Author: The Kaiko Research Team Translator: Cointime Lu Tian
Weekly Review
It’s been a volatile week, with both Binance and Coinbase being hit by major SEC lawsuits, leading to wild price swings and altcoin selloffs. Other news includes Tether investing in a BTC mining company, the Arbitrum network being suspended for an hour, and Australia's largest bank to limit cryptocurrency trading. This week we’ll be looking at:
Trends of the Week
Market makers are leaving Binance.US
Binance.US is in serious trouble. A week after the SEC filed its lawsuit, market makers and traders are leaving the exchange. Liquidity, measured by the total market depth of the exchange’s 17 tokens, has fallen by nearly 80% in the past week. On June 4, the day before the SEC filed its lawsuit, the market depth was $34 million. Today, the market depth is just $7 million.
Market depth on Coinbase and Binance (Global) has also declined since the lawsuit. Since the beginning of June, Coinbase’s liquidity has dropped by about 16%, while Binance’s has dropped by about 7%. Binance’s market depth initially remained stable and even increased immediately after the lawsuit ended, but then dropped over the weekend as the altcoin market sold off.
The sharp drop in liquidity suggests that market makers are nervous and want to avoid losses caused by volatility, while also worrying that their assets may be trapped on exchanges like the FTX crash.
Binance.US has suffered the most damage so far of the three exchanges targeted in the lawsuit, as we can see from its market share relative to other US exchanges. In April, Binance.US had a 20% market share. Today, it has only 4.8%.
Meanwhile, Coinbase’s market share has surged over the past week, from 46% to 64%, for reasons that remain unclear. No specific asset has seen an unusual surge in trading volume.
Finally, Coinbase may have the most to lose in the lawsuit, as 80% of its operations are in the United States, while the Binance.US entity accounts for only a small portion of Binance's global activity. However, the allegations in the Binance/Binance.US lawsuit are more explosive.
Price Fluctuations
TUSD loses its peg in minting event
In the early hours of June 10, the stablecoin TrueUSD (TUSD) fell to its lowest level against USDT since March, hitting ₮0.994 on Binance. The sell-off occurred after news broke that Prime Trust, one of the stablecoin’s partners, would suspend minting. TUSD’s market cap and trading volume have continued to climb since Binance promoted the stablecoin’s zero-fee BTC-TUSD trading pair. BTC-TUSD has become the most traded BTC market in the cryptocurrency market, currently accounting for 61% of all BTC trading volume on Binance. However, despite the surge in trading volume, liquidity measured by order book depth has lagged, meaning that market makers are cautious about providing liquidity for the stablecoin. During the unpegging period, market depth dropped from $61 million to just $39 million.
SOL, MATIC and ADA suffer after lawsuit
Top altcoins closed the week in the red, falling to pre-FTX levels as traders fear more exchanges will delist and move to safer assets. Solana’s SOL, Polygon’s MATIC, and Cardano’s ADA, which were identified as securities in recent SEC lawsuits, fell between 20% and 30%. Although Coinbase initially said it had no plans to delist the tokens, trading platform Robinhood — which gets 20% of its trading revenue from crypto trading — announced it would stop supporting the three tokens at the end of June.
Liquidity issues
Bank restrictions lead to a drop in fiat transaction volumes
Bank access for crypto companies is becoming increasingly important. When looking at cryptocurrency trading volumes denominated in fiat currencies, one can see the rapid impact of banking restrictions on the market.
For example, in May, Binance saw its market share drop significantly after losing its GBP banking business. Since then, the average daily trading volume of cryptocurrencies denominated in GBP has fallen sharply, and the total trading volume across all exchanges currently averages only about $30 million per day.
The regulatory crackdown and banking crisis in the United States have also made it more difficult to trade cryptocurrencies denominated in US dollars. Since March, we can observe a decline in the market share of the US dollar relative to the euro. The euro's market share relative to the US dollar has increased from 9% at the beginning of the year to 18% now.
Does this mean crypto activity is shifting towards Europe? It’s probably too early to tell. More likely, dollar-denominated volumes have fallen more sharply, while euro-denominated volumes have been more resilient.
Liquidity data from U.S. exchanges shows a similar trend, further confirming that U.S. cryptocurrency activity has been hit hard. Since the beginning of 2023, the total market depth of the top 25 crypto assets has fallen by 24%.
