The crypto market has seen ups and downs in the new year

Original title: "The crypto market has had a turbulent start to the year"

Original source: DaLing Think Tank

1. In January, the price of Ethereum broke through the historical high of $1,400, and the types of ETH exchange-related trading products and derivatives continued to increase.

2. Since September, the total BTC-USD transaction volume has almost doubled relative to the total BTC-USDT transaction volume.

3. The peak daily trading volume of BTC-USDT and ETH-USDT occurs between 9:00 and 11:00 a.m. Eastern Time.

4. On January 11, the price of Bitcoin fell by more than $9,000 in one day, setting a record for the highest single-day trading volume in Bitcoin history.

5. Over the past 10 months, ETH-USD slippage has been steadily decreasing.

January 2021 Monthly Overview

A new year, new regulation, and a new era of financial populism. January may be one of the most influential months in the history of financial markets. The retail investor vs. Wall Street battle that took place in January is familiar to those active in the crypto industry. The crypto asset market has been influenced by the open finance movement. But this movement has raised fundamental questions about the traditional financial model.

Throughout January, Bitcoin's intraday price volatility reached new peaks, causing a double-digit plunge in Bitcoin's price, which also brought the market to the two days with the highest daily trading volume of Bitcoin. And due to the excessive trading volume, infrastructure problems occurred in several of the world's largest exchanges. In January, the price of Ethereum broke through the historical high of $1,400, and the types of trading products and derivatives related to ETH exchanges continued to increase, indicating that professional investors began to pay close attention to crypto assets. Over the past year, ETH liquidity has increased significantly, indicating that the ETH market is moving in a more efficient and stable direction.

Social media drives the market

Market moves driven by the power of social media, often led by a decentralized community of traders on internet forums, are nothing new to those active in the crypto markets. As the dust settled on the GameStop short-selling, Elon Musk changed his Twitter profile to Bitcoin, which immediately triggered a nearly 20% price increase for Bitcoin. The volatility caused Bitcoin trading volume to increase twentyfold in a minute and caused several of the world's largest crypto asset exchanges to temporarily go offline. Even by Bitcoin's normal trading standards, this volatility was extreme. At the same time, the incident also highlighted a common problem with current crypto exchanges. Exchanges need to ensure the scalability of their core infrastructure so that they can respond quickly when the market unexpectedly occurs.

Figure 1: BTC trading volume on January 29

The internet forum that fueled GameStop’s meteoric rise decided it was time for XRP (a crypto asset that is being investigated by the SEC and delisted from most major exchanges) and Dogecoin (a crypto asset inspired by a meme). Since the forum issued the call, the prices of both assets have soared, and no one can stop them. Memes have been around in the crypto space for a long time and will continue to be active in the crypto market for some time to come.

Figure 2: Comparison of hourly price changes of XRP and Dogecoin

The change in trading patterns indicates that institutions have officially entered the market

Trading volume data is a powerful tool for studying market trends and can be used to derive several indicators of institutional behavior. In addition, on-chain data, exchange product and crypto fund investment data, and information provided by the media all confirm that institutions have entered the market from all levels. Trading volume data is just one of the tools used to support the fact that institutions have entered the crypto market.

Since September, the total volume of BTC-USD transactions has almost doubled relative to the total volume of BTC-USDT transactions, indicating a significant shift in trading patterns in the market. This shift may be caused by traders wanting to convert fiat currencies to profit as BTC prices have reached all-time highs. However, it also indicates that new traders (perhaps institutional traders) are preferring to trade in fiat currencies rather than stable tokens.

Figure 3: USD vs Tether: BTC Total Proportion

As shown in Figure 4, the average transaction size of exchanges such as LMAX Digital and Bitstamp has increased significantly since September, which may also be caused by the entry of institutional traders into the crypto market. This shift indicates that the number of high-volume traders has increased compared to low-volume traders, or that a small number of high-volume traders have begun to execute larger orders. Of course, the increase in the average BTC-USD transaction size may also be related to the historical highs in BTC prices (BTC sell orders are often larger than buy orders, which also increases the average transaction size).

