Current market conditions have contributed to a resurgence of institutional interest in bitcoin. In the face of unprecedented monetary and fiscal policies by central banks and governments around the world, more and more institutional investors are recognizing that these measures significantly increase the likelihood of political errors, either by creating financial imbalances in certain sectors of the economy or by contributing to higher inflation.
The authors of this article consider, from the point of view of an institutional investor entering the market, the distribution and trading volumes of bitcoin in its various markets. The article is a preview of the upcoming ARK Invest study, which will provide a more complete analysis of the features of the institutional approach to bitcoin.
Calculating Bitcoin's market capitalization is relatively simple. Coin Metrics estimates the aggregate value of the bitcoins in circulation at $ 136 billion, which is comparable to the largest public companies in the United States. However, estimating trading volume is a more complex task, and various techniques applied to it can produce significantly different results.
The market structure of Bitcoin is noteworthy in that it most accurately reflects the structure of foreign exchange markets. It is similar in that bitcoin markets are globally distributed, operate 24 hours a day and use a basic agreement on assets and their prices. The difference is that a significant part of Bitcoin's trading volumes is concentrated on centralized exchanges that process transactions between any market participants on their own, and not through the interbank market.
The daily trading volume of Bitcoin can be estimated with different levels of aggregation. For the institutional investor (buying side), deploying fresh capital in the industry, the most relevant, perhaps, will be the volume of trading in bitcoin against the US dollar on the spot markets of large exchanges, estimated at $ 0.5 billion per day. With this level of trading volume, an institutional investor who wants not to go beyond one percent of the total trading volume can count on a capital allocation of $ 5 million per day.
While the Bitcoin trading ecosystem consists of hundreds of centralized exchanges, several decentralized and several OTC operators, most trading is concentrated on a very limited number of large centralized exchanges. We obtained volume figures for this analysis based on data from a number of large exchanges, including Binance, Binance.US, Bitfinex, bitFlyer, Bithumb, BitMEX, Bitstamp, Bittrex, Bybit, CEX.IO, Coinbase, FTX, Gate.io, Gemini, Huobi, itBit, Kraken, Liquid, OKEX, Poloniex and Upbit.
The distribution of the Bitcoin trade volume to the US dollar in spot markets follows a power law, where approximately 90% of the volume falls on the four largest exchanges in our sample: Coinbase, Bitstamp, Bitfinex and Kraken. The fragmented nature of trading volume and liquidity in this industry indicates that institutional investors should be prepared to go through the integration process with several exchanges in order to gain access to the full range of trading activity.
Expanding the range of Bitcoin markets under consideration to any fiat markets increases the daily trading volume to $ 1.2 billion, with trade against the US dollar accounting for about half of the total. In addition to the US dollar, the main fiat countercurrencies for bitcoin are the Japanese yen, the euro, the Korean won and the British pound. A number of large exchanges that we selected for analysis do not include several smaller regional exchanges, but their trading volumes are too small to interest institutional investors.
The stablecoins have evolved to the status of systemically important assets for the Bitcoin ecosystem and continue to increase their share in the total trading volume. The inclusion in the calculation of markets traded for stablecoins significantly increases the daily volume of bitcoin trades up to $ 3.5 billion, primarily due to Tether, a stablecoin operating in the gray zone. Thus, managers of institutional capital, both on the purchase side and on the sale side, should make a fundamental decision on whether the benefits of participating in stablecoin markets (primarily increasing liquidity) outweigh the risks associated with this. Stablecoins such as USD Coin, Paxos Standard or TrueUSD that are more compliant with regulators cannot be compared with Tether in terms of trading volumes.
The largest increase in trading volumes is provided by the addition of derivatives markets to this mix. As with other asset classes, bitcoin derivatives markets are slightly larger than spot markets. According to the published volumes, derivatives can be the most effective way to enter the bitcoin market. However, crypto derivatives markets are still developing, and their participants have to deal with an intricate mixture of various contract specifications that can take margins and calculate profits and losses in bitcoins, stablecoins or in fiat terms.
Estimating the volume of Bitcoin trading can be somewhat facilitated if you define a single reference system. Here we compare the volume of spot markets of bitcoin with the volume of spot markets of other asset classes.
With a daily trading volume of only $ 4.1 billion, the bitcoin spot markets are still negligible compared to US stock markets, bond markets or global currency markets. Bitcoin in its current state is most comparable in scale to the shares of a large company, and not to a whole class of assets. Large institutional investors, such as endowments, pension funds, or welfare funds, can reasonably conclude that bitcoin is suitable for placing only a part of the already small share in the portfolio allocated for alternative assets.
However, if historical growth rates continue, then in order to exceed the daily volume of the entire US stock market, Bitcoin will need less than 4 years. And in order to exceed the daily volume of the US bond market, Bitcoin will need less than 5 years of growth.
Fragmentation of trading volumes in the Bitcoin ecosystem prevents a simple and straightforward assessment of the size of its market. Institutional investors considering entering this area should first examine the landscape and determine which exchanges, markets, and with which assets it will be more convenient for them to make transactions. Important decisions, such as whether they are willing to trade in stablecoins like Tether, or use derivative financial instruments, such as perpetual futures contracts, can have a significant impact on trading volume and liquidity. But regardless of these decisions, all aspects of Bitcoin trading volume have experienced exponential growth and, if it continues to be stable, will soon grow to levels comparable to large classes of traditional assets.
