Bitcoin’s price volatility has been a source of doubt about its narrative both as digital cash and as digital gold.
How could something so volatile be a secure haven investment? How could it’s a reliable unit of account or a medium of exchange? Attention to the volatility problem is clear within the many attempts to mint “stablecoins,” digital currencies pegged to paper money.
Perhaps bitcoin itself will achieve stability over time, as its liquidity improves with growing investment within the crypto-asset category. those that believe it’ll do so may feel disappointment or impatience reading this text.
For in 2019, market and network data have told a special story: volatility has increased and liquidity remains stagnant.
Bid-ask spreads aren’t narrowing
One reliable measure of liquidity is that the bid-ask spread: the difference between the worth a seller wishes to understand and therefore the price a buyer wishes to pay. Narrow bid-ask spreads are a symbol of a liquid market, during which relatively large amounts can trade without moving the worth.
We checked out six BTC/USD exchanges that bid-ask spread data were available. the info show that bitcoin/dollar markets’ bid-ask spreads are wide, compared to other asset categories – which 2019 has brought little to no relief.
Half of the six exchanges ended November with a wider average monthly bid-ask spread than a year ago; the opposite half were narrower. the typical change was a 0.14 percent widening. the 2 exchanges with the narrowest bid-ask spreads over the amount, Bitfinex and Coinbase, both saw bid-ask spreads widen.
Average monthly spreads, expressed as a percentage of the worth, range from 0.045 percent on Coinbase in March, to 0.304 percent on itBit in July. For comparison, bid-ask spreads on Vanguard ETF products immediately range from 0.01 percent to 0.09 percent.
Chart showing 30-day moving average BTC/USD bid-ask spread at 10 BTC depth and volatility vs. time, Dominion Day 2018 through Dec. 1 2019.
Greater volatility isn’t attracting liquidity providers
As the chart above shows, BTC/USD bid-ask spreads tend to widen in periods of high volatility. That’s normal, as market makers seek to take advantage of investors’ fear and greed. Compared with the last half of 2018, this year has been bumpy for bitcoin: the 30-day volatility of daily returns has topped 4 percent on 65 days within the past 12 months. It’s fallen below 1 percent on just six days within the same period. the info is from data.bitcoinity.org.
Liquidity providers aren’t rushing in. to live market makers’ enthusiasm for bitcoin, we address network data: the mixture balances of exchange wallets, as a percentage of bitcoin’s total supply. This measure of exchanges’ bitcoin flows shows some responsiveness to volatility. Year-to-date highs were set in late May and early July, when volatility was on the increase and peaking, respectively.
However, those points stand call at a flat sea: exchanges’ bitcoin wallet balances haven’t changed much since declining in 2018, holding around 8 percent, some extent first reached in mid-November, 2017.
Weekly percentage of bitcoin total supply persisted exchange vs time, January 2017-October 2019
Labeling wallets is an inexact science. Exchanges’ activities on the bitcoin network tend to follow predictable patterns, indicating net inflows. However, large balances often move in unpredictable ways and it are often difficult to differentiate the flow of capital from a change in custodial practice. This wallet labeling data is provided by IntoTheBlock.
As the end of 2019 approaches, bitcoin appears to be in stasis. Markets are not any more liquid than they were, this point in 2018 – still an order of magnitude but bitcoin’s blue-chip equivalents on the US stock exchange.
The path out of this stasis is murky. Bitcoin’s volatility has increased, while the share of bitcoin engaged within the market has remained flat. If stability and liquidity are a part of bitcoin’s road to becoming a more mature asset, the year 2019 has been a period of fixation.
Special because of Kaiko for help validating bid-ask data.