Quotes"In the beginning, fiat was the dominant quote currency. People were trading $btc to USD pairs, #eth to USD pairs, etc. Then around 2017, we started seeing #cryptoassets as the dominant quote currencies." ~Nomics CEO @ClayCollins Click To Tweet "It really is a graduation for a #cryptoasset to move from being a base currency to being a quote currency. There's very few. It's all $btc, #eth, #stablecoins & fiat." ~Nomics CEO @ClayCollins Click To Tweet "An interesting thing about #crypto is that it's attempting to disrupt traditional finance, but once people enter this new system, they don't seem to want to switch a lot. @Tether_to is a great example." ~Nomics CEO @ClayCollins Click To Tweet
Welcome to this conversation with Flippening host and Nomics.com CEO Clay Collins. The content is excerpted from Clay’s recent presentation at Consensus: Distributed, a virtual version of CoinDesk’s annual blockchain conference.
Here’s the video:
Topics Discussed In This Episode
- What is quote currency dominance?
- How stablecoins became the dominant quote currencies in crypto trading
- Why Binance offers so many BNB trading pairs
- Why exchanges like FTX list so many altcoins
- Why most aggregators end up doubling their volume data
- Why it’s important to have a sound methodology when calculating trading volume
Links Relevant To This Episode
- Nomics’ Fully Customizable Daily Crypto Newsletter
- Clay Collins
- Galen Moore
- Consensus: Distributed
- Bitcoin (BTC)
- Tether (USDT)
- Ethereum (ETH)
- Binance Coin (BNB)
- USD Coin (USDC)
- Dai (DAI)
- Sam Bankman-Fried
- Transparent Volume on Nomics.com
- 0x (ZRX)
Clay: Welcome to Flippening, the first and original podcast for full time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors, and find out just why this podcast is called Flippening.
Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion, [00:00:30] and do not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.
Mike: Hi, this is Mike, producer of the Flippening podcast. I’d like to welcome you to this episode, which is a bit of a departure. Today’s guest is Flippening host and Nomics CEO Clay Collins.
Clay recently spoke at Consensus: Distributed, a virtual, COVID-safe version of CoinDesk’s annual blockchain conference. [00:01:00] In his talk, hosted by CoinDesk Senior Research Analyst Galen Moore, Clay covered several topics including the importance of quote currency dominance and why most aggregators 2x their volume data.
We bring you that presentation, complete with slides and a video replay, which you can find at flippening.com/consensus. That’s flippening.com/consensus.
And now, before we get started, here’s Clay with a word from our sponsor.
Clay: This episode is brought to you by the good folks at nexo.io. Here’s a word from them.
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Mike: Okay, back to our regularly scheduled program. Here’s Clay’s presentation at Consensus: Distributed. Enjoy.
Clay: I want to start off with [00:03:00] talking about quote currency dominance, which is something that I think is not talked about very much. Let’s talk about quote currency dominance as an indicator. What is quote currency dominance—what we’re calling as QCD? For a given trading pair, we first have to define what a quote currency is. The quote currency is the second currency in a trading pair. This is the base currency, this is the quote currency, [00:03:30] and it generally uses the price reference. The quote currency is what—
Galen: Sorry. If I say that Bitcoin is trading at $9000, that means that the US dollar is the quote currency in that case, correct?
Clay: Right. That would be a BTC to USD trading pair with USD being the quote currency. That’s basically what quote currency is. What’s the quote currency dominance? Quote currency dominance is the percentage of overall global volume where the quote currency is what you’re looking at. If you took [00:04:00] all the markets where BTC is the quote currency, added up those volumes, and took that as a percentage of global trading volume, that would be its percentage of quote currency dominance.
This is a really interesting metric to look at. Here’s why I think it’s important, here’s my case for this. Money is referred to as a store value, a unit of account, and a means of exchange, and at least on crypto [00:04:30] exchanges, I think that quote currency dominance is the best measure of means of exchange.
Galen: In other words, this is a better measure than how many times Bitcoin is used to buy a cup of coffee or something like that.
Clay: Yeah. I mean, this is very crypto exchange centric.
Galen: Right. People are using it as the unit of account to value other currencies, and therefore, that means it becomes the medium through which trade happens on exchange.
Clay: [00:05:00] Stablecoins are an interesting example of this. I’d say if someone’s trading Tether, if that’s their quote currency, then probably the unit of account is the US dollar, but the means of exchange is Tether.
Galen: Good point.
Clay: There are some interesting things to consider here and we’ve looked a lot at quote currency dominance. At our core, we’re an infrastructure company. We don’t have a single full-time analyst on our team who [00:05:30] looks at data. We’re much more accustomed to providing this data to analysts. But we found that during periods of time, quote currency dominance, or the dominance of a currency as a quote currency has some interesting correlations. For example, this is May and June of last year, we found that Tether as a quote currency was negatively correlated with market cap, and that was statistically significant.
This [00:06:00] suggests that when people are trading across Tether pairs, often they’re looking to exit, I guess, non-stablecoin positions. There’s a lot of conclusions you could draw from this.
