same time, as major exchanges are competing for the US market, Coinbase's market share has not been affected, and the global overall trend is soaring. In addition, the market also reflects some positive signals in terms of stablecoins, liquidity, derivatives, etc.

As investors' concerns about the Fed's policies grow, how will the crypto market react in the current period? What will be the future market trend? This article will conduct an in-depth analysis of the current market situation and interpret future trends.

Source: Medium

Author: Kaiko

Compiled by: Chen Yiwanfeng

Price Changes

Signs of recovery are extinguished again, and risk assets are entering a turbulent period

After the Super Bowl, Bitcoin once stabilized above $42,000, but in the past week, its price began to decline again and fell below $40,000.

Before the recent week of Bitcoin’s decline, the cryptocurrency market was still stable and neutral due to the Super Bowl, and inflation data showed a 7.5% year-on-year increase, which shocked both traditional and crypto markets as traders had already digested the prospect of rapid interest rate hikes. In addition to the usual macro-induced volatility, the cryptocurrency industry was also attracted by the news that US law enforcement recovered $3.5 billion in stolen Bitcoin from an unlikely duo. On the other hand, Binance invested $200 million in Forbes, which was unbelievable to most people because Binance had sued Forbes for defamation. Finally, KPMG, one of the world’s largest auditors, announced that it would add Bitcoin to its balance sheet. Then, risk assets began to enter a turbulent period due to rising geopolitical uncertainty and concerns about monetary tightening.

Bitcoin fell below the psychological level of $40,000 and Ethereum fell below $2,800, losing all of its gains since the beginning of the month. Despite outperforming the broader crypto market and Metaverse-related stocks, Metaverse tokens that led February's fragile crypto recovery also lost traction. On the regulatory front, BlockFi reached a $100 million settlement with the U.S. Securities and Exchange Commission (SEC), and Canada approved 34 crypto wallets that were linked to the funding of protests led by Trump against the country's vaccine mandate. Meanwhile, JPMorgan Chase became the first bank to launch in the Metaverse.

The price efficiency of stablecoins varies across DEXs

Liquidity is very important for stablecoins to maintain their 1:1 USD peg. On centralized exchanges, the price discovery process for stablecoins occurs across hundreds of markets and direct USD pairs, with ample liquidity provided by market makers. On DEXs, stablecoin pools are one of the most popular liquidity pools, despite the greater risk of decoupling due to low liquidity, slow transaction times, and lack of direct USD markets.

For example, on January 28, stablecoins Terra USD (UST) and Magic Internet Money (MIM) experienced a liquidity crisis on major DEXs, causing both to deviate from their pegs as traders quickly sold their holdings. To better understand the liquidity of DEX stablecoins, we plotted the 15-minute volume-weighted average price (VWAP) of four USDC-USDT liquidity pools that have the highest trading volume among all DEXs.

We observed that the USDC-USDT price changed the most on Sushiswap and the least on UniswapV3.

Sushiswap has relatively low volume and transaction count, suggesting that arbitrageurs are not behaving as expected to maintain the 1:1 peg. Curve is a DEX optimized for stablecoin swaps and a close competitor to Uniswap V3, and both stablecoin pools have shown low volatility, indicating efficient price discovery.

We can also observe how Uniswap’s upgrade from V2 to V3 strongly affected price efficiency. The introduction of “pooled liquidity” for V3 along with 0.01% fees enabled efficient stablecoin pools, making the DEX a strong competitor to Curve.

How does the liquidity of stablecoins on DEXs compare to CEXs? We plotted the highest volume USDC-USDT pair to understand the changes in the price discovery process on CEXs. Overall, liquidity of the same stablecoin pairs varies less on CEXs, with the exception of OKX. However, Uniswap V3 and Curve have similar price volatility to Binance, KuCoin, and Kraken, suggesting that liquidity on DEXs has matured significantly and is now comparable to that on CEXs.

Bitfinex exchange token hits all-time high

Cryptocurrencies issued by exchanges, which allow holders to benefit from lower trading fees, vote on new coin listings, and earn passive staking rewards, have outperformed the rest of the crypto industry since the beginning of the year. To better understand this trend, we charted the tokens of Binance, FTX, Huobi, Bitfinex, and OKX. While exchange tokens offer tangible benefits to holders, they can also serve as a measure of an exchange’s success and are often tied to news events.

