In recent years, there have been questions surrounding the integrity of the data published by cryptocurrency exchanges. In an attempt to help clean up these discrepancies, market data provider CryptoCompare for the past couple of years has been publishing a monthly exchange report to help create benchmark standards across the industry.
CryptoCompare Head of Research Constantine Tsavliris joined Coinscrum host Pierre Martinow to discuss the latest exchange review. Tsavliris explained how two years ago, there was no reliable and consistent source of market intelligence centered on exchanges. CryptoCompare’s monthly report, therefore, filled an obvious gap in the market. It aims to capture some of the key developments within the cryptocurrency exchange market and does so by focusing on analysis as it relates to trading volume.
He explained how in their methodology, they separate spot vs. derivatives, high-risk exchanges vs. low-risk exchanges, etc. They also provide an overview of where the market is likely headed and where it’s been.
According to Tsavliris, the CryptoCompare Benchmark was created in mid-2018 in response to reports about fake trading volume that was taking place on exchanges. CryptoCompare’s approach has been to separate the low-risk exchanges and high-risk exchanges using a transparent methodology. He described it as a “rigorous methodology” that looks at various categories of analysis:
- Regulatory standing/legal score
- Data provision/transparency
- Management team
- KYC/transaction monitoring
- Negative events
- Market quality (order book/trade data)
- Asset quality/diversity
The report also aims to examine features such as liquidity, spread and similar metrics. They take all of these categories and they assign scores to them to come up with a rigorous final score, ranging from “AA” as the best to “F” being the worst.
Coinscrum’s Martinow noted how some regions have licensing and regulatory requirements while others do not, asking if CryptoCompare takes this into consideration. Tsavliris explained that they absolutely do, saying many regions have licensing and regulatory requirements while others don’t. A few of these might include trade monitoring, transaction monitoring or more stringent KYC processes. It is something they measure in the Benchmark and include in the findings.
According to CryptoCompare’s latest Benchmark, 50% of exchanges are implementing internal market surveillance procedures. These exchanges have an internal methodology to flag strange trades. They also take into account exchanges that use external service providers, which amounts to 5-6% of them. CryptoCompare awards more points to exchanges with an external market surveillance provider because they feel there is less conflict of interest to adjust any of the findings.
For the month of October, CryptoCompare saw a decline in volumes of nearly 18% vs. September. This goes for both top-tier and lower-tier exchanges.
Top-tier exchange volumes fell 19.3% while lower-tier exchange volumes fell 14.7% vs. September levels. Tsavliris noted that this might seem like a paradox given that there was a significant bull run for much of October. The market, however, experienced quite a lot of volatility in September, when the bitcoin price fell from $12K to $11K. In general, there was more volatility in September vs. October, which explains the drop in volumes. Another reason is that there was very little price reversal in October, which translates to lower trading volumes in the month.
Yet another reason could be due to a decline in interest for decentralized finance (DeFi) from September to October. Tokens such as Yearn.finance have dropped in value from $45K in mid-September to $15K in mid-October. That is quite a significant drop and might explain some of the decline in volumes, Tsavliris said.
CryptoCompare also breaks down spot volume vs. derivatives volume. In October, spot volumes fell nearly 18% while derivatives volumes fell by a lesser 2.4%.
Tsavliris explained that derivatives volume as of October accounted for 52% of the total market volume vs. 48% in September. In the year-ago period, derivatives volume represented just under 40% of total volume, so they’ve been making up ground.
According to Tsavliris, this growing trend could be attributed to a couple of different factors, chief of which could be new players entering the market. For example, a year ago, Binance accounted for very little trading volume and now they are the leading crypto derivatives exchange.
Another reason could be due to a variety in the different types of products that are available, such as futures swaps and options that are traded on several exchanges, which wasn’t the case a year ago. He noted that this also covers the underlying cryptocurrencies that are used in certain products. For instance, last year it was ETH and BTC, and now you’ve got many more of the top cryptocurrencies being used in derivatives products.
While it’s difficult to pinpoint an exact change in the profile of cryptocurrency traders, Tsavliris observes that derivatives products tend to be used by more sophisticated traders to hedge risks. He said that given derivatives volumes have increased, one can assume that there are more sophisticated traders operating in the derivatives markets than there was a year ago.
CryptoCompare includes all of the major exchanges in their derivatives research, including Binance, OKEx, BitMEX and other players such as the CME and FTX. These account for the majority of the volume.
Tsavliris noted that options volume in particular is increasing, saying CME volumes have been relatively steady in terms of options volume. He believes they peaked in June when 8K contracts were trading. Now options are hovering at 4K contracts. They’re seeing increased open interest for options products, which are increasingly being used as a tool for more sophisticated traders.
OKEx had the highest open interest figures in October at about $1.5 billion followed by Binance. The CME and BitMEX were relatively neck and neck in terms of open interest with just over $800 million, which Tsavliris said is significant given that the CME is one of the only regulated players at the moment.
U.S. Elections Impact
It is too soon to tell the exact impact of the U.S. presidential elections on the cryptocurrency futures market. It is clear that volumes dropped from September to October for derivatives products. But that was also the case from August to September, which is why it is difficult to point to the elections as the reason. There are other factors ongoing, such as a second wave of COVID and the lockdowns. Tsavliris said that they’ll have to see exactly how the market reacts to the U.S. election situation in the upcoming months.
Finally, there is a possible trend of increased institutional interest in regulated venues, based on open interest figures, which Tsavliris said they will be watching closely in the coming months.