data taken at 10.27am 17/07/2020
Written by: Yves, Head of Trading at Wirex
On July 15th, the intraday volatility of the Bitcoin price reached its lowest level this year (source: Bitmex .BVOL24H historical values). The volatility’s downward trend started two months ago. Daily volumes traded on exchanges have also been on a downward trend. Both volatility and volume levels indicate a lower activity this week.
This low activity is in sharp contrast to the rising open interest in Bitcoin options. Deribit recorded a $1.1 billion interest on July 16th. The open interest levels this week have exceeded the pre-halvening levels, and they are getting closer to the record levels reached in June, when open interest went as high as 1.3 billion on June 25th (source: analytics.skew.com). The market is relatively quiet, but remains in high alert. The low volatility is partially explained by a general increase of both mean-reverting and market-making trading strategies that are highly active on exchanges:
Mean-reverting strategies typically seek to buy or sell cryptocucurrencies at a very high frequency. They take advantage of the smallest price discrepancies or arbitrage opportunities, which dampens down the range of the Bitcoin price, an indicator of intraday realized volatility.
Market-makers inject large size limit orders on the order book. They provide liquidity. They help decrease the market impact of large market orders, which consequently decreases the price range.
The higher number of frequency traders and market-makers is also supported by the higher liquidity. A classic indicator of liquidity is the average size of the bid-ask spread that we can see on major exchanges. The average spread calculated over six major exchanges shows that this spread reached its historical low this week, on July 16th.
Of course there are other reasons that can explain the lower volatility of the Bitcoin price. The most original explanation is certainly the twitter poll this week initiated by Peter Schiff. Peter Schiff is an economist who considers the Bitcoin price dynamic to share a large resemblance with the tulip mania. The poll, with more than 28 thousand votes, and of course all its potential biases, shows that close to 57% of the voters would rather “take Bitcoin to their grave” than sell it at the current level.
Another fundamental indicator of a higher liquidity now, or in the near future, comes from the development of Central Bank Digital Currencies (CBDCs). CBDCs are undoubtedly meant to be a safe haven for all cryptocurrency traders, because they are simply backed by Central Banks. This week, the Japanese government is reportedly raising a review of a CBDC, to be “included in the basic policy of economic and financial management reform”. China announced a digital Yuan earlier this year, assembled a task force and is now planning to test it on food delivery platforms. It is reported that the People’s Bank of China struck a partnership with a digital application giant: the “Uber of China” DIDI. Soon, the “Amazon of China” Meituan-Dianping and the “Youtube of China” Bili Bili might also be joining the partnership.
CBDCs would contribute to the integration of cryptocurrencies on Main Street, boost confidence, and eventually normalize the cryptocurrency market to the standards set by the traditional foreign exchange markets.
Regarding the alternative cryptocurrencies, the Stellar Lumens (XLM) price increased again this week, with the XLM/BTC pair gaining more than 17%. The jump started two day ago when the Stellar foundation announced wonderful news of a collaboration with Samsung that brings the Stellar blockchain to our Samsung Galaxy smartphones. As reported, the “Stellar blockchain services are now available through the Samsung Blockchain Keystore” to allow Stellar developers to create blockchain-related applications. Stellar-based companies are already committing.
Overall, XLM seems to be an exception this week, as the Litecoin price (LTC/BTC down ~4%) or the Ether price (ETH/BTC down ~0.8%) have also lost ground.
The Ripple (XRP/BTC) price is also down close to 2.5% this week (over the same period). The Ripple inflation is weighing on the XRP price. Although the fee of every XRP transaction recorded on the blockchain (0.00001 XRP per transaction) is burnt, the level of activity and the total XRPs burnt do not compensate for the XRPs sold. XRPs are continually sold by the Ripple business to remain cash flow positive. In other words, There is not enough organic demand for XRP and there is too much supply.
On the retail side (the Wirex application), the XLM interest is on the rise with a ratio of XLM bought over XLM sold at 1.26, versus 0.82 last week. The XRP interest decreased again this week (1.44 versus 1.79 last week). The ETH interest is neutral, with a ratio at 0.99. Finally the BTC interest is steady and positive with an unchanged ratio at 1.19.
The above is an opinion piece and therefore should not be taken as financial advice. Please do your own research thoroughly when looking at Cryptocurrency.