Coin Metrics, a market leading cryptoasset data provider, today announced changes to constituent markets that underpin the CMBI Single Asset Index Series Benchmarks, including:
Addition of the Binance.US BTC/USD market to the CMBI Bitcoin Index
Removal of the bitFlyer BTC/USD market from the CMBI Bitcoin Index
Addition of the Binance.US ETH/USD market to the CMBI Ethereum Index
The changes bring the CMBI Bitcoin Index and CMBI Ethereum Index constituent changes in line with one another, both now composed of 7 USD markets from Coinbase, Bitstamp, Kraken, Gemini, Bittrex, itBit and Binance.US.
The constituent market changes were proposed by the Index Committee to maintain the most accurate representation of each index’s underlying markets. After independent review, the Oversight Committee approved the changes based on the results of the Coin Metrics’ Market Selection Framework, volume analysis and empirical testing of data. The resulting changes were deemed to improve the robustness, accuracy and quality of the market data that supports the determination of index levels. For more detailed information on the selection criteria, please refer to the Reference Rates v2.4 Release Notes.
“Binance.US focuses on delivering robust and healthy markets for our users’ own price discovery–our goal is to be a reliable reference rate for transparent data providers like Coin Metrics” commented Catherine Coley, CEO of Binance.US. “Being added to CMBI Indexes underlines that goal, and we’re pleased to be included”.
About Coin Metrics
Coin Metrics is a leading provider of transparent and actionable cryptoasset market and network data. Coin Metrics delivers mature data across multiple formats to various industry stakeholders, including financial enterprises, funds, media and research outlets, and data/application providers. Coin Metrics’ data empowers people to make informed crypofinancial decisions.
About CMBI
Coin Metrics launched CMBI to bring independent and transparent index solutions to the cryptoasset investment community. In the nascent and often complex cryptoasset market, CMBI Indexes strive to be dynamic and adjust to the rapidly changing market conditions to design and maintain investable products. CMBI Indexes provide markets and customers with industry-leading solutions that aid in performance benchmarking and asset allocation.
This week we want to highlight our work to improve the quality of information in our industry by introducing a framework to better identify exchanges with spot volume reporting that you can trust. Below are some excerpts from our research. You can find the full report here.
Overview
Fake trading volume is a persistent problem on crypto exchanges. With little regulatory oversight, it can be difficult to determine whether reported volume numbers are accurate or exaggerated. At Coin Metrics we’ve taken a data driven approach to the problem and are excited to introduce a “trusted volume” metric to help identify legitimate trading volume.
Our trusted volume metric is an aggregation of the reported volume from exchanges that we consider the most accurate and trustworthy. This is based on a combination of both quantitative and qualitative features. The analysis below is limited to spot exchanges and spot volume. This is a distinction with regards to derivative exchanges such as BitMEX and Deribit.
Our framework for measuring the reporting quality of an exchange is broken down into three broad categories: volume correlation, web traffic analytics and qualitative features. Each of these three categories culminates in a pass/fail test. Exchanges that pass all three measures are included in our trusted volume set of metrics.
Part I: Correlation of Hourly Volume with Regulated Exchanges
During times of high volatility and large price movements, exchanges should see an increase in trading volumes in a similar magnitude to their peers. The same applies in times of low volatility and small price movement. Accordingly, authentic volume should have a higher correlation to other authentic volume. Fake volume should surface as an outlier with lower correlation.
In this test, we took hourly volume from long-standing, regulated exchanges based in the United States and used that as our ‘trusted’ control group. These exchanges all have a relatively long established history of at least five years and legitimacy that has been somewhat bolstered by regulations within the United States. These exchanges also support fiat USD trading, which adds additional credibility. This list includes Bitstamp, Bittrex, Coinbase, Gemini, itBit and Kraken. All data in this section is from trading volume between June 1 and June 30, 2020.
Using a time series of the hourly volume from all markets on all exchanges in our test set, we aggregated the volume by base asset and calculated the correlation between the exchange and the volume for the same base asset on the trusted exchanges. We did this for all assets listed on at least two or more trusted exchanges.
Above is a look at the correlations between the volume from exchanges and the volume from our ‘trusted’ control group for a few of the more well known assets, sorted by the correlation in the Bitcoin markets. We take the correlations (like those seen in the examples above) and look at them in their entirety to get a better sense for the overall dispersion of the exchange’s markets’ correlation to the ‘trusted’ control group.
Above is a series of distributions with each row representing the dispersion of the correlation between an exchange’s markets and the trusted markets. The further right the distribution, the more closely correlated it is with the trusted market’s volume. The further to the left, the less correlated. These markets are sorted by the median correlation of all of the exchange’s qualifying markets. However, a median measure across an exchange’s markets is not the best measure for economic activity.
In order to make this measurement better represent the exchanges’ overall volumes we created an aggregated volume weighted correlation based on the relative volumes of the exchanges’ markets. This was accomplished by taking the volumes for the month of June 2020 and calculating the percentage that each base asset made up of the exchange’s total qualified volume. Total qualified volume here is defined as volume in a base asset listed on two or more of the ‘trusted’ exchanges. We then used that percentage to create a volume weighted average of the correlations of each exchange. We believe that the reasonable cutoff for this test is a volume weighted correlation to the ‘trusted’ markets of 80% or greater.
Part II: 24 Hour Volume Over Third Party Web Traffic Metrics
Another way of analyzing fake volume is to look at volume compared to the amount of users visiting an exchange. In theory, the amount of an exchange’s volume should hold some relation to the amount of traders visiting their site. More users should lead to more volume and the inverse should hold as well. An exchange inflating volume numbers should tend to have a higher ratio of volume to traders relative to the other exchanges.
After weeks of decentralized finance (DeFi) growth with little movement from Ether (ETH), ETH finally exploded this past week. ETH market cap grew 15.6% week-over-week leading all other major cryptoassets. ETH transaction fees also continued to surge, growing over 76.1% week-over-week. ETH had an average of over $1.5M daily fees over the last week, outpacing Bitcoin (BTC) by about $500K per day. ETH adjusted transfer value surged as well, growing by 77.9%, and averaging close to $1B per day.
BTC’s fees also showed strong growth, gaining 74.1% week-over-week. BTC is starting to rise along with ETH, buoyed by strong security. BTC’s hash rate recently hit a new-all-time high on July 24th and grew 7.4% week-over-week.
Network Highlights
On July 25th, Ethereum contract calls hit a new all-time high of 3.11M. Ethereum contract usage is surging as decentralized finance (DeFi) apps continue their hot streak.
ETH is also gaining momentum on exchanges. While the amount of BTC and ETH transactions involving exchanges (i.e. sent either to or from an exchange) has been relatively equal over the last year, ETH has started to pull ahead in July. The following chart shows the number of daily transactions involving exchanges, smoothed using a 7 day rolling average.
Binance net flows show a similar pattern. Net flows measures the net amount of a cryptoasset flowing in and out of exchanges (i.e. deposits minus withdrawals) as observed on-chain. Over the last year, Binance’s BTC and ETH net flows have mostly mirrored each other, although BTC’s movements have generally been more extreme. But over the last week, BTC and ETH net flows started going in opposite directions: ETH has been flowing into the exchange, while BTC has been flowing out.
