Crypto exchanges like Coinbase offering this functionality, have been a big beneficiary of this trading model
It wouldn’t be an overstatement to say that this has been a landmark week for the general crypto market. The Cryptoverse finally has a much-needed public company — a major step forward in the mainstream adoption that we have been talking about for months. US-based Coinbase, the largest crypto exchange in the country, went public via a direct listing earlier today. Expected to fetch $250 per share, it debuted on the Nasdaq at a price of $381 apiece.
Today was the pinnacle of the excitement in the crypto community that had been building ever since Coinbase announced to go public. The exuberance was bound to spill over to the general crypto market and it did. Bitcoin & Ethereum both hit fresh all-time highs earlier today — the former came within a whisker of $65k, while the latter topped $2400. Coinbase shares closed lower at $328.28 but getting a lift again in aftermarket trading.
Even without this listing euphoria, Coinbase has a reputation of lifting the fortunes of digital coins which get listed on the popular crypto exchange. Dubbed as the ‘Coinbase effect’, I explored the phenomenon in one of my previous pieces. Anyways, the public listing (COIN) of the company enabled it to hit a market value of nearly $100 billion — more than many well-known firms, including oil giant BP and other trading platforms.
Whether coincidental or not, the IPO of Coinbase couldn’t have come at a better time. Large institutional investors have been pouring money into digital assets — 2.3 million Bitcoin that have changed hands on-chain at a price of more than $50k. This kind of demand to buy and hold at such high prices puts a floor on the price.
Record trading volumes in the last few months have also boosted the revenues of crypto exchanges exponentially — Coinbase’s estimated Q1 2021 revenue of $1.8 billion has already surpassed its total annual revenue for the whole of last year ($1.3 billion). According to Chainlysis Market Intel, the realized gain of bitcoin on all exchanges since November is $65 billion, which is 78% of the $84 billion realized gain made over the entire history of bitcoin.
Chainalysis has also mapped the bitcoin addresses of nearly 800 exchanges. This enabled the calculation of metrics such as the realized gain, described above, and provides other insights into exchanges. We are going to be looking at some of these insights today. These metrics basically enable us to understand that the exchange of cryptocurrency for fiat currencies, is the biggest type of business overall for crypto exchanges like Coinbase.
The first insight from blockchain data on exchanges is that crypto-to-fiat exchanges receive the most bitcoin compared to other types of exchanges. As evident from the chart below (Figure 1), this metric has been climbing since October. Crypto-to-Fiat exchanges, as a group, now receive over $1 billion of bitcoin each day. Attracting the biggest amount of Bitcoin, they are thus the biggest sources of liquidity in the market. Crypto-to-Crypto still has some room to cover when it comes to exchanging digital assets. Derivatives & other exchanges are far behind.
The second insight is that crypto-to-fiat exchanges have the largest number of users depositing bitcoin via the blockchain. Chainalysis analyzes this by counting the number of deposit addresses receiving bitcoin on each exchange. According to the data in the chart below (Figure 2), crypto-to-fiat exchanges, as a group, receive bitcoin to over 80k deposit addresses each day — which is significantly higher than the number for crypto-to-crypto exchanges, having 50k active deposit addresses each day. Simply put, more users are sending their bitcoin to crypto-to-fiat exchanges than the latter.
The number of deposit addresses is an upper bound on the number of users depositing bitcoin via the blockchain as a user may have multiple deposit addresses. It is also a lower bound of the number of users an exchange has. The vast majority of users never transfer bitcoin on the blockchain, instead, they solely interact with an exchange’s website.
And the final insight, as shown in the chart below (Figure 3), suggests that a very small number are responsible for the majority of those deposits. This trend is much more evident in crypto-to-fiat exchanges, where 70% of inflows are received by just the ten largest deposit addresses on each exchange — compared to only 45% for crypto-to-crypto exchanges. To put it in layman’s terms, a small number of players control a large amount of the actual bitcoin flowing into exchanges, and secondly, that these players have greater power on crypto-to-fiat exchanges than they do on crypto-to-crypto exchanges.
However, one thing that needs to be kept in mind is that some of these large deposit addresses are internal to an exchange, making this measure of concentration an upper bound. Nonetheless, the concentration still remains high despite accounting for this caveat.
Overall, the three metrics suggest that the current bitcoin market is currently driven by the exchange of fiat currencies for bitcoin, rather than any other use case. And Coinbase, as a leading venue for this, is capitalizing on this fact. Having said that, exchanges continue to experiment with the booming DeFi and NFTs space — there is a lot more opportunity left in the Cryptoverse.
Originally Published on Medium