“Beached Whale,” 1598, image via Metropolitan Museum of Art
Galen Moore is a Senior Research Analyst at CoinDesk. The following article originally appeared in Institutional Crypto by CoinDesk, a weekly newsletter focused on institutional investment in crypto assets. Sign up for free here.
Bitcoin’s price volatility has been a source of doubt about its narrative both as digital cash and as digital gold.
How could something so volatile be a safe haven investment? How could it be a reliable unit of account or a medium of exchange? Attention to the volatility problem is apparent in the many attempts to mint “stablecoins,” digital currencies pegged to fiat money.
Perhaps bitcoin itself will achieve stability over time, as its liquidity improves with growing investment in the crypto-asset category. Those who believe it will do so may feel disappointment or impatience reading this article.
For in 2019, market and network data have told a different story: volatility has increased and liquidity remains stagnant.
Bid-ask spreads aren’t narrowing
One reliable measure of liquidity is the bid-ask spread: the difference between the price a seller wishes to realize and the price a buyer wishes to pay. Narrow bid-ask spreads are a sign of a liquid market, in which relatively large amounts can trade without moving the price.
We looked at six BTC/USD exchanges for which bid-ask spread data were available. The data show that bitcoin/dollar markets’ bid-ask spreads are wide, compared to other asset categories – and that 2019 has brought little to no relief.
Half of the six exchanges ended November with a wider average monthly bid-ask spread than a year ago; the other half were narrower. The average change was a 0.14 percent widening. The two exchanges with the narrowest bid-ask spreads over the period, Bitfinex and Coinbase, both saw bid-ask spreads widen.
Average monthly spreads, expressed as a percentage of the price, range from 0.045 percent on Coinbase in March, to 0.304 percent on itBit in July. For comparison, bid-ask spreads on Vanguard ETF products right now range from 0.01 percent to 0.09 percent.
Chart showing 30-day moving average BTC/USD bid-ask spread at 10 BTC depth and volatility vs. time, July 1 2018 through Dec. 1 2019. Source: bitcoinity
As the chart above shows, BTC/USD bid-ask spreads tend to widen in periods of high volatility. That’s normal, as market makers seek to profit from investors’ fear and greed. Compared with the second half of 2018, this year has been bumpy for bitcoin: the 30-day volatility of daily returns has topped 4 percent on 65 days in the past 12 months. It’s fallen below 1 percent on just six days in the same period. The data is from data.bitcoinity.org.
Liquidity providers are not rushing in. To measure market makers’ enthusiasm for bitcoin, we turn to network data: the aggregate balances of exchange wallets, as a percentage of bitcoin’s total supply. This measure of exchanges’ bitcoin flows shows some responsiveness to volatility. Year-to-date highs were set in late May and early July, when volatility was on the rise and peaking, respectively.
However, those points stand out in a flat sea: exchanges’ bitcoin wallet balances haven’t changed much since declining in 2018, holding around 8 percent, a point first reached in mid-November, 2017.
Weekly percentage of bitcoin total supply held on exchange vs time, January 2017-October 2019Source: IntoTheBlock
Labeling wallets is an inexact science. Exchanges’ activities on the bitcoin network tend to follow predictable patterns, indicating net inflows. However, large balances often move in unpredictable ways and it can be difficult to distinguish the flow of capital from a change in custodial practice. This wallet labeling data is provided by IntoTheBlock.
As the end of 2019 approaches, bitcoin appears to be in stasis. Markets are no more liquid than they were, this time in 2018 – still an order of magnitude less than bitcoin’s blue-chip equivalents on the US stock market.
The path out of this stasis is murky. Bitcoin’s volatility has increased, while the percentage of bitcoin engaged in the market has remained flat. If stability and liquidity are part of bitcoin’s road to becoming a more mature asset, the year 2019 has been a period of arrested development.
Special thanks to Kaiko for help validating bid-ask data.
The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.
This article is intended as a news item to inform our readers of various events and developments that affect, or that might in the future affect, the value of the cryptocurrency described above. The information contained herein is not intended to provide, and it does not provide, sufficient information to form the basis for an investment decision, and you should not rely on this information for that purpose. The information presented herein is accurate only as of its date, and it was not prepared by a research analyst or other investment professional. You should seek additional information regarding the merits and risks of investing in any cryptocurrency before deciding to purchase or sell any such instruments.
Jun 18, 2020 at 16:00 UTCWith an Austrian app that aims to track COVID-19 now including blockchain, CoinDesk’s Markets Daily Bitcoin news roundup is back! For early access before our regular noon Eastern time releases, subscribe with Apple Podcasts, Spotify, Pocketcasts, Google Podcasts, Castbox, Stitcher, RadioPublica or RSS. This episode is sponsored by Bitstamp and Ciphertrace. Today’s stories: Bitcoin’s Mayer multiple indicates the cryptocurrency is undervalued despite…
JPMorgan has carried out its first live blockchain-based collateral settlement transaction involving BlackRock and Barclays, the U.S. banking giant said on Wednesday.JPMorgan’s Ethereum-based Onyx blockchain and the bank’s Tokenized Collateral Network (TCN) was used by BlackRock to tokenize shares in one of its money market funds. The tokens were then transferred to Barclays Plc for
Blockchain startup Bitsy wants to help build out the bridge between cryptocurrencies and fiat money. To that end, the company announced a new crypto wallet Friday, one aimed at providing a simplified, user-friendly experience. CEO Ann-Marie Hopkins told CoinDesk that the wallet will allow users to buy some amount of cryptocurrency, such as bitcoin, and ensure…
markets View Bitcoin’s short-term outlook remains bullish while prices are held above $3,658 (the low of the long-tailed doji created on Feb. 27). A break above $4,000, however, could be preceded by a pullback to $3,750 if another rejection at a newfound resistance of $3,900 ends up breaching the bullish higher low of $3,826 on…
news Seychelles’ stock exchange has just listed a tokenized security for trading, becoming the first in the world to do so. The exchange, MERJ, is licensed by the Indian Ocean nation’s Financial Services Authority as a securities exchange, clearing agency and securities depository (CSD), and is launching the token to represent its own equity. Revealed exclusively…
news Facebook has acknowledged what many have been saying – that regulatory issues may be an insurmountable barrier to the launch of its Libra global cryptocurrency project. In a frank disclosure in the firm’s latest quarterly report to the U.S. Securities and Exchange Commission (SEC), the firm said that the many barriers it will face…
news Square Crypto, the division of the Cash App company focused exclusively on bitcoin, just hired one of the world’s most prolific bitcoin developers. Chaincode Labs alum and Blockstream co-founder Matt Corallo previously authored notable efficiency improvements such as the rust-lightning implementation, which makes it easier for users to build and interact with layers of…
Nassau, The Bahamas — In early 2022, Ryan Austin was part of a non-profit foundation devoted to teaching people in The Bahamas how to code. One of the early donations it received was from FTX, Sam Bankman-Fried's now-defunct cryptocurrency exchange that operated from the nation. The $30,000 contribution was made to train public school teachers
The Labour Party is a favorite to win the U.K.'s upcoming general election.Regardless of who is elected, crypto policy should still continue developing as it has been, said Adam Jackson, director of policy at Innovate Finance.A U.K. election is not going to derail the progress the country has made when it comes to regulating the