Volatility in financial markets is a mean reverting process. Prolonged periods of low levels of volatility encourage market participants to take on greater position sizes, engage in increased leverage, set tighter stops, and reduce the thresholds upon which they will respond to new information. This phenomenon is even stronger in crypto markets due to the amount of leverage present in futures markets and the method by which exchanges engage in liquidations as part of their risk management engine.
Cryptoassets are showing signs of life again following a period where Bitcoin’s 30-day annualized correlation briefly dipped below 25%, a level rarely reached in its ten year history. Ethereum has shown particularly strong gains over the past week — a rational response to its improving network fundamentals. Critical metrics such as transaction fees and adjusted transfer value have steadily increased as Ethereum benefits as the platform hosting most stablecoin and DeFi activity.
Bitcoin, up until very recently, has shown a somewhat muted response. While it has performed well year-to-date compared to other financial assets, some have questioned why it hasn’t performed even better in response to coordinated easing from the world’s major central banks. While the below chart only shows data up until midnight UTC on Sunday (to serve as a timestamp to calculate weekly changes), Bitcoin has since broken through the psychologically-important $10,000 level on Monday.
Gold has reached all-time highs over the past week and today’s move in Bitcoin reinforces its safe haven properties, although Bitcoin’s lack of response over the past month was beginning to call in question this theory. Investors should continue to pay attention to real yields (nominal interest rates adjusted for inflation) because it serves as the most straightforward measure of the opportunity cost of holding cash. With the market pricing in low nominal interest rates for the foreseeable future and inflation expectations still moderate but with the potential to rise, holding non-yield producing assets such as gold and Bitcoin are increasingly attractive. Bitcoin is perhaps the purest way to express a market view that long-term realized inflation will come in higher than what is currently priced in.
Some describe owning Bitcoin as an insurance policy against instability of our financial markets. Insurance policies are similar to options and in today’s world, Bitcoin is increasingly being used as a call option on inflation. The coronavirus and the monetary and fiscal response have increased the uncertainty in the future path of monetary policy, inflation, and growth, all of which are supportive to Bitcoin’s prices.
Bitcoin and gold’s 30-day correlation are returning to near all-time highs. The all-time high was reached in March when all risk assets sold off due to the rapid need for liquidity driven by coronavirus fears. Previous to 2020, Bitcoin and gold’s correlation have normally oscillated around zero while reaching brief moments of high positive and negative correlation. If high positive levels of Bitcoin and gold’s correlation can be sustained, it might serve as an indication of a regime shift in Bitcoin’s response to geopolitical and macroeconomic developments.
CM Bletchley Indexes (CMBI) Insights
After the majority of returns over the last two months came from small-cap assets, it was the large-caps that experienced the greatest gains this week. The CMBI Ethereum Index was the best performer, returning a staggering 30.8% for the week, with the CMBI Bitcoin Index also performing very well, returning 7.9%.
Of the market cap weighted indexes, it was the Bletchley 10 (large-cap) and Bletchley 20 (mid-cap) that performed the best through the week, returning 9.8% and 7.4% respectively. After months of outperformance, the Bletchley 40 (small-cap) did not experience a similar run, falling 2.3% during the week. The Bletchley Total performed in line with these indexes, returning 9.3%, largely due to the weighting of constituents significantly favoring large-cap and mid-cap assets.
Coin Metrics is pleased to announce the release of a new Network Data Visualization offering. Come check it out at https://network-charts.coinmetrics.io
As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]
Subscribe and Past Issues
Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.
If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.
Check out the Coin Metrics Blog for more in depth research and analysis.
Fake trading volumes have been a dark mark on the industry – it is difficult to find a single metric to accurately sift through the reported numbers.
We’ve taken a data driven approach to the problem and are excited to introduce a “trusted volume” metric to help identify legitimate trading volume.
Our framework for measuring the reporting quality of an exchange is broken down into three broad categories: volume correlation, web traffic analytics and qualitative features.
As of June 2020, the passing exchanges for ‘trusted’ spot volume include Binance (and Binance US), Bitbank, Bitfinex, bitFlyer, Bitstamp, Bittrex, CEX.IO, Coinbase, Gate.io, Gemini, itBit, Kraken, and Poloniex.
Overview
Fake trading volume is a persistent problem on crypto exchanges. With little regulatory oversight, it can be difficult to determine whether reported volume numbers are accurate or exaggerated. At Coin Metrics we’ve taken a data driven approach to the problem and are excited to introduce a “trusted volume” metric to help identify legitimate trading volume.
Our trusted volume metric is an aggregation of the reported volume from exchanges that we consider the most accurate and trustworthy. This is based on a combination of both quantitative and qualitative features. The analysis below is limited to spot exchanges and spot volume. This is a distinction with regards to derivative exchanges such as BitMEX and Deribit.
Our framework for measuring the reporting quality of an exchange is broken down into three broad categories: volume correlation, web traffic analytics and qualitative features. Each of these three categories culminates in a pass/fail test. Exchanges that pass all three measures are included in our trusted volume set of metrics.
Part I: Correlation of Hourly Spot Volume with Regulated Exchanges
During times of high volatility and large price movements, exchanges should see an increase in trading volumes in a similar magnitude to their peers. The same applies in times of low volatility and small price movement. Accordingly, authentic volume should have a higher correlation to other authentic volume. Fake volume should surface as an outlier with lower correlation.
In this test, we took hourly spot volume from long-standing, regulated exchanges based in the United States and used that as our ‘trusted’ control group. These exchanges all have a relatively long established history of at least five years and legitimacy that has been somewhat bolstered by regulations within the United States. These exchanges also support fiat USD trading, which adds additional credibility. This list includes Bitstamp, Bittrex, Coinbase, Gemini, itBit and Kraken. All data in this section is from trading volume between June 1 and June 30, 2020.
Using a time series of the hourly volume from all markets on all exchanges in our test set, we aggregated the volume by base asset and calculated the correlation between the exchange and the volume for the same base asset on the trusted exchanges. We did this for all assets listed on at least two or more trusted exchanges.
Above is a look at the correlations between the volume from exchanges and the volume from our ‘trusted’ control group for a few of the more well known assets, sorted by the correlation in the Bitcoin markets. We take the correlations (like those seen in the examples above) and look at them in their entirety to get a better sense for the overall dispersion of the exchange’s markets’ correlation to the ‘trusted’ control group.
Above is a series of distributions with each row representing the dispersion of the correlation between an exchange’s markets and the trusted markets. The further right the distribution, the more closely correlated it is with the trusted market’s volume. The further to the left, the less correlated. These markets are sorted by the median correlation of all of the exchange’s qualifying markets. However, a median measure across an exchange’s markets is not the best measure for economic activity.
In order to make this measurement better represent the exchanges’ overall volumes we created an aggregated volume weighted correlation based on the relative volumes of the exchanges’ markets. This was accomplished by taking the volumes for the month of June 2020 and calculating the percentage that each base asset made up of the exchange’s total qualified volume. Total qualified volume here is defined as volume in a base asset listed on two or more of the ‘trusted’ exchanges. We then used that percentage to create a volume weighted average of the correlations of each exchange. The result is the table above. We believe that the reasonable cutoff for this test is a volume weighted correlation to the ‘trusted’ markets of 80% or greater.
