Why did cryptocurrency market trading volumes plummet in September? How to get out of Deep Bear?

Author: Ben Strack, Blockworks; Compiler: Songxue, Golden Finance

Cryptocurrency market trading volumes continued to decline in September, reaching levels not seen in several years, causing prices for the two largest crypto assets by market capitalization to fall early Monday.

While analysts say **lower interest rates and the approval of a U.S. spot crypto ETF could reignite trading volumes, the trading environment is likely to remain subdued for the foreseeable future. **

A report released by Compass Point Research and Trading analysts on September 8 showed that the average daily trading volume of centralized exchanges in August was US$8.4 billion, a decrease of 16% month-on-month and a year-on-year decrease of 78%.

Analysts added that trading volumes in the first week of September were "abysmal" at about $5.9 billion. Those numbers fell another 29% month-on-month and were reaching their highest levels since late 2017, they wrote.

The average daily trading volume of decentralized exchanges in August was slightly more than 1.8 billion US dollars, which performed better than centralized exchanges, but was still about 8.5% lower than in July.

Fineqia International research analyst Matteo Greco highlighted in a Monday research note that weekly trading volumes on centralized exchanges have recently averaged approximately $9 billion, the lowest level since late 2020.

Greco said the indicator represents the moving average of weekly trading volumes calculated between September 4 and 10.

Fineqia analysts added that trading volumes on major decentralized exchanges totaled $22 billion in August, which was the lowest monthly trading volume since December 2020.

On top of that, according to Fineqia, approximately 75% of the total Bitcoin (BTC) supply is held by long-term holders, reflecting that BTC has not moved in over 155 days. Greco noted that short-term holders held only 2.5 million BTC, the lowest level since 2011.

CoinShares research director James Butterfill said on Monday that the trading volume of cryptocurrency exchange-traded products last week (September 4-8) also fell to $754 million, a 73% plunge from the previous week.

Grayscale Investments fell sharply last week on higher-than-usual trading volume after it won a lawsuit against the U.S. Securities and Exchange Commission in the D.C. Circuit Court of Appeals.

Still, $754 million in cryptocurrency ETP trading volume is still well below the average weekly trading volume of $1.4 billion so far in 2023.

As of 2 p.m. ET on Monday, the prices of Bitcoin and Ethereum (ETH) were down 2.1% and 3% from 24 hours ago, according to CoinGecko.

**What causes it and how can it be restored? **

Greco said on Monday that interest rate hikes by central banks over the past 18 months have significantly contributed to reduced liquidity levels in financial markets, indicating that investors are taking de-risking actions.

He added: “This affects the entire financial sector and has an even greater impact on the digital asset market, which is the most volatile and risky market in history.”

Chase White, senior research and policy analyst at Compass Point, said high short-term Treasury rates are particularly affecting interest in cryptocurrencies and other risky assets.

"You can get a risk-free return of 5.5%, which is attractive to investors given the current uncertainty about the global macroeconomic outlook," he explains. “Beyond the macro picture, the lack of fiat on-ramp to crypto platforms appears to be impacting liquidity, as U.S. banks are indeed no longer servicing the crypto industry outside of some of the largest domestic players.”

Investors are showing increasing confidence in the approval of a spot Bitcoin ETF, Greco said in a report on Monday. He noted that the Grayscale Bitcoin Trust’s (GBTC) discount rate — which was around 17% on Friday — hit its lowest level since early 2022.

Several companies, including financial giant BlackRock, have filed for spot Bitcoin ETFs, a product the SEC has never allowed to list. In addition to seeking to launch a Bitcoin ETF, Ark Invest, 21Shares, and VanEck recently revealed plans to launch a spot Ethereum ETF.

Greco added: “The end of rate hikes, especially if combined with the approval of a spot Bitcoin ETF, could be a major driver in bringing new capital into the market and improving liquidity.”

White labeled “lower interest rates and the visibility of a return to economic growth” as the biggest drivers that could bring cryptocurrency numbers back. He expects this to begin in early 2024.

“However, any move by the SEC to approve a spot (Bitcoin or Ethereum) ETF could provide a boost that decouples the cryptocurrency market from the broader macro picture,” White said.

White and others said they believe a spot Bitcoin ETF could be approved by the end of this year or early 2024.

“Beyond that, we appear to be facing a relatively quiet trading environment over the next few months,” White said.