Figure 4: Average transaction size: BTC-USD

BTC and ETH trading volumes peak during North American trading hours

While BTC-USD and ETH-USD trading volumes are mainly concentrated in US exchanges such as Coinbase, BTC-USDT and ETH-USDT trading volumes are mainly concentrated in Asian exchanges such as Binance, Okex and Huobi. But surprisingly, the volume trends of BTC-USD and BTC-USDT, as well as ETH-USD and ETH-USDT are very similar, with the volume peaks of all trading pairs occurring in the overlapping area of ​​European and North American trading hours. Compared with the volume of the US dollar, the daily volume of USDT is more stable, and the peak occurs between 9 am and 11 am Eastern Time. This shows that the influence of the Asian market is not as large as previously estimated.

Figure 5: Average Hourly Trading Volume

(UTC time 0:00-23:00)

Volume surges amid falling market depth

On January 11, the price of Bitcoin dropped by more than $9,000 in a single day, setting the highest single-day trading volume in Bitcoin history. The number of transactions on this trade is huge, as data shows that the depth of the BTC-USD order book has a long-term downward trend. The average bid and ask prices on the BTC-USD order book have declined over the past few months. This may also be one of the reasons why the price of Bitcoin has repeatedly hit new highs and then dropped sharply. The fewer the number of buys or sells on the BTC-USD order book, the more susceptible the asset price is to large market orders.

Figure 6: BTC-USD trading volume

Figure 7: BTC-USD market depth

Ethereum’s liquidity is improving

Due to the extreme volatility in the ETH market, the bid-ask spread of ETH-USD has widened recently, but the average bid-ask spread of ETH-USD transactions is still smaller than it was a year ago, based on the trend throughout the year. The bid-ask spread is an indicator of overall market liquidity: a narrower spread indicates a deeper market and that large orders are less likely to affect the price of an asset. Spreads are set by market makers, and during periods of price volatility, they will widen the spread to account for increased risk. The narrowing spread indicates that the ETH market is becoming more robust and efficient.

Figure 8: ETH-USD bid-ask spread

Despite recent ETH market volatility, slippage on a simulated $100,000 sell order on ETH-USD has decreased significantly since March. Even before the market volatility, ETH-USD slippage was relatively high. However, over the past 10 months, ETH-USD slippage has been steadily decreasing, indicating that the Ethereum market is more liquid and market making is more active than last year.

Figure 9: Price decline for $100,000 sell order: ETH-USD

Renewed focus on DeFI

When Robinhood shut down trading of volatile stocks, many in the crypto space saw this as a huge opportunity for a decentralized financial system that does not rely on centralized intermediaries such as brokers, exchanges, or banks for trading. It is undeniable that DeFi is now a huge sandbox with new experiments emerging every week. Hidden beneath the hacker's activities is a new type of financial infrastructure that is completely decentralized - no centralization means no one can stop trading. In January, DEX (decentralized exchanges) trading volume doubled, and most of the top DeFi tokens saw triple-digit gains.

Figure 10: DeFi Token growth

In January, Ethereum hit multiple all-time price highs, even overshadowing Bitcoin. For years, Bitcoin was the only crypto asset considered by traditional investors, but that has all changed over the past year. CME will soon launch Ethereum options, Galaxy Digital announced a new Ethereum fund for institutional investors, and Grayscale just filed several DeFi-related trusts. The more regulated the investment vehicles for ETH, the stronger and more efficient the ETH market will be.

Figure 11: BTC vs. ETH growth

Intraday price movements are becoming increasingly extreme

Bitcoin's record-breaking rally has led to the longest period of extreme intraday price swings ever. Traditional price volatility measures do not fully capture extremes because they are calculated based on daily returns. Since mid-December, Bitcoin has experienced at least one hour of price fluctuations of 2% or more almost every day, a rare occurrence over the past five months. Generally speaking, Bitcoin's positive price movements are less extreme than its negative price movements.

Figure 12: Hourly rate of increase since September 1

This article is a translation. Its content is intended for information transmission and does not constitute any investment advice.

Some pictures are from the original text.