Part II: 24 Hour Volume Over Third Party Web Traffic Metrics
Another way of analyzing fake volume is to look at volume compared to the amount of users visiting an exchange. In theory, the amount of an exchange’s volume should hold some relation to the amount of traders visiting their site. More users should lead to more volume and the inverse should hold as well. An exchange inflating volume numbers should tend to have a higher ratio of volume to traders relative to the other exchanges.
To test this hypothesis, we used third party data on web traffic from Alexa and SimilarWeb. Page visit metrics from these providers will be our proxy for exchange customers. We understand that this will not be perfect due to API traders that do not visit the webpage as actively. However, the values should still give us a reasonable directional indication of user activity.
Above is a look at the 24 hour volume for all spot exchanges in our coverage universe. This shows the volume divided by the Alexa page views per million. Exchanges with a relatively high ratio have a high amount of trading volume compared to the amount of users visiting the site. The regulated exchanges in our sample have an average ratio of $9.05.
Here we do a similar comparison for SimilarWeb’s visits. Visits are a lower number than page views because you can have multiple pageviews per visit. It is our belief that this more accurately represents the volume inflation due to this distinction between unique visits vs page views. We have truncated the x-axis for visual purposes at $500 per visit, however please note that the value for Bibox is $2,502.67. Any exchanges with a ratio of greater than $50 are relatively more suspicious based on the regulated exchange average of $21.96.
Looking at both of those ratios together in the scatter plot above, you can begin to see outliers (please note that the y axis is in log scale). We believe that exchanges failing to meet both the thresholds set above (Volume to Alexa PageViews < $20 and Volume to SimilarWeb Visits < $100) fail this test.
It should be noted that these third-party web traffic metrics may have a western bias due to their techniques used to track traffic, discounting certain search engines or VPN use. You would expect to see two groupings of exchanges form here. The first being the ‘retail’ exchanges, those with a lot of customers making small transactions. On the plot above this is reasonably visible in the grouping around Coinbase, Gemini, Bittrex etc. The second group should be the exchanges where leverage is more common. Binance, OKex would represent this exchange as they allow for traders to trade more per capita with the use of margin. The exchanges falling outside of the reasonable parameters exhibit a less consistent ratio of volume to visits/views than we are comfortable with.
Part III: Qualitative Factors
In addition to our quantitative analysis, we looked at a number of qualitative exchange features. We treated these as binary qualifications and assigned them each a weight based on relative significance in determining trustworthiness, transparency, and authenticity. If a venue had the given feature, it was given full points. The following is the list of qualitative features and relative weights used in our analysis:
a REST API 10
a Websocket feed 5
Historical trade data is available 10
Real time trade data is available 10
Real time order book data is available 10
Has a Trading policy in place 2
Has market surveillance 2
Has regulatory oversight 5
Requires KYC for basic trading 2
Offers insurance for fiat holdings 2
Offers insurance for crypto holdings 2
Allows fiat deposits and withdrawals 5
Markets quoted in fiat 2
Trading fees 10
Listing standards 2
HQ is based in United States 5
Does not have Trading competitions/contests 5
This features were chosen because they help demonstrate an exchanges transparency (e.g. API access, trade, orderbook data), fair market structure (e.g. trading rules, fiat access, KYC), and arm’s length economic transactions (e.g. trading fees, no trading contests). Below is a ranking of the spot exchanges that we analyzed based on their total score from these factors.
We decided on 50 and below as the cutoff point. Our rationale behind 50 points was that because this is a qualitative measure we should treat it fairly liberally and exclude only those in the bottom decile. Bibox, Kucoin, OKEx and ZB.com were the only exchanges ruled out due to this metric.
Results
Above are the outcomes for the correlation, web traffic, and qualitative metrics that we tested exchanges on. Among our list, only OKEx failed all three tests. This low failure proportion is likely due to the manual selection of the initial list of exchanges to test. Four exchanges only passed one test, seven passed two. The fourteen exchanges that passed all three tests will be used for calculating what we believe to be the most accurate measure of daily spot volume.
These exchanges are:
Binance
Binance.US
Bitbank
Bitfinex
bitFlyer
Bitstamp
Bittrex
CEX.IO
Coinbase
Gate.io
Gemini
itBit
Kraken
Poloniex
This is the current passing group as of July 1, 2020. This list will be reviewed periodically and exchanges are likely to be added and removed overtime as their underlying data changes.
Note: certain exchanges, such as FTX have added a broader listing of spot assets since the end of June and subsequently improved performance on the volume correlation test.
Since its inception in 2009, Bitcoin triggered many discussions around its raison d’être. Conflicts between different points of view of what Bitcoin is and should be spanned years and tore many communities apart. Hasufly and Nic Carter cataloged the many different Bitcoin narratives in Visions of Bitcoin.
In this piece we aim for something a bit different than the usual discourse on this topic: instead of approaching Bitcoin as a political, philosophical or technical project and going top-down, we start by observing the history of what happened on-chain to gain insight into how Bitcoin’s usage has evolved over time.
Early Exchanges
Bitcoin launched in January 2009 to little fanfare. Before July 2010, it only saw a paltry eight thousand transactions (excluding protocol-mandated mining transactions). But then, within two weeks, Bitcoin did more transactions than it did in all its previous history.
This change is also visible when looking at a more subtle indicator: what was the precision of the amounts being sent? In that same period, the number of transactions specifying oddly precise amounts of bitcoin to be transferred increased dramatically.
A few events led to the sudden increase in Bitcoin usage in July 2010. First, Bitcoin had its Slashdot moment – the release of Bitcoin version 0.3 was picked up by the popular tech news outlet. A few days after, MtGox opened its doors to traders and users began using more decimals in their transactions to reflect the fact that they were transacting in Bitcoin, but with USD amounts.
As Bitcoin’s price increased in mid-2011, more and more outputs began using all the available decimals. What this tells us is that Bitcoin’s first growth spurt was directly related to the emergence of MtGox, the first marketplace allowing the exchange of BTC for US dollars.
SatoshiDice
The next interesting growth spurt comes from the rise of SatoshiDice in April 2012. It allowed users to bet bitcoin on the roll of a dice, with different odds, by just sending bitcoin to a specific address (for example, send 1 BTC and get 2x back with a 48% chance). Its key innovation was to use a provably fair protocol to show that it wasn’t defrauding its users with a bad random number generator.
In a matter of days after its launch, SatoshiDice grew to represent 40% of Bitcoin’s daily activity.
SatoshiDice represents a compelling argument for Bitcoin as a cheap and trustless payment network. Playing the same game with bank wires would not only be illegal, but also painfully slow. Its popularity died off due to many reasons, some regulatory (it had to ban US players), some business related as it changed ownership several times and some technical as raising transaction fees made using it less interesting to users.