Bitfinex’s LEO token and FTX’s FTT have seen the biggest gains since the start of the year, up 69% and 18%, respectively. Bitfinex’s LEO hit an all-time high after the U.S. Department of Justice seized nearly $3.6 billion from the 2016 Bitfinex hack. The token was originally issued to refinance Bitfinex after the hack, with the promise that if the funds were recovered, the exchange would use them to buy back tokens and destroy them. FTX’s token gained after the exchange’s recent $400 million funding round, giving it a valuation of $32 billion.

Metaverse Crypto Tokens Outperform Stocks

Recently, gaming platform Roblox followed Meta (formerly Facebook) in reporting disappointing earnings, plunging more than 25% in a single day. Meta's stock price has fallen by more than 30% since the beginning of the month, indicating that investors lack confidence in the company's shift to the metaverse. In contrast, crypto tokens related to the metaverse, including the intersection of decentralized games, NFTs, and virtual worlds, have performed better.

Gala Games’ GALA is up more than 27% since the beginning of the month after the platform announced it would invest $5 billion over the next year to grow its NFT offerings and build a theme park. Theta Network’s token THETA is still up 3% in February after partnering with Samsung to offer digital collectibles. Decentraland’s MANA and Axie Infinity’s AXS lost some of their gains after a sell-off, falling 3%.

Market size changes

Curve’s average transaction size exceeds $1 million

Curve is one of the most popular decentralized exchanges for stablecoin swaps because its unique liquidity mechanism allows for more efficient price discovery than its competitors. The DEX attracts large traders seeking to swap stablecoins without the risk of slippage, and today has the highest average trade size of all liquidity pools. In November, Curve's average daily trade size exceeded $1 million for the first time, and is currently still well above the 2021 average.

Overall, Curve’s trading volume is still relatively low compared to other DEXs, but it has found a niche in large stablecoin swaps. Despite its relatively low market share, Curve holds the largest share (13%) of DeFi’s total value locked (TVL) on Ethereum, more than double Uniswap’s TVL.

In contrast, the average transaction size on other DEXs is small, ranging from $5 to $25,000, although they are much higher than the transaction size on CEXs. High Ethereum transaction fees make trading on DEXs too expensive for many retail traders, resulting in large transaction sizes.

Exchanges compete for US market share, Coinbase market share soars

Competition for the massive U.S. cryptocurrency market is heating up as global giants like Binance and FTX launch regulated U.S. branches aimed at catering to more institutional-type traders. As can be observed from the Bitcoin USD spot market share of major regulated exchanges, Coinbase’s market share recently hit an all-time high of nearly 60% in December before falling back to 51% in January. The surge was due to strong trading activity in Coinbase’s BTC-USD market during the Omicron sell-off and the low-volume holiday season. Bitfinex’s market share has dropped significantly from over 50% in 2018 to 14% in 2022. In contrast, LMAX Digital and Kraken have mostly managed to maintain their share.

Despite investing heavily in U.S. expansion over the past few months, Binance.US and FTX.US still have relatively small trading volumes. However, FTX.US seems to be gaining a bit of traction, surpassing Binance.US (3%) and Gemini (4%) in just a few months.

Coinbase has listed five times as many new crypto assets in 2021 compared to 2020. Historically, Coinbase has been fairly conservative when it comes to adding new assets to its platform, but the exchange’s strategy shifted in 2021 to more closely mimic its competitors like Binance and FTX, which employ a rapid listing strategy. Binance has listed assets at a faster pace in 2021, though listings are down compared to the previous year. Coinbase’s new approach to listings is in line with growing investor interest in altcoins and growing competition from decentralized exchanges (DEXs), which allow anyone to list tokens without permission.

However, this also coincides with the increasing involvement of centralized exchanges in venture activities. The venture arms of major exchanges such as Coinbase, Binance, FTX and Crypto.com are among the largest investors in the emerging crypto ecosystem, including projects offering tokens listed on their platforms, which creates a potential conflict of interest.