Market depth initially plummeted during the banking crisis in March, falling by more than 40% in a few days before recovering. The most recent drop in depth is associated with Binance.US and Coinbase, which are included in the aggregation along with nine other exchanges. Liquidity on other exchanges is much stronger.
According to a new report from Bloomberg, global cryptocurrency trading is still growing despite the woes of crypto banking.
May was the lowest month for sales since October 2020
Combined monthly trading volumes across 18 CEXs in May fell to their lowest level since 2020. Volumes have been steadily declining in the second quarter of the year, retreating from multi-month highs reached during the banking crisis in March. However, just 11 days into June, we can observe an increase in activity related to the recent SEC litigation.
ETH DEX market share remains stable
Volumes have dropped significantly over the past month. In the case of ETH, CEX and DEX volumes have dropped by almost the same amount, as evidenced by their stable volume shares. The asset indicator volume includes all ETH (and wETH) volume, such as: ETH-USD on Coinbase and LINK-ETH on Uniswap V3. DEX share peaked in the week of the USDC depeg, reaching nearly 40%. Immediately thereafter, it fell to a yearly low of 13%. However, since late April, DEX share has barely budged, remaining at 16%. This is roughly the same as the end of 2021, at the end of the bull run. Notably, DEX volume did not change even after the SEC claimed that Binance and Coinbase’s ETH staking programs constituted an offering of unregistered securities.
Derivatives
BTC and ETH implied volatility rises
BTC's implied volatility was lower than ETH's last week, but after the SEC announced that it would sue Binance, both quickly climbed, especially for shorter expiration dates. This means that traders are starting to price in greater volatility, making options expensive. ETH's implied volatility also rose, but it did not surpass BTC until later in the week, surging over the weekend and remaining high this week.
The implied volatility of BTC and ETH did not drop significantly in response to the news that the SEC sued Coinbase. Given that both lawsuits involve ETH collateral services, ETH's smaller reaction to the lawsuits may be surprising. Coinbase executives said the exchange will continue to provide services during the lawsuit.
Binance open interest drops by $500 million
Last week, the total market holdings fell, and BTC holdings on Binance fell by more than 25% from their highs, with open interest falling from $4.1 billion to $2.9 billion, as long positions were liquidated and prices fell. However, it is worth noting that Binance's financing rate remained basically positive throughout the week, with only two financing payment periods on the 6th and 11th showing negative values.
Macroeconomics
Coinbase’s bonds hit in lawsuit
Last week, the yield on Coinbase convertible bonds (which move inversely to price) surged from 12% to 15%, having been trending downward for most of May. The increase is relatively low, below the peak during the U.S. banking turmoil in March, suggesting that the market has fully factored in the potential risks. Since Terra's collapse in May 2022, the yield on bonds associated with Coinbase has been 5% higher than U.S. non-investment grade corporate bonds, commonly known as "junk bonds." Junk bonds are rated below BBB/Baa and have a relatively high risk of default.
Interestingly, the yield on MicroStrategy's debt maturing in December 2025 has been trending downward this year, currently around 2%, since hitting a record high of 29% following the FTX debacle. While both Coinbase and MicroStrategy's stock prices fell last week following the SEC's lawsuit, MicroStrategy has outperformed Coinbase this year. Notably, Bitcoin - MicroStrategy's only crypto asset - was not mentioned in the recent SEC lawsuit.
Bitcoin has a low correlation with VIX
Last week, the CBOE Volatility Index (VIX) fell back to pre-pandemic levels, while the S&P 500 entered a technical bull market (up more than 20% from its recent lows). The VIX measures the expected volatility of the S&P 500 over the next 30 days. While the current low VIX can be explained by technical factors such as options supply and demand, historically it has typically fallen during periods of market optimism and risen during stock market sell-offs.
Over the past three years, Bitcoin has been negatively correlated with the VIX, with sell-offs occurring in tandem with rising volatility in the U.S. stock market. However, since March, the correlation has slightly turned positive. This reflects lower cryptocurrency trading volumes and liquidity, suggesting that traders may stay away from the market amid a challenging regulatory environment, limiting cross-asset spillovers. BTC’s correlation with the S&P 500 has also weakened significantly this year, falling to a low of 6% in April before recovering to around 30% in June.
