Fighting the Tide

As Warren Buffett once opined “only when the tide goes out do you learn who’s been swimming naked.” It certainly feels like the waters have been receding on the crypto community over the past year. Revenues have fallen, valuations have declined, funding is harder and several firms have ceased to trade.

This downward trend is captured in the chart. We’ve aggregated daily spot trading volumes across all the major exchanges and extracted the underlying, seasonally adjusted timeseries (in red). Based on the market toll for trading (e.g. bid-ask spread, fees and so on) these volumes are a rough proxy for industry brokerage income. It’s in US dollars since that’s the currency used to settle these firms’ costs, such as salaries.

Industry income has fallen. A lot. Daily volumes were around $130bn during 2021. For the most recent quarter, this had declined to $30bn or -75%. If we are shaking out capacity with bankruptcies at 15% per year, and layoffs generate another 25% saving, then the industry is only halfway there. Other revenue sources, further layoffs, or an imminent turnaround in fortunes might be needed to plug the gap.

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This income drop has roughly two phases. The first phase, during 2022, was driven by the devaluation of BTC relative to USD. The second phase since then has been driven by a steady decrease in traded volumes. This fall is the dominant reason why the industry’s overall credit risk remains around its all-time high. The industry burn rate is up, and its access to capital is constrained.

But ending on a positive note, the tide may eventually come back in. This timeseries is both highly volatile and quite the random walk. So, projecting forward, whilst the red line shows a slight downward trend, the orange shading gives a sense of the very wide range of future possibilities. We estimate that there’s a 40% chance volumes will climb back to $80bn; there’s a 20% chance of surpassing $150bn.

Equity holders are still long a valuable option. Credit providers, as always, may pick up the downside.

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