On July 17th a Cloudflare outage briefly disrupted much of the internet. Although the major crypto networks were mostly unscathed, the outage led to a slight decrease in transactions likely due to popular wallets going down. Bitcoin (BTC) transactions were down 5% week-over-week as a result. But BTC transaction fees were up 54.5% week-over-week, signifying a surge in demand for block space despite the dip in transactions. Ethereum (ETH) transactions also dipped on July 17th, but they are still up week-over-week thanks to the continued rapid growth of decentralized finance (DeFi) applications.
Network Highlights
DeFi continues to push ETH fees higher. ETH median fees are approaching $0.40, which is the highest they’ve been since mid-2018. High fees are a mostly healthy sign – high fees typically signify high demand for block space, and create more revenue for the miners securing the network.
But high fees can also make it prohibitively expensive to send transactions, especially for use cases like gaming and collectibles that depend on large amounts of low cost transactions. Over the last week the amount of unique active ETH addresses decreased, despite an increase in transactions (7 day average).
Another sign of DeFi’s growth, the amount of ETH transferred by smart contracts is surging towards new all-time highs. There’s been an average of over 1M ETH transferred per day for most of July (7 day average).
DAI supply increased by over 40M since July 17th likely due to high demand for DAI within the DeFi ecosystem. For example, DAI currently has a 6.16% supply APY on Compound, about 4.5% higher than either USDC or USDT.
It was a relatively sleepy week for the markets, with one big exception: ChainLink. ChainLink continues to defy gravity and pushed through to a new all-time high price this week of $8.80. This is happening on the continued tail of a euphoric period of momentum for altcoins.
ChainLink has continued to increase its market share of spot volume as well, now making up roughly 9% of the rolling 7 day average.
Volatility continued to drift lower for all the major assets and the long volatility trade continued to get crushed. We reported on this trend back in June as holding below these levels for less than 20 days in a majority of cases. We are now at day 41.
CM Bletchley Indexes (CMBI) Insights
Most CMBI and Bletchley Indexes finished the week slightly down, excluding the Bletchley 40 (small-cap), which significantly outperformed the rest of the indexes, returning 7.1%.
The CMBI Bitcoin Index was down 0.4%, continuing its streak of weekly performance in the ±3% range for the 7th straight week.
The strong performance of small-cap assets relative to the rest of the market can be witnessed in the returns of the Bletchley Total Even Index. This index is composed of the 70 constituent markets included in the B10, B20 and B40, weighting each constituent equally (1.43%). The result is much greater exposure to small-cap assets (57.1%) than its market cap weighted peer, which allocated Bitcoin a 65% weighting and small-caps collectively only 1.6%.
For further detail on the performance of the CMBI Bitcoin Index and CMBI Ethereum Index, please check out the CMBI Single Asset Index Factsheet.
Coin Metrics Updates
This week’s updates from the Coin Metrics team:
Coin Metrics is pleased to announce the release of a new Network Data Visualization offering. Come check it out at https://network-charts.coinmetrics.io
As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]
Subscribe and Past Issues
Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.
If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.
Check out the Coin Metrics Blog for more in depth research and analysis.
Coin Metrics has been offering data and tools to the community since our inception in 2017. Today, our Community Data Visualization tools are being upgraded. These new tools bring best-in-class charting capabilities to Coin Metrics’ EOD data.
NEW FEATURES
New look and feel for improved usability and metric/asset navigation
Excel and PNG download capability
“Save” chart functionality with an API key
Ability to plot multiple metrics for multiple assets in the same chart
Formula Builder Charting Tool: transform (e.g., add, subtract, multiple, divide) our on-chain data using our powerful custom formula capability (accessible here: formula-builder.coinmetrics.io)
Correlation Tool: create insightful multi-asset correlation charts with single or multiple combinations of asset pairs (accessible here: correlation-chart.coinmetrics.io)
In the works (upcoming enhancements):
More Correlation options: we are working on timing synchronization for cryptoasset and traditional index/asset closes and user choice on the treatment of data gaps
Chart Sharing updates: in the future, our users can share charts with others, regardless of the recipient’s data tier/access
Formula Builder enhancements: we are developing functionality to enable our community users to save formulas for future use
If you are interested in learning more about our new tools, please contact us at [email protected]!
ABOUT COIN METRICS
Coin Metrics is a leading provider of transparent and actionable cryptoasset market and network data. Coin Metrics delivers mature data across multiple formats to various industry stakeholders, including financial enterprises, funds, media and research outlets, and data/application providers. Coin Metrics’ data empowers its clients and the public to better understand, value, use, and ultimately steward public crypto networks.
This feature is adapted from Antoine Le Calvez’ presentation at the MIT Bitcoin Expo 2020.
Since its inception in 2009, Bitcoin triggered many discussions around its raison d’être. Conflicts between different points of view of what Bitcoin is and should be spanned years and tore many communities apart. Hasufly and Nic Carter cataloged the many different Bitcoin narratives in Visions of Bitcoin.
In this piece we aim for something a bit different than the usual discourse on this topic: instead of approaching Bitcoin as a political, philosophical or technical project and going top-down, we start by observing the history of what happened on-chain to gain insight into how Bitcoin’s usage has evolved over time.
Early Exchanges
Bitcoin launched in January 2009 to little fanfare. Before July 2010, it only saw a paltry eight thousand transactions (excluding protocol-mandated mining transactions). But then, within two weeks, Bitcoin did more transactions than it did in all its previous history.
This change is also visible when looking at a more subtle indicator: what was the precision of the amounts being sent? In that same period, the number of transactions specifying oddly precise amounts of bitcoin to be transferred increased dramatically.
A few events led to the sudden increase in Bitcoin usage in July 2010. First, Bitcoin had its Slashdot moment – the release of Bitcoin version 0.3 was picked up by the popular tech news outlet. A few days after, MtGox opened its doors to traders and users began using more decimals in their transactions to reflect the fact that they were transacting in Bitcoin, but with USD amounts.
As Bitcoin’s price increased in mid-2011, more and more outputs began using all the available decimals. What this tells us is that Bitcoin’s first growth spurt was directly related to the emergence of MtGox, the first marketplace allowing the exchange of BTC for US dollars.
SatoshiDice
The next interesting growth spurt comes from the rise of SatoshiDice in April 2012. It allowed users to bet bitcoin on the roll of a dice, with different odds, by just sending bitcoin to a specific address (for example, send 1 BTC and get 2x back with a 48% chance). Its key innovation was to use a provably fair protocol to show that it wasn’t defrauding its users with a bad random number generator.
In a matter of days after its launch, SatoshiDice grew to represent 40% of Bitcoin’s daily activity.
SatoshiDice represents a compelling argument for Bitcoin as a cheap and trustless payment network. Playing the same game with bank wires would not only be illegal, but also painfully slow. Its popularity died off due to many reasons, some regulatory (it had to ban US players), some business related as it changed ownership several times and some technical as raising transaction fees made using it less interesting to users.
Bitcoin As a Collectible
An insight into one of Bitcoin’s usages can be gained by looking at its … non-usage. In 2011, Bitcointalk user Casascius started selling physical coins that could be loaded with real bitcoin. Over time, several denominations and form factors became available, from 1 BTC brass coins to 1,000 BTC pure gold coins. As the list of addresses born by these coins was made public, anyone can track the amount of coins held in such coins.
