Tuesday, October 31, 2023


What caught my eye in Olga Kharif's Crypto Delistings From Exchanges Are Already Running at a Record Pace This Year was this:
Trading volume on most exchanges has plummeted in the past year, even as the number of coins has continued to multiply, with more than 1.8 million tokens listed on centralized and decentralized exchanges.
Kharif reported on the collapse of trading volume earlier in Coinbase’s Quarterly Crypto Trading Volume Likely Lowest Since Before Public Debut:
The largest US digital-asset platform registered about $76 billion in spot trading volume, a drop of 52% from the year-ago period, according to data compiled by researcher CCData. The tally is also likely the least since before the company’s much ballyhooed direct listing on the Nasdaq Stock Market in April 2021, or just months before prices of cryptocurrencies peaked.
Thus what caught my eye wasn't the drop in trading volume, it was "more than 1.8 million tokens"! Below the fold I ask how this could possibly make sense.

The thing is that, like the Gini coefficients of cryptocurrency holdings, the "more than 1.8 million tokens" have an incredibly long-tailed distribution. Almost all the 1.8M tokens are completely irrelevant, and are very likely to be scams.

According to coinmarketcap.com, the top 10 tokens have a combined "market cap" of about $1.1T, with #10 TRON at $8.2B and a daily volume of $386M. They represent about 88% of the total "market cap". The next 10 have a combined "market cap" of $52B, with #20 Avalanche at $3.7B and a daily volume of $365M. The top 20 represent about 92% of the total.

For contrast, tokens from 101 to 110 have a combined "market cap" of $2.7B with #110 NEM at $254M and a daily volume of $7M. Past #100 we are deep into shitcoin territory, but there is a long way yet to go.

The 1000th biggest token is currently Vesper. Its "market cap" is $3.7M with a daily volume of $67K. This means that there are more than 1.799M tokens with "market caps" less than $3.7M, or that at least 99.9% of all tokens have "market caps" of less than $3.7M, and derisory daily volume.

Nearly 0.5% of the way to the 1.8M mark we find things like #8767 XPRO, whose "market cap" is $5K. So it is likely that 99.5% of all tokens have "market caps" of less than $5K. Imagine how easily a token with a "market cap" of less than $5K could be manipulated!

Another way to look at this is to compare "more than 1.8 million tokens" with 4 million, the number of listed companies in the US. Do you think that 99.5% of all listed companies in the US have "market caps" of less than $5K?

This incredibly skewed distribution is typical of most aspects of cryptocurrencies. For example, Vildana Hajric writes in Just Eight Exchanges Handle 90% of All Crypto Trading Volume that:
The top eight platforms account for nearly 92% of depth — a measure of all bids and asks within 10% of the mid price — and 90% of volume, according to Kaiko. Binance, the largest crypto exchange, has this year accounted for more than 30% of global market depth and more than 60% of worldwide trade volumes. Besides Binance, the list also includes Coinbase, OKX and Huobi, among others. For context, there are hundreds of crypto exchanges, according to data from CoinGecko, though many of them see negligible or no trading at all.
The many tiny exchanges trading many tiny tokens are ripe for manipulation.

Not that, as I discussed in The Invisible Hand Of The Market, the major exchanges are immune from it. Muyao Shen reports that Bitcoin’s Big Moves Are Being Magnified by a Protracted Lack of Liquidity:
A protracted dearth of liquidity in cryptocurrency markets is playing a key role in the more than 10% swings in the price of Bitcoin seen in recent weeks.

Market depth remains at its lowest point this year even with the recent resurgence in trading activity being spurred on in part by expectations for a Bitcoin exchange-traded fund, FalconX’s research team found. They measure market depth by looking at the average volume of Bitcoin trading activities within 1% of its current price, on a 24-hour basis.
At first glance the graphs of volume on centralized and decentralized exchanges look similar, but check the Y axes. Decentralized market volume is something like $15B/month, whereas centralized exchange volume is around $200B/month. Once again, the distribution is highly skewed.

1 comment:

Wes Felter said...

I wonder if the 1.8M number includes NFTs which, by design, each only have one "share".