Cryptocurrency prices experienced notable volatility at the beginning of the year, contributing to a record decline in trading activity. According to a monthly report released by CryptoCompare on February 4, combined trading volumes for cryptocurrency derivatives and spot markets fell by 14.6% in January. This decline resulted in an average weekly outflow of approximately $61 million from the cryptocurrency sector, marking the fastest rate of capital withdrawal since late 2020.
The Grayscale Bitcoin Trust, a $25 billion fund, saw more sellers than buyers in January. This imbalance drove the trust’s share price to a record discount of approximately -25% relative to its net asset value.
Amid these developments, the overall cryptocurrency market continued to trend downward. The total market capitalization fell from a peak of $3.2 trillion in November 2021 to $1.9 trillion by the end of January 2022. Over the same period, Bitcoin’s price dropped from a high of around $69,000 to below $40,000.
Overall Market Performance and Trading Volume Trends
“Cryptocurrency prices declined in January,” noted CryptoCompare, “with Bitcoin and Ethereum closing at $38,495 and $2,689, respectively, representing decreases of 16.7% and 26.8% since December.” As a result, total spot trading volume on centralized exchanges fell significantly to $1.81 trillion, down 30.2% from the previous month and reaching the lowest level since late 2020.
Within the spot market, top-tier exchanges saw a 21.2% decline in trading volume, settling at $1.6 trillion. Lower-tier exchanges experienced a more drastic drop of 66.3%, with volumes falling to $175 billion. Top-tier exchanges now account for 90.3% of all spot trading activity.
On January 24, total spot trading volume across all cryptocurrency exchanges reached a monthly peak of $91 billion. Despite this intra-month spike, it still represented a 47.5% decline from the high recorded in December. That same day, top-tier exchanges recorded a daily high of $83.9 billion in trading volume, down 32.6% from the previous month’s peak.
Derivatives Trading: A Contrast to Spot Market Activity
In contrast to the sharp contraction in spot trading, the derivatives market experienced only a slight decline. Trading volume in this segment decreased by a marginal 0.4%, moving from December’s total to $2.86 trillion in January.
Despite this slight digestion in volume, the derivatives market’s share of overall cryptocurrency trading activity reached a historic high of 61.2% in January. This figure surpassed the previous record of 57.3% set in November 2020. “This indicates that hedging and speculative activities in the cryptocurrency market increased in January as participants shifted towards trading futures and options,” CryptoCompare pointed out. It is worth noting, however, that derivatives trading volume remains significantly below its all-time high of $4.96 trillion, recorded in May 2021.
Exchange-traded derivatives also saw growth. The report showed that the number of Bitcoin options contracts traded on the Chicago Mercantile Exchange (CME) in January rose by 28.6% to 1,882 contracts. This was the highest volume since December 2020, when 3,749 Bitcoin options contracts were traded.
Bitcoin futures contract volume also increased by 23.9% to 181,400 contracts. Similarly, Ethereum futures contract volume saw significant growth, rising 59.4% to 116,200 contracts.
Exchange-Specific Performance and Market Share
According to CryptoCompare’s exchange tier system, Binance (rated BB) was the top spot exchange by volume in January, processing $504 billion in trades, though this represented a 23.0% decline from December. It was followed by OKEx (BB) and Coinbase (AA), with volumes of $131 billion and $120 billion, respectively.
Other major players included BeQuant (BB), FTX (BB), and Huobi Global (BB), which saw spot trading volumes of $79.4 billion (down 25.2%), $67.3 billion (down 17.9%), and $64.7 billion (down 36.9%), in that order. The top 15 exchanges by volume accounted for approximately 67.8% of all spot trading activity, a slight increase from 67.3% in December.
In the derivatives market, Binance continued to lead with a monthly volume of $1.5 trillion, despite a 5.4% drop from December. OKEx followed with $559 billion (up 18.4%), then FTX with $346 billion (down 10.2%), and Bybit with $219 billion (down 2.9%). The daily peak for derivatives trading occurred on January 21, reaching $181 billion. While a significant figure, it was still 3.4% lower than the intra-month high of $188 billion seen in December.
Macroeconomic Influences and Institutional Behavior
The recent price corrections and cooling trading activity are largely attributed to the market’s anticipation of interest rate hikes by the U.S. Federal Reserve. Furthermore, institutional research from firms like JPMorgan Chase indicates that as more large, professional investors enter the crypto market, its price movements are becoming increasingly correlated with those of technology stocks.
“In anticipation of the Fed’s upcoming rate hikes, institutional investors are selling growth stocks alongside crypto assets,” explained Michael Sonnenshein, CEO of Grayscale Investments. “However, it is important to note that investor demand for digital and crypto asset investment products remains substantial.”
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Despite short-term volatility, cryptocurrency adoption continues to grow mainstream. A 2021 survey conducted by Grayscale Investments revealed a significant rise in investor interest and demand for Bitcoin, with over half of all current Bitcoin investors having made their first purchase within that year.
Evolving Investor Preferences and Market Tools
Investor preferences for acquiring cryptocurrencies are also evolving. The same survey showed that in 2020, over three-quarters of respondents preferred purchasing Bitcoin through exchanges. By 2021, nearly 60% indicated a preference for using dedicated cryptocurrency applications like eToro or Coinbase for their transactions.
This shift highlights a growing comfort with and access to digital asset platforms among retail investors. After falling below $40,000 in January, Bitcoin’s price rebounded this week, posting its largest gain in four months and climbing back above the $41,000 mark. This recovery suggests underlying resilience and ongoing investor interest despite periods of market uncertainty.
Frequently Asked Questions
What caused the drop in cryptocurrency trading volume in January?
The decline was primarily driven by significant price volatility and capital outflows from the market. Anticipation of U.S. Federal Reserve interest rate hikes led many investors to sell riskier assets, including cryptocurrencies and tech stocks, reducing overall trading activity.
How does derivatives trading differ from spot trading?
Spot trading involves the immediate purchase and sale of cryptocurrencies at current market prices. Derivatives trading involves contracts like futures and options, which derive their value from an underlying asset and are often used for hedging against price swings or for speculation.
Why did derivatives market share hit a record high while spot volume fell?
As spot prices became more volatile and uncertain, more traders turned to derivatives products to hedge their existing holdings or to speculate on future price movements without needing to hold the actual asset, leading to a higher relative share for derivatives.
Which were the top cryptocurrency exchanges by volume in January?
Binance was the leading exchange in both spot and derivatives trading. Other top-tier exchanges included OKEx, Coinbase, FTX, and Huobi Global, with the top 15 exchanges accounting for over two-thirds of all spot trading volume.
Is investor interest in cryptocurrencies decreasing?
Despite recent market downturns and outflows, surveys and data indicate that long-term investor interest remains strong. Many investors entered the market in 2021, and the preference for user-friendly trading apps is growing, suggesting continued mainstream adoption.
What is the significance of the Grayscale Bitcoin Trust trading at a discount?
A significant discount of the trust's share price to its net asset value often indicates higher selling pressure than buying demand from institutional investors. It can reflect market sentiment and expectations about Bitcoin's future price.