More recently, Bitcoin China (BTCC) launched another set of physical coins, having the particularity of being funded directly by block rewards. Here too, the list of addresses is known, allowing tracking.
Combining Casascius and BTCC coins, we can see that around 50k BTC (2.5% of all supply) are still held in physical coins to this day.
Going further than the narrow scope of physical coins, looking at Bitcoin’s supply through the lens of the last time of activity yields another insight concerning Bitcoin’s status as a collectible: more and more of the supply remains untouched for long periods of time. This tends to validate the store-of-value hypothesis of Bitcoin’s usage.
Conclusion
This analysis confirms the adage that “Bitcoin is multitudes”. Whilst the theoretical visions of Bitcoins are often painted as opposing one another, on-chain data shows that they often co-exist. At the same time as SatoshiDice was making use of Bitcoin’s cheap payments, collector physical coins were being created.
Bitcoin’s usage has evolved over time and will undoubtedly keep evolving. On-chain data gives meaningful insight into how Bitcoin is being used, and provides an important piece of the puzzle alongside theoretical and philosophical discussions.
The following is an excerpt from an in-depth research report on the rise of stablecoins following the March 2020 crypto crash. Access the full report here.
Stablecoin supply has exploded in 2020 but it’s unclear exactly why. After it took 5 years for stablecoin supply to reach 6 billion, it only took another 4 months for it to grow from 6 billion to 12 billion following the March 12th crypto crash.
A large majority of the supply growth was due to Tether. On March 12th 2020, the price of most crypoassets dropped over 50% after global equity markets crashed due to the rise of COVID-19. Within two weeks of the crash over 800M new USDT_ETH were issued. For context, about 740M USDT_ETH were issued from January 1st through March 11th. Additionally, USDT_TRX supply would increase by over 2B by the end of June.
Following the price crash, stablecoin markets were suddenly thrown into disarray. Stablecoin prices can fluctuate during times of market volatility due to sudden changes in supply and demand. For example, when Bitcoin price suddenly plummets, the demand for stablecoins often increases as investors look to move into a safe haven asset. This increased demand can cause the price of a stablecoin to rise above $1 on select exchanges.
The below chart shows stablecoin prices on an hourly basis (using Coin Metrics’ hourly reference rates) from March 11th through March 14th. The price of most stablecoins jumped up to between $1.03 and $1.06 from 2:00 to 6:00 UTC on March 13th. This corresponds with the timing of the BitMEX liquidation spiral, when Bitcoin price dropped to as low as $3,900.
USDT, USDC, PAX, BUSD, and HUSD appear to have recovered relatively quickly, returning close to their $1 pegs within days after the crash. But as seen in the below chart, USDT’s price remained above $1. Notably, USDT’s price remained significantly higher than USDC, PAX, BUSD, and HUSD through mid-May (DAI and GUSD are excluded from the following chart due to their extreme divergence).
Because of their nature as price-pegged assets, deviations in stablecoin prices create arbitrage opportunities. For example, when a stablecoin’s price is above $1, new supply can be printed at $1 each, and then sold on an exchange for a profit. Done at a large enough scale, this can lead to significant profit even if the price is only slightly over a dollar.
Bitcoin (BTC) and Ethereum (ETH) continued to show positive momentum this week, with small growth in usage metrics including active addresses and transactions.
But the smaller-cap assets noticeably outperformed this past week. Ripple (XRP), Litecoin (LTC), and Bitcoin Cash (BCH) all grew more week-over-week than BTC and ETH in most usage, valuation, and economics metrics. XRP led the way in many categories, including a 14.8% growth in active addresses and 11.8% growth in market cap.
Is this a sign of an altseason? We explore in this week’s Network Highlights and Market Data Insights sections.
Network Highlights
In addition to Ripple, Litecoin, and Bitcoin Cash, many other mid to small cap cryptoassets saw increased activity over the last week. Often described as a “meme coin,” Dogecoin (DOGE) had a large increase in market capitalization on July 7th and 8th. This corresponds with a viral TikTok video that promoted DOGE.
DOGE two-year revived supply also spiked on July 8th. Over 1B units of supply that had not moved on-chain for at least two years were suddenly transferred. This suggests that some longer term holders sold off amidst the frenzy.
DOGE active addresses have been surging in July but are still below 2020 highs. Network usage is not increasing as fast as valuation, a potential signal of a price bubble.
Cardano (ADA) has also been growing recently. In anticipation of the Shelley mainnet release, ADA’s market cap reached new 2020 highs on July 8th. Cardano’s market cap has passed LTC’s, despite having about 7x less daily active addresses.
Market Data Insights
This week marked a roughly $13.9B, or nearly 38%, uplift in spot volume. This is a remarkable number when considering the historically low volatility range that BTC and ETH have been trading in. Low volatility generally coincides with low volume but in the past week, the speculation on a few key altcoins pushed trading volumes upward. In this analysis, we will focus on three in particular: Doge, Cardano and ChainLink. Together they made up 20% of this week’s increase.
Let’s take a look at some exchanges that benefited the most, beginning with the more well known exchanges that support a long tail of altcoins. Binance, Bittrex, Kraken and Poloniex all benefited from these assets. Binance, Bittrex and Kraken saw a fairly equal distribution between all three assets, similar to the overall uplift contributed by these assets to the total spot volume for all exchanges.
Poloniex saw 57% of its weekly increase in volume from Doge trading. The exchange has one of the longest standing Doge markets and was the primary trading venue for the Doge spike in the summer of 2019. Regardless of a historically liberal listing policy, Poloniex does not currently support Cardano and missed a large opportunity this past week. Given that they have prioritized the listing of lesser known assets recently such as BitCherry and Flexacoin, it brings into question the exchange’s listing strategy.
Coinbase also saw a large portion (39.5%) of this week’s gain in volume attributed to ChainLink. Often considered to have a fairly liberal listing strategy and primarily U.S. retail trading base, this large portion of trading attributed to ChainLink may signal that we are still in the midst of an altseason and that even small traders are embracing a risk-on investing strategy.
CM Bletchley Indexes (CMBI) Insights
For the first time in 5 weeks, all of the CMBI and Bletchley Indexes experienced positive returns week on week. The CMBI Bitcoin Index Continued to demonstrate a low level of volatility, returning 1.8% for the week, marking the 6ths consecutive week of less than |±3%| performance. The CMBI Ethereum Index had a better week, returning 5.6%. But it was the multi-asset indexes that had the best performances, returning between 6.0% (Bletchley 10, Large Cap) and 16.5% (Bletchley 20, Mid Cap) during the week.
Despite the low volatility of Bitcoin, it was the Bletchley 10 Even Index that was the best performer, returning 18.7%, largely due to the strong performances of Chainlink and Tezos. In an even weighted index, all constituents are weighted evenly at the time of rebalance, thus applying a higher weighting to the lower market cap assets than a market cap weighted index (which for the Bletchley 10 weights Bitcoin 71%).
For further detail on the performance of the CMBI Bitcoin Index and CMBI Ethereum Index, please check out the CMBI Single Asset Index Factsheet.