Order Book Liquidity

Bitcoin market depth recovers after December crash

After falling to a 7-month low in early December, Bitcoin's market depth has improved over the past month. Above, we plot the number of buys and sells within 2% of the mid-price of a native BTC unit aggregated across 8 exchanges. We observe that Bitcoin's market depth has been trending downward since August last year, but the trend reversed in late December. Throughout January, market depth has steadily climbed despite the decline in Bitcoin's price, suggesting that market maker liquidity is recovering. Overall, there has been a clear drop in trading volume over the past few months, which could explain the drop in liquidity.

Spread volatility decreases in 2022

Despite multiple swings in January, liquidity, measured by the average bid-ask spread, is much more stable than it was a year ago. Above, we plot the average bid-ask spreads on major exchanges in January 2022 and January 2021. Last January was one of the most volatile months in Bitcoin’s existence, marked by a record bull run and several sharp corrections that led to a sharp spike in spreads. A year later, we can observe that the market is generally much calmer on each exchange. Bittrex and Gemini saw the largest decreases in average spreads, exceeding 5 basis points.

Derivatives

Funding rate returns to neutral

Bitcoin's perpetual contract funding rates have reentered neutral territory after turning negative and hitting their lowest level since the January sell-off. Funding rates are the cost of holding a long position and are a measure of overall market sentiment and bullish demand. When they are negative, it means shorts are paying longs to keep their positions open, while bullish demand weakens. Funding on all exchanges except OKX reset to neutral in early February. Bitcoin perpetual contract open interest has remained relatively stable, hovering around $9 billion, which suggests relatively low leverage.

At the same time, the put-call ratio continued to rise over the past half month, indicating that the sentiment in the options market is bearish.

The ratio is calculated by taking the ratio of put options (short bets) to call options (bullish bets) and when it rises, it indicates that demand for bearish bets is increasing. Demand for put options has been increasing relative to demand for calls over the last month as traders seek protection from volatility and falling risk sentiment.

Macro Trends

Inflation hits 40-year high

Inflation in the United States climbed 7.5% in January, hitting another multi-decade high, and showed few signs of easing. The increase exceeded market expectations and was driven by rising costs of goods and services, a sign of expanding inflationary pressures. We can observe that BTC had been moving in sync with rising costs for most of last year before breaking away from its peg in November. Crypto assets fell along with tech stocks as inflation continued to soar as the Federal Reserve took a hawkish turn, stopped using the term "transient inflation" and began to reduce its monthly bond purchases.

Although Bitcoin’s correlation with stocks has fallen slightly over the past month, the overall macro backdrop appears to be negative for risk assets. High inflation data and a tight labor market supported the Federal Reserve’s aggressive 50 basis point rate hike in March, rather than the standard 25 basis point increase.

However, as central banks around the world are exiting coronavirus-era monetary stimulus in a more synchronized manner, concerns are growing about a slowdown caused by a mistaken tightening of policy. U.S. consumer confidence fell to its lowest level in a decade in early February, suggesting demand has weakened.

Volatility roils stocks as concerns grow

The Federal Reserve's hawkish stance and surging inflationary pressures have led to increased stock market volatility over the past few weeks. Above we plot the 20-day rolling volatility of Bitcoin, Ethereum, and major U.S. stock indices. We observe that volatility for both Bitcoin and Ethereum has spiked in January, but remains low compared to the summer. In contrast, volatility in the tech-heavy Nasdaq 100 and the broader S&P 500 has been steadily rising since early July last year as traders' expectations for rate hikes in 2022 have risen from near zero to as many as seven.

Yield curve flattens to lowest level since 2020

The US yield curve (the gap between the 10-year Treasury yield and its 2-year counterpart) flattened to just 40 basis points last week, the lowest level since July 2020. Typically, a negative or inverted yield curve is seen as an indicator of a recession while historically, a positive (steep) yield curve is associated with stronger economic activity and a stock market rebound. We observe that although the yield curve is still 50 basis points away from inversion, it has been flattening rapidly since October. This trend points to growing concerns that the Fed is getting its policy wrong and expects aggressive tightening as economic growth slows. Despite stock market volatility and geopolitical tensions, the Fed is holding its hawkish policy strong as US inflation shows no signs of easing. The US PPI, or the price producers receive for their goods and services, rose 9.7% year-on-year in January, indicating that businesses are raising prices.