The Binance Effect

The events of the last few months, namely the relentless regulatory enforcement and the banking crisis have upended crypto exchange market structure. During a bear market, consolidation among exchanges is expected. However, as the SEC targets specific exchanges and leave some cutoff from USD payment rails, many exchanges have been left at a competitive disadvantage.

Additionally, Binance reintroduced fees for its most liquid BTC pairs while making the BTC-TUSD its only zero fee pair, completely shifting volume flows on crypto’s most liquid exchange. All in all, it has been a volatile month or so for exchange market structure, and this article attempts to shine a light on the trends that are happening beneath the surface.

Overall BTC Volume Trends

Zooming out and looking at aggregated volumes, crypto volume’s look encouraging, particularly when grouping by quarter. Q1 2023 was the second highest volume quarter ever.

Considering this high volume quarter occurred during a bear market, that feat is quite impressive. Volumes benefited from a safe haven narrative circulating amongst investors in BTC as the banking crisis was developing. Not only did BTC hit nearly record high volumes during both a bear market and a banking crisis, but it also happened as the SEC was tightening its grip on the crypto industry. 

To get a better understanding of volume dynamics, it’s also important to look at BTC trading volume per pair. We can see that in the last year or two, the USDT and BUSD pairs have gained the most share of volumes. What’s important to note here is that these pairs are the two largest stablecoin trading pairs on Binance, and both benefited from Binance’s zero fee program for the last 7 months. Binance’s effect on volumes is drastic, which we will explore later in this article.

BUSD and USDT’s dominance over the last couple of years has been largely at USD’s expense, as crypto investors become increasingly less reliant on fiat pairs. That trend is clear to see when zooming in on BTC-USD volumes per quarter, which paint a stark contrast to the overall quarterly volume trend earlier in this article. Q1 2023 was the lowest volume quarter for the BTC-USD pair since 2020.

Low USD volumes should come as little surprise to anyone. A combination of the banking crisis and regulatory enforcement has seen crypto firms nearly completely cutoff from all USD payment rails, with only the bigger firms able to find new banking partners. This has led to lower liquidity on USD pairs, which we discussed at depth here, as market makers become less inclined to offer liquidity on pairs on which their operations have become a lot less efficient.

Binance Effect on Volumes

So far, we have just looked at quarterly volume. The problem with that is the crypto exchange market underwent a very drastic change at the end of Q1, which is playing out in the volume figures since then. 

On the 22nd of March, Binance ended their zero fee program for most spot pairs, including their two most liquid BTC pairs, USDT and BUSD. However, the caveat to the announcement was that there was one pair, BTC-TUSD, Binance chose to hold the claim to only zero fee BTC pair on the exchange. Why they chose to do so, for such an obscure stablecoin, is a topic for another Deep Dive, and one my colleague Riyad touched on for Coindesk recently. The impact on the market can not be understated as BTC daily volumes plummeted since the announcement.

The above chart shows overall BTC daily volume across all exchanges. However, when we dig a bit deeper, it’s clear that Binance was responsible for the sharp increase in volumes. Or perhaps better stated, Binance may have been responsible for the huge increase in volumes, seeing its market share rise by 20% during the 7 months of zero fees on the exchange. Now those fees have been mostly reinstated, the volumes more accurately represent those of a bear market – not the second highest quarter figure we saw earlier.

The drastic drop off in volumes was clear on Binance. Right on cue, as soon as the exchange re-introduced fees for BTC-BUSD/USDT, volumes plummeted for both pairs. TUSD has grown from nothing to around $60mn an hour, but this is paltry compared with USDT’s average of nearly $1bn an hour before fees were re-implemented.

To hit home just how drastic an impact this decision is for the crypto market, the BTC-TUSD just became the largest Bitcoin pair in crypto. BTC-TUSD now commands 50% of total BTC volume on Binance, rising from practically 0% just a month ago before the announcement. 

For as long as zero fee trading lasts on BTC-TUSD, TUSD needs to be considered a top stablecoin in crypto, whether people like it or not. Similar to how Binance favored BUSD, TUSD is the benefactor of increased volumes now, even if the reasons why Binance granted TUSD this gift are unclear.

However, market depth data on Binance shows us that BTC-USDT is still king from a liquidity standpoint, with market makers evidently more comfortable with exposure to Tether over TUSD. The rise of TUSD liquidity is remarkable though, up again from virtually zero to around $10mn at the 1% depth level, overtaking BUSD as the second most liquid pair on Binance. BTC-USDT liquidity sits at $27mn.

Now, looking past just BTC volumes, total CEX volumes for all pairs are still mostly denominated in USDT, with 80% market share of volumes – by far the biggest stablecoin in global trading volumes. However, second spot looks TUSD’s to grab. BUSD is currently second at 10%, with TUSD at 9%, however BUSD has an expiry date next year and is being phased out by Paxos, leaving TUSD as now the next largest stablecoin by trading volume. One month ago, TUSD wasn’t remotely relevant. The Binance Effect has pushed TUSD to become the second largest stablecoin on CEXs globally in just one month.

Finally, the decision by Binance has not only altered the stablecoin market structure, but also the exchange structure. After Tether volumes plummeted on Binance since the end of zero fees, Binance lost nearly all of the 20% market share it had gained in the last 7 months during the zero fee program. Interestingly, early signs are that the market share of Binance has gone to Upbit, a Korean exchange, rather than Coinbase, who face near term regulatory uncertainty.

Conclusion

A crypto market that is less reliant on Binance is arguably a healthier market. A market that is less reliant on Tether is also arguably healthier too. The problem lies in the replacement, the newly favored stablecoin TUSD, a relatively unheard of stablecoin which has no public ties to Binance. Binance has a lot of power in the market, as evidenced by its latest zero fee move. Reintroducing fees on its BTC-USDT pair plummeted volumes for crypto’s most traded pair, which is a negative for the industry as a whole. Choosing TUSD as its next best stablecoin has catapulted the stable to the second largest stablecoin on CEX’s, and the largest on Binance, in just one month. If anyone doubted the sway Binance had in the market, they don’t now.

However, the positive side of this is that Binance have leveled the playing field with the reintroduction of fees on most pairs. That should lead to a healthier market structure and less monopolistic competition amongst exchanges. Attention now turns to how accommodative regulators will be to Binance’s biggest competitor, Coinbase. For the first time in seven months, significant exchange market share is up for grabs, with Coinbase, and in turn, the US, in line to benefit. However, with continued regulatory ambiguity, I expect most of that share to move overseas.