Coin Metrics Updates
This week’s updates from the Coin Metrics team:
Coin Metrics is hiring! Please check out our Careers page to view the openings.
As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]
Subscribe and Past Issues
Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.
If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.
Check out the Coin Metrics Blog for more in depth research and analysis.
Price discrepancies between exchanges can emerge for a variety of reasons, including market manipulation, exchange downtime, and trader error. These dislocations are aggravated by market inefficiencies that may prevent arbitrage.
While market dislocations are particularly common for small exchanges and illiquid assets, even liquid markets on major exchanges are impacted reasonably often. The presence of market dislocations makes relying on price feeds from a single exchange unreliable for portfolio valuation and contract settlement.
Creating reference rates that are robust to market dislocations is surprisingly complex. Coin Metrics offers Hourly and Real-Time Reference Rates for many of the assets covered by the CM Market Data Feed.
Messy Markets
Liquidity in cryptocurrency markets is fragmented across a handful of major exchanges and scores of minor ones. Due to market inefficiencies, manipulation, and trader error, prices on these exchanges often diverge, with at least one venue mispricing the asset and failing to reflect the global market price. This issue is especially acute for illiquid and smaller-capitalization assets, which may have weaker settlement assurances and are more prone to manipulation.
Beyond creating arbitrage opportunities, this lack of a robust cardinal market price leads to difficulties in portfolio valuation and contract settlement. Derivatives like futures and options require a price against which to settle, necessitating the use of a reference rate that accurately reflects the conditions across markets.
To address the growing need for cardinal prices, Coin Metrics has developed Hourly and Real-Time Reference Rates for many of the assets covered by the CM Market Data Feed. These rates calculate the market price of an asset against a lookback period of one hour and one second, respectively, combining data from several marketplaces to create a price feed that is robust against market inefficiencies. Our live reference rates are available as part of our free community data.
Ineffective Inefficiency
Markets are typically modeled as efficient, reflecting in their prices all known information. In an efficient market, mispricings tend to be short-lived, since any price discrepancies are closed through arbitrage. These markets are said to obey the law of one price, which argues that identical goods should be sold for the same price across marketplaces.
In the presence of transaction costs and operational risks, however, even rational markets may not behave efficiently. In an inefficient market, price divergences may be sustained so long as friction persists.
The most substantial sustained price dislocation in the cryptoasset market has been between spot prices on Bitfinex and on other exchanges. Due to concerns over the exchange’s solvency, Bitcoin on Bitfinex has frequently traded at a premium to the rest of the market, most prominently during late 2018 and early 2019.
Since the spread was first observed by Coin Metrics in April of 2017, Bitfinex’s BTC/USD market has not been factored into Coin Metrics’ Hourly or Real-Time Reference Rates. A snapshot from a typical trading day in late 2018 shows a spread of about 1.3% between the Bitfinex BTC/USD market and the markets used to compute these rates.
In addition to concerns over a counterparty’s cash flows, dislocations may be sustained due to concerns over the settlement assurances of the asset being traded.
The primary function of a public blockchain is to provide a settlement layer for the transfer of assets, and the proper execution of this function requires that transactions be probabilistically irreversible given a sufficient number of confirmations. This immutability can be compromised in several ways, most infamously through 51% attacks, in which an attacker with control of the majority of a network’s hashpower reorders the blockchain.
Recipients of poorly-secured assets may therefore require a large number of confirmations in order to recognize a transfer as valid. Exchange operators must be particularly cautious, due to the volume of deposits they receive and therefore stand to lose in the event of a reorganization. This has led exchanges to raise the wait time and number of confirmations required to deposit some assets. Increased wait times, in turn, increase the amount of risk taken on by traders seeking to profit from market inefficiencies in these assets, aggravating existing illiquidity and potentially leading to sustained market dislocations.
The most notable incident of this type occurred on April 29, 2020, when Coinbase’s Ethereum Classic (ETC) markets diverged significantly from those on other exchanges. The dislocation was wide and lasted several hours, in part due to the large number of confirmations required by exchanges for ETC deposits following several 51% attacks on the chain.
Complicating this dislocation is the fact that Coinbase is the primary marketplace on which ETC is traded, reducing clarity on which price should be considered the market price and highlighting the need for transparently calculated reference rates.
Capital controls are another source of market friction, introducing barriers in foreign exchange markets that have echoes in cryptocurrency markets. These barriers were largely responsible for the so-called “Kimchi premium” between spot markets quoted in Korean won and those quoted in other fiat currencies.
Capital controls fall into the broader category of restrictions on fiat transfers that impact liquidity in cryptocurrency markets. Delays in fiat deposits or withdrawals caused by exchange downtime or strained relationships with banking partners are another, related source of friction.
Because supply and demand are not guaranteed to be homogeneous across exchanges, prices can diverge in an inefficient but rational market. In reality, market participants are prone to error and irrationality, introducing further sources of misalignment.
Fat Fingers
In one common type of error, known as a fat-finger error, a trader mistakenly submits an incorrectly typed trade. These errors may result in flash crashes, or rapid downward market movements that are quickly corrected.
On May 17, 2019, the Bitcoin market experienced a flash crash caused by a single large sell order that may have been placed in error. The effects of the crash were felt particularly strongly on Bitstamp, the exchange where it originated.
As a result of their long computation window, Coin Metrics’ Hourly Reference Rates were unaffected. Coin Metrics’ Real-Time Reference Rates correctly tracked the market price, excluding the additional downward movement on Bitstamp.
Despite a drop in market caps, it was a relatively good week for Bitcoin (BTC) and Ethereum (ETH) fundamentals. BTC security is looking healthy, with hash rate and mining revenue both increasing. Hash rate grew by 6.6% week-over-week and should soon pass pre-halving levels.
ETH transactions dropped by 3.5% week-over-week, while BTC transactions grew by 3.7%. But despite the dip in transactions, ETH active addresses increased by 8.1%, compared to a 5.8% increase for BTC. The reasons for ETH’s continued active address growth are explored in this week’s Network Highlights.
Network Highlights
ETH had over 500K active addresses each of the last seven days. This has only happened during one other period in ETH’s history – January 2018, when ETH’s price soared to new all-time highs of over $1,400. The current active address surge, however, is not driven by an ETH price peak, as ETH’s price has remained under $250 since February. Instead, it appears to be driven by rapid growth of Ethereum-based stablecoins and decentralized finance (DeFi).
ERC-20 tokens, which are issued on the Ethereum blockchain, can be used as a proxy to measure activity on Ethereum. Although far from a full picture, the activity of popular ERC-20s can shed light on the usage trends of the overall network.
The following chart shows active address counts for three Ethereum-issued stablecoins: Tether (USDT_ETH), USD Coin (USDC), and Paxos (PAX). All three have seen large increases in active addresses since March, with USDT_ETH leading the way by a huge margin.
But despite the fast growth, USDT_ETH active addresses appear to have peaked in June (at least temporarily), and are decreasing entering July. PAX active addresses also peaked in early June and have been decreasing since. However, not all stablecoins are declining. USDC active addresses have grown relatively steadily since March and are now reaching new all-time highs.
