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Our latest Market Spotlight blog delves into recent trends in the digital asset industry, utilising their market-leading data. Key focus areas include the 2022 performance of the top 100 digital assets by market capitalisation, crypto market activity in December, the influence of new macroeconomic data on markets, and Binance's growing dominance in the industry.
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The end of the year typically comes with reduced volumes and weaker performances, even in traditional markets. December also marks the end of the tax period for many funds and investors, which may lead to the selling of assets to finalise tax returns (e.g. close losing positions to carry forward tax losses or close winning positions to record realised profits for the year).
General market activity also tends to reduce as a result of the holiday season. This is particularly prevalent in crypto markets, where the 24/7 nature of the industry means that holiday seasons are typically more impactful in reducing volumes. Outlined below are BTC and ETH spot volume changes and performance in the month of December in the last five years.
Volatility in cryptocurrency markets has also been steadily declining from the yearly peak reached in November, with a number of factors contributing to this. As a result, 30-day volatility has declined to similar levels seen prior to the collapse of FTX:
Macroeconomic data had a mix of positive and negative news in December — the CPI figure in the United States came in at 7.1%, below the consensus estimate of 7.3%, which saw a positive reaction in markets. However, the FOMC meeting the day after resulted in a 50bps rate hike, and more importantly, the median forecast of Fed officials for interest rates in 2023 rose to 5.1%, from 4.6% in September. This increase in expected terminal rates will put more downside pressure on markets and the economy, suggesting a U-turn in macroeconomic expectations and Fed policy will still take time.
Interestingly, the 365-day correlation between the daily returns of BTC, ETH and traditional assets has been steadily increasing in the last year, as the chart below illustrates.
We expect this trend to continue into the first quarter of the new year, as macroeconomics continues to be the most important factor in market direction. However, we believe this correlation will subside in the latter parts of 2023, as the crypto industry begins to clear out the hubris from the multiple collapses this year and begins to see some asset-specific narratives and catalysts.
2022 has been a tough year for all cryptoassets, fueled by major macroeconomic headwinds, in addition to several major events like the LUNA crash and FTX’s bankruptcy.
In the following section, we take a look at how the Top 100 assets’ (by market capitalisation) reacted to this year’s developments and dive deeper into the best-performing assets in 2022. We look at price action, returns, volatility and volumes, utilising CryptoCompre’s API and other data products.
Prices have seen a rigorous decline this year, signalling the increasingly bearish sentiment of traders following the uncertainties that have risen in 2022. Analysing year-to-date returns, we find that among the top 100 assets, 19 assets have outperformed Bitcoin, led by Trust Wallet’s TWT and Optimism’s OP, which recorded returns of 101% and 53.4% YTD. The list also includes the following:
While YTD returns is a metric for long-term holders, daily traders rely on more short-term metrics to assess an asset. For example, average daily returns can be used to better capture changes in price on a daily basis. Looking into average daily returns, we find that, similarly to YTD returns, negative average daily returns are prevailing, with some outliers including:
Most of the above assets have benefitted from their own narratives throughout the year. For example, TWT saw outsized returns in November, after the collapse of FTX incentivised users to own a token linked to a self-custodial wallet. The Token especially saw a significant rise after the CEO of Binance, CZ, spoke about Trust Wallet, which was acquired by Binance in 2018.
CHZ, Chiliz native token, which is also a Binance portfolio company, saw its token rise in anticipation of the World Cup in Qatar this winter.
High Volatility was also a by-product of 2022. Looking into the 360-day volatility of the top 100 assets, we found that BTC and GT (Gatechain’s token) were the least volatile assets with a volatility of 65.8% and 56.8%.
GateChain is a public blockchain focused on on-chain asset safety and decentralized trading. Its low volatility could be attributed to the low trading volume it experienced during the year, as GT’s average daily volume was $117k (around 0.01% of BTC’s average daily trading volumes).
BTC’s lower volatility isn’t a surprising occurrence. In bear markets, BTC tends to be a safety asset for most investors, acting as an industry benchmark which reduces the volatility of the asset significantly.
When analysing digital assets, it is insufficient to examine returns and volatility alone. In some instances, cryptocurrencies can record decent returns whilst having lower volatility, because of their low trading volumes. Furthermore, some ‘meme coins’ can record high returns despite an outbreak in volatility.
In the following chart, we plotted some of the major assets, accounting for returns, volatility and volumes. The chart shows that Bitcoin was the most traded asset in 2022, with almost the least volatility, and was among the top assets in terms of average daily and YTD returns.
For an industry that places much emphasis on the theme of decentralisation, the dominance of Binance’s market share has become an alarming concern in the past couple of years. The collapse of FTX has further fueled these fears, with the market share of Binance in spot and derivatives markets currently standing at an all-time high of 61.6% and 64.1% respectively.
Binance was arguably the exchange that gained the most out of the FTX debacle. Not only did the exchange’s CEO, Changpeng Zhao, play a vital role in FTX’s liquidity crisis with his tweet on November 8th, but Binance also seemed to have established itself as a credible and trustworthy exchange resulting in an increased user base and market share.
After all, why would CZ be vocal about transparency and proving the solvency of centralised exchanges if his own exchange is insolvent? As a result, Binance continued to strengthen its market dominance with the exchange accounting for 74.6% of all bitcoin spot trading in December.
Concerns about the liquidity of the exchange started to arise after Binance released its Proof of Reserves audit results from the major accounting firm, Mazars, in the 2nd week of December.
While Binance publicised the inspection by Mazars as a Proof of Reserves audit, the official report by the accounting firm confirmed otherwise. According to Mazars, the audit performed for Binance and other exchanges including Kucoin and Crypto.com were ‘Agreed Upon Procedures’ (AUP) reports, which illustrate the scope of requirements suggested by the exchanges.
This misinterpretation, together with other flaws in the supposed audit, along with the similarities in the utility of BNB and FTT on their respective exchanges, has led already panic-stricken crypto investors to remove their assets from the exchange. This has resulted in a net outflow of $10.4bn between 12th and 18th December, a record high for the exchange.
Even though this year has taught us that there is no such thing as too big to fail in crypto, the damage done to the industry will be incomprehensible if Binance implodes. Binance currently accounts for around 60% of the crypto trading, the third largest stablecoin issued with Paxos, and a top 5 blockchain ecosystem worth $40bn.
So, what’s the verdict? Will the largest exchange in the industry turn out to be another FTX? Well, in our opinion, the chances of Binance going insolvent and facing a similar fate to FTX are very slim.
Binance currently trades more than $20tn in spot and derivatives volume in a year. Even if we consider the lowest maker fees in their tier, the trading volume translates to an annual revenue of $4bn. The exchange doesn’t look like an entity in financial distress or in need of cost-cutting as evidenced by their continued hiring spree and acquisition of Voyager’s assets worth $1bn.
Also, unlike FTT, which was used as discounts and collateral for derivatives trading, BNB has other value accrual mechanisms including being the native cryptocurrency of the BNB chain. Moreover, the exchange didn’t face major concerns while facing the largest withdrawals from the platform, a challenge that would have likely caused significant issues for their counterparts.
Binance has also been comfortable with the theme of stress testing performed by users, a concept similar to Proof of Keys day, advocated by the exchange back in 2019. Though we have been let down by many heroes who have exuberated confidence in the past year, we may have to invest our trust in CZ and Binance once again.
For more information about some of the major risk events that took place during the year, please refer to our website. For more detailed information and customised reports, please reach out to the team via: research@ccdata.io
Disclaimer: Please note that the content of this blog post was created prior to our company's rebranding from CryptoCompare to CCData.
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