Bitcoin's price volatility has now tumbled to a 15-month low, and trading volumes are slumping. It's an open question for the nascent but fast-growing industry whether consolidation lies ahead for the world's 400-plus cryptocurrency exchanges.
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MARKET MOVES
Bitcoin's notorious volatility has practically disappeared during the most-recent phase of the coronavirus-induced economic crisis – and that's now taking a toll on trading volumes at cryptocurrency exchanges around the world.
For more than two months, bitcoin has stayed in a range between roughly $8,500 and $10,200, an astonishing stretch of stability for an asset whose price rose 13-fold in 2017, tumbled 73% in 2018 and then jumped 94% last year. It's up 29% so far in 2020, after wild gyrations earlier in the year that have mostly faded since late April.
The largest cryptocurrency changed hands Tuesday at $9,257, down 1% on the day. Yawn.
According to CoinDesk Research, bitcoin's 30-day historical volatility has fallen to its lowest in more than a year:
The skyline of New York. No, just kidding – it's a chart showing how precipitously bitcoin's historical volatility has dropped in the past few months. (CoinDesk Research)
The preternatural calm in the bitcoin market has sapped the enthusiasm of cryptocurrency traders long accustomed to bigger daily price swings and adrenaline rushes. Based on a new report, many traders are moving toward the sidelines.
The London-based data provider CryptoCompare wrote this week that trading volumes on top-tier cryptocurrency exchanges like Binance, OKEx and Coinbase fell by 36% in June to $177 billion; on lower-tier exchanges, volumes tumbled by 53% to $466 billion.
Trading in cryptocurrency futures has also withered on venues like Chicago-based CME, according to the report.
"The decline in bitcoin futures trading volume is mainly due to the continued decline in bitcoin volatility," OKEx CEO Jay Hao wrote Tuesday in a post on LinkedIn.
The price action is so uncharacteristically "drowsy" for bitcoin that the market is surely due for an awakening, the Norwegian cryptocurrency analysis firm Arcane Research wrote Tuesday in a report.
"While the direction for bitcoin's next move is unclear, a large move is surely approaching," Arcane wrote.
In the meantime, the decline in trading volumes could rekindle questions over how many cryptocurrency exchanges are really needed to serve the nascent but fast-growing market.
The multitude offers a marked contrast with the scenario in traditional financial markets, where trading volumes tend to aggregate on a few large exchanges. Think New York Stock Exchange, Nasdaq and Tokyo Stock Exchange for stocks, or the CME and Intercontinental Exchange for commodity futures.
Part of the explanation lies in just how fast and easy it is to build an exchange with digital-asset market technology, focused on blockchain-enabled tokens. Setting aside the burden of meeting regulatory or compliance requirements, white label offerings mean it can be almost like setting up a website (with added complexities like secure custody).
ChainUp, a Singapore-based provider of technology services to the blockchain industry, says on its website that it has helped more the 300 crypto exchange clients.
Don Guo, CEO of Broctagon Fintech Group, which helps smaller cryptocurrency exchanges tap into bigger pools of liquidity available from large exchanges, says the business model is more akin to that of local or regional stock-brokerage firms that can survive with a smaller clientele.
"It's not like traditional finance," Guo said in an interview via Microsoft Teams. "People want to start exchanges. They want to launch their own netcoins or their own tokens, or they have their own communities."
Eventually, "there will definitely be consolidation" in the industry because "it's already a crowded space," says Stephen Stonberg, a former Goldman Sachs and Brevan Howard executive who now serves as chief operating officer of Liechtenstein-based Bittrex Global.
"The market is so inefficient, which is why there are so many players," Stonberg said in an interview. "I don't think you'll need state and local crypto exchanges. There's no need for that level of fragmentation."
For now, cryptocurrency traders and exchanges alike might welcome an industry shake-up – in the form of a fresh bout of bitcoin price volatility.
– Bradley Keoun, Editor, First Mover
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Trend: The path of least resistance for bitcoin is on the higher side, according to daily chart indicators.
The MACD histogram, an indicator used to identify trend strength and direction, has crossed above zero for the first time since early June, signaling a bullish reversal. The indicator suggests that the bearish trend following the June high of $10,430 has ended.
A similar message is being delivered by the 14-day relative strength index, which has made an upside break of a two-month falling trendline.
In addition, volatility, as represented by the average true range (ATR) indicator, has declined to the lowest level since December 2019. In the past, BTC has witnessed upside breaks whenever ATR dropped to lows seen at press time, as noted by Adrian Zdunczyk, CEO of trading community The BIRB Nest.
As such, one may expect bitcoin to soon slice through the immediate resistance at $9,373 (50-day moving average) and challenge the psychological hurdle of $10,000. Bitcoin is currently trading near $9,300, representing a 0.50% gain on the day.
The cryptocurrency jumped 3% on Monday, confirming an upside break of a 10-day trading range of $8,830 to $9,300. Since then, however, the upside has been capped by the 50-day MA. "The 50-day MA must be broken and reclaimed as support for bulls to continue and add to the local uptrend momentum," said Zdunczyk.
On the downside, the weekly opening price of $9,077 is the level to beat for the sellers. A violation there would validate the bearish crossover of the 5- and 10-week averages and could yield a quick drop to $8,630 (May 25 low).
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