Below we look at three DeFi related ERC-20 tokens: 0x (ZRX), Maker (MKR), and Kyber Network (KNC). KNC is hitting new all-time highs entering July in anticipation of its Katalyst and KyberDAO updates which will introduce new staking rewards – once the update goes live KNC holders will be able to participate in protocol governance by staking their tokens, while earning ETH rewards in return. ZRX active addresses are also growing in early July after a large spike in May. MKR addresses have declined since a peak in mid-June, but are still relatively elevated.
In addition to a surge in active addresses, the number of addresses holding at least 0.01 ETH has shot up since April. On April 1st there were 7.12M addresses holding at least 0.01 ETH. By July 1st there were over 8.37M, a growth of about 1.25M addresses.
Market Data Insights
Over the past 3 months we have entered a period of consistent correlation between the S&P 500’s daily returns and Bitcoin’s daily returns. This is a trend worth noting due to the fact that immediately prior to the sell off in March the markets were negatively correlated.
This is not the first time that the two markets have become positively correlated, although it has been one of the longest and most stable correlations. Below we take a look at the 30 and 90 day correlations of the two markets dating back to January 2015. Following the sell off in March, we reached a level of 90 day correlation of above 0.4. Since then, correlation has remained above 0.3 for the longest duration to date.
A positive correlation between these asset classes is largely due to the swift selloff and sustained recovery following the market reactions surrounding COVID-19. Many attribute this risk-off in both assets to the general sentiment that ‘in a selloff, the beta of all assets goes to 1’ also applies to Bitcoin. This period is making some individuals focusing on the Bitcoin industry nervous as Bitcoin’s prior lack of correlation with the broader equity market is often touted as one of its greatest selling points. Only time will tell if correlation returns to pre-March levels or remains elevated for a longer period.
CM Bletchley Indexes (CMBI) Insights
Another relatively flat week for most of the CMBI and Bletchley Indexes. The Bletchley 20 (mid-cap assets) experienced the strongest returns, finishing the week up almost 10%. This performance is largely due to the performance of Cardano, The B20’s highest weighted constituent, which finished the week up almost 20%.
The CMBI Bitcoin Index and CMBI Ethereum Index finished the week down slightly, returning -1.1% and -0.2%, respectively. Index volatility continues to trend down towards a historically low range, with both the CMBI Bitcoin Index and the CMBI Ethereum Index returning less than ±2.5% for each of the previous five weeks.
Coin Metrics Updates
This week’s updates from the Coin Metrics team:
Coin Metrics is hiring! Please check out our Careers page to view the openings.
As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]
Subscribe and Past Issues
Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.
If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.
Check out the Coin Metrics Blog for more in depth research and analysis.
Price discrepancies between exchanges can emerge for a variety of reasons, including market manipulation, exchange downtime, and trader error. These dislocations are aggravated by market inefficiencies that may prevent arbitrage.
While market dislocations are particularly common for small exchanges and illiquid assets, even liquid markets on major exchanges are impacted reasonably often. The presence of market dislocations makes relying on price feeds from a single exchange unreliable for portfolio valuation and contract settlement.
Creating reference rates that are robust to market dislocations is surprisingly complex. Coin Metrics offers Hourly and Real-Time Reference Rates for many of the assets covered by the CM Market Data Feed.
Messy Markets
Liquidity in cryptocurrency markets is fragmented across a handful of major exchanges and scores of minor ones. Due to market inefficiencies, manipulation, and trader error, prices on these exchanges often diverge, with at least one venue mispricing the asset and failing to reflect the global market price. This issue is especially acute for illiquid and smaller-capitalization assets, which may have weaker settlement assurances and are more prone to manipulation.
Beyond creating arbitrage opportunities, this lack of a robust cardinal market price leads to difficulties in portfolio valuation and contract settlement. Derivatives like futures and options require a price against which to settle, necessitating the use of a reference rate that accurately reflects the conditions across markets.
To address the growing need for cardinal prices, Coin Metrics has developed Hourly and Real-Time Reference Rates for many of the assets covered by the CM Market Data Feed. These rates calculate the market price of an asset against a lookback period of one hour and one second, respectively, combining data from several marketplaces to create a price feed that is robust against market inefficiencies. Our live reference rates are available as part of our free community data.
Ineffective Inefficiency
Markets are typically modeled as efficient, reflecting in their prices all known information. In an efficient market, mispricings tend to be short-lived, since any price discrepancies are closed through arbitrage. These markets are said to obey the law of one price, which argues that identical goods should be sold for the same price across marketplaces.
In the presence of transaction costs and operational risks, however, even rational markets may not behave efficiently. In an inefficient market, price divergences may be sustained so long as friction persists.
The most substantial sustained price dislocation in the cryptoasset market has been between spot prices on Bitfinex and on other exchanges. Due to concerns over the exchange’s solvency, Bitcoin on Bitfinex has frequently traded at a premium to the rest of the market, most prominently during late 2018 and early 2019.
Since the spread was first observed by Coin Metrics in April of 2017, Bitfinex’s BTC/USD market has not been factored into Coin Metrics’ Hourly or Real-Time Reference Rates. A snapshot from a typical trading day in late 2018 shows a spread of about 1.3% between the Bitfinex BTC/USD market and the markets used to compute these rates.
In addition to concerns over a counterparty’s cash flows, dislocations may be sustained due to concerns over the settlement assurances of the asset being traded.
The primary function of a public blockchain is to provide a settlement layer for the transfer of assets, and the proper execution of this function requires that transactions be probabilistically irreversible given a sufficient number of confirmations. This immutability can be compromised in several ways, most infamously through 51% attacks, in which an attacker with control of the majority of a network’s hashpower reorders the blockchain.
Recipients of poorly-secured assets may therefore require a large number of confirmations in order to recognize a transfer as valid. Exchange operators must be particularly cautious, due to the volume of deposits they receive and therefore stand to lose in the event of a reorganization. This has led exchanges to raise the wait time and number of confirmations required to deposit some assets. Increased wait times, in turn, increase the amount of risk taken on by traders seeking to profit from market inefficiencies in these assets, aggravating existing illiquidity and potentially leading to sustained market dislocations.
The most notable incident of this type occurred on April 29, 2020, when Coinbase’s Ethereum Classic (ETC) markets diverged significantly from those on other exchanges. The dislocation was wide and lasted several hours, in part due to the large number of confirmations required by exchanges for ETC deposits following several 51% attacks on the chain.
Complicating this dislocation is the fact that Coinbase is the primary marketplace on which ETC is traded, reducing clarity on which price should be considered the market price and highlighting the need for transparently calculated reference rates.
Capital controls are another source of market friction, introducing barriers in foreign exchange markets that have echoes in cryptocurrency markets. These barriers were largely responsible for the so-called “Kimchi premium” between spot markets quoted in Korean won and those quoted in other fiat currencies.
Capital controls fall into the broader category of restrictions on fiat transfers that impact liquidity in cryptocurrency markets. Delays in fiat deposits or withdrawals caused by exchange downtime or strained relationships with banking partners are another, related source of friction.
Because supply and demand are not guaranteed to be homogeneous across exchanges, prices can diverge in an inefficient but rational market. In reality, market participants are prone to error and irrationality, introducing further sources of misalignment.
Fat Fingers
In one common type of error, known as a fat-finger error, a trader mistakenly submits an incorrectly typed trade. These errors may result in flash crashes, or rapid downward market movements that are quickly corrected.
On May 17, 2019, the Bitcoin market experienced a flash crash caused by a single large sell order that may have been placed in error. The effects of the crash were felt particularly strongly on Bitstamp, the exchange where it originated.
As a result of their long computation window, Coin Metrics’ Hourly Reference Rates were unaffected. Coin Metrics’ Real-Time Reference Rates correctly tracked the market price, excluding the additional downward movement on Bitstamp.
It’s difficult to discern a user’s intent in submitting a trade, and flash crashes that appear to be caused by an incorrectly placed trade may in fact have resulted from intentional manipulation. In spot markets, there are several ways in which a seemingly irrational activity could be profitable, including as a way of tampering with the index used by a derivatives market.
Bitstamp’s markets are used in the calculation of BitMEX’s settlement prices, leading to speculation that the Bitstamp flash crash may have been induced by someone seeking to profit from a trade on the derivative exchange. Because BitMEX’s Bitcoin price index is computed as a weighted mean, it is not robust to outliers in its constituent markets. As a result, a malicious actor could have profited from opening a leveraged short on BitMEX and manipulating the underlying index.
Manipulation is especially common in illiquid markets, where the amount of capital required to move the market is much lower. Coin Metrics’ Hourly and Real-Time Reference Rates managed to exclude one possible instance of manipulation on Bittrex’s TRON markets from their calculations by giving lower weight to markets with unexpectedly high variance.
It’s difficult for observers to determine market participants’ intent, and this incident may have resulted from user error rather than manipulation.
Operator, Operator
Another common source of dislocation in crypto markets is operator downtime. While exchanges operating in traditional markets typically conduct scheduled maintenance outside of trading hours, the round-the-clock nature of crypto markets means that any maintenance requiring downtime will necessarily be disruptive to users.
Exchange downtime can lead to stale pricing data if not properly accounted for by index providers. These disruptions are common and underscore the need for reference rates that collect data from diverse sources and are robust to anomalies in one or more of these sources.
One instance of exchange downtime on Kraken was preceded by an outlying trade, and immediately followed by a flurry of stale transactions once trading resumed. This disruption also happened to coincide with anomalous trading on bitFlyer, but was successfully navigated by Coin Metrics’ Hourly and Real-Time Reference Rates.
Spontaneous downtime can be even more disruptive to traders than scheduled maintenance. Unscheduled trading disruptions are often caused by overloaded servers, which tend to act up during periods of high market volatility, potentially leading to loss of funds by users.
The most infamous incident of this type occurred during the March 12th market crash, when BitMEX was brought down. The mechanisms behind this crash were covered in depth in State of the Network Issue 43, and while exchange downtime did not lead to a spot market dislocation in this instance, it left lasting marks on the market that were discussed in State of the Network Issue 47.
Robust Reference Rates
Regardless of their cause, pricing anomalies are an inevitability in crypto markets. Reference rate designers, particularly derivative exchange operators, must prepare for these eventualities by ensuring that their prices are robust to such events. The manner in which a reference rate is calculated can dramatically impact its response to market dislocations and other anomalies.
The Bitstamp flash crash highlights that even liquid markets on major exchanges can experience anomalies. With this considered, reference rate operators should design their methodologies to be robust against failures on these markets. One effective technique for doing so is to use a median price across exchanges rather than a mean price, since medians are more robust to outliers.
Reference rate designers should also establish a weighting penalty against markets that experience an unexpected amount of variance during the calculation period, since this is likely to indicate a dislocation from the rest of the market through a fat-finger error or market manipulation. Since illiquid exchanges are both less critical to global market conditions and more prone to manipulation, reference rates should also factor trading volumes into their weightings.
The reputation of a marketplace should be also considered in deciding whether or not to whitelist its markets, since reported prices and volumes must be trusted. While this process cannot be fully automated, the implementation of a listing framework can dramatically reduce the number of cases requiring operator discretion.
Maintaining robust reference rates is crucial for effectively handling pricing anomalies, which occur frequently in the fragmented and inefficient crypto market. This is particularly significant for derivative exchanges, whose products require a settlement price and may be vulnerable to manipulation in the underlying markets if this index is not well-designed. For more information about Coin Metrics’ reference rates, check out our reference rates product page and live reference rates chart.
Coin Metrics is pleased to announce the release of its Free Float Supply Methodology and the first set of supply data to support the top ranked cryptoassets by market capitalization.
Free Float Supply more accurately represents market realities and dynamics and thus can better inform market participants and aid in making intelligent and informed decisions.
The concept of Free Float Supply was first introduced in traditional equity markets in the late 1990s to provide a more accurate representation of the supply of shares that were available to public markets. Prior to free float, indexes were constructed and weighted utilizing the total number of shares issued (i.e. total number of shares stated in the company registry). However, as companies increasingly issued less shares to the market, Asset Managers, Index Funds, etc. started incurring high costs and tracking error that resulted from indexes misrepresenting market supply/demand dynamics. Index Administrators were able to overcome this by applying a methodology that restricted particular strategic and insider shareholders’ shares from supply calculations.
Coin Metrics, as an Independent Index Administrator, decided that the most prudent approach to designing indexes was to adopt a similar methodology to supply determination and develop a standardized methodology to be applied uniformly across the various blockchain architectures and cryptoasset tokenomic models.
The intent of Free Float is to determine the supply that is highly unlikely to contribute to liquidity in the short term. Coin Metrics identified and excluded the following types of cryptoassets from a protocol’s Free Float Supply:
Foundation cryptoassets that are held and controlled by a centralized or decentralized organization directly associated with the protocol
Foundering team cryptoassets that are publicly disclosed or can be determined from genesis block forensic investigations
Venture capital and early investor cryptoassets that are subject to a vesting schedule
Company employee cryptoasset holdings that are subject to a vesting schedule
Cryptoassets that are staked in a smart contract to partake in governance and long-term strategic outcomes of a network without any direct monetary incentive to do so
Burned cryptoassets
Provably lost cryptoassets
Any cryptoassets that have been inactive on-chain for 5 or more years
Forked cryptoassets that have never been active on the forked chain
If you are a financial service provider that would like to discuss the Coin Metrics Free Float Methodology, please reach out to [email protected].
ABOUT COIN METRICS
Coin Metrics is a leading provider of transparent and actionable cryptoasset market and network data. Coin Metrics delivers mature data across multiple formats to various industry stakeholders, including financial enterprises, funds, media and research outlets, and data/application providers. Coin Metrics’ data empowers its clients and the public to better understand, value, use, and ultimately steward public crypto networks. Further Coin Metrics research can be found here.
ABOUT CMBI
Coin Metrics launched CMBI to bring independent and transparent index solutions to the cryptoasset investment community. In the nascent and often complex cryptoasset market, CMBI Indexes strive to be dynamic and adjust to the rapidly changing market conditions to design and maintain investable products. CMBI Indexes provide markets and customers with industry-leading solutions that aid in performance benchmarking and asset allocation.