Galen: Basically, the overall market cap is going down, Tether’s use as quote currency is going up, is that the term?
Clay: Right. During this period, yep.
Galen: When was this again?
Clay: This is this May to June of last year. Conversely, with the United States [00:06:30] dollar, the USD’s quote currency dominance is positively correlated with a market cap during that time. In general, what we see is people tend to trade US dollars to buy Bitcoin, but once they’re in the system, if they want stability, they tend to go to a stablecoin versus exiting out fiat, maybe because those are more expensive trades.
There’s a lot to look into here yet, and we haven’t fully examined everything, but I wanted to take this at a high level [00:07:00] and speak to—we’re going to get more and more granular here over time. But if we look at fiat versus crypto quote currency dominance over time, what we find is that at the very beginning, fiat was the dominant quote currency. People were trading across BTC to USD pairs, Ethereum to USD pairs, or the Korean won or British pound, et cetera. But then somewhere [00:07:30] around 2017, we started seeing cryptoassets being the dominant quote currencies on a volume basis.
Galen: We started to think about the rise of BitMax and Binance around that time.
Galen: It’s kind of a little later than that, and certainly, that’s crypto to crypto activity really growing in volume reflected in their growth as well.
Clay: Exactly. You can follow this over time from 2013 to basically [00:08:00] now—a lot more fiat quote currency dominance, and then really, in the last couple of years, crypto quote currency is dominating for the most part. We have this in broad strokes, fiat versus crypto, but then if we decide to look at asset type versus crypto, what we see is really, this is a story in the last couple of years about stablecoins versus cryptos. You’ve got supreme periods and non-stable coins.
Galen: Stable coins versus—and [00:08:30] when you say crypto there, you mean floating crypto.
Clay: Right. Yeah, exactly. That’s not [inaudible 00:11:39]
Galen: Interesting also to me to see the infinitesimal amount that exchanges coins occupying this chart.
Clay: Yeah. I really thought that was going to be a thing.
Galen: A lot of people did.
Clay: It was a smart strategy to attempt on the part of Binance to list all these BNB pairs because [00:09:00] if you want your cryptoasset to become the unit of account or means of exchange for the space, that’s one of the fastest ways to do it, right? You’ve got the most popular exchange by volume.
Galen: They have incentives if you’re trading with the Binance Coin, there’s some reduction of fees, right?
Clay: Right. It really is a graduation for a cryptoasset to move from being a base currency to being a quote currency. Really, it’s all Bitcoin, [00:09:30] Ethereum, stablecoins, and fiat. That’s really all you see. Every once in a while, there’ll be a very specific exchange and maybe they’ll list their exchange coin, but there’s not a lot of critical math there. If we break this down even more, or we look at this on a percentage basis, again, we see in July of 2019 stablecoins were 50% of quote currency volume and we see stablecoins over time [00:10:00] eating up more and more of that quote currency dominance.
Galen: It’s just gobbled the fiat, really. The crypto is pretty much flat to my eye. It’s not a huge change there.
Clay: Yeah, it’s gobbling up fiat and—
Galen: It’s interesting because if you think of it as replacing Bitcoin in some ways, but it really is the growth of the crypto to crypto trade, and stablecoins have just captured that as it’s grown.
Clay: Yeah. If you drew a line here [00:10:30] through non-stablecoin crypto dominance, it would definitely be going down as well. Fiat would be going down and non-stablecoin crypto would be going down also. If we want to dig into this a little bit further, what we see is really the rise of Tether. Lots of people have a lot of issues with Tether. I’m not here to enter that debate, but [00:11:00] I do think there are issues with its backing, certainly in transparency around that.
Galen: Whatever your feelings on that, you can’t deny the dominance. When you put it on the chart next to Bitcoin, you hardly see any of the others besides Tether.
Clay: Yeah. We really seem to see Tether and Bitcoin growing here over time and then everything else, USDC, PACS, Korean won, other fiat currencies, and even DAI, [00:11:30] they’re really just blips on this radar. If we look at this on a percentage basis, again, that’s what we see is even Bitcoin is going down and getting gobbled up by Tether. One of the interesting things about crypto is that it’s attempting to disrupt the traditional financial system, but Lindy FX and first-mover advantages, in many cases, [00:12:00] seem to be sticking. People, once they’ve entered this new system, don’t seem to want to switch a lot, and Tether is a great example of that.
Galen: I think that’s part of the story as well, of some of the exchanges that have grown. The listing of many, many coins has been—I was talking with Sam Bankman-Fried & FTX about this a little while back, like why list all these […] coins? They don’t matter. The reason as well, if you want to trade that particular asset, that’s a good reason to switch.
Clay: [00:12:30] Yeah. If that exchange is the only place where you can trade an asset that you’re passionate about, then that’s going to lead to new account growth. On the whole, it’s hard to miss the dominance of Tether as a quote currency, it’s interesting what the data seems to show is that people tend to enter through fiat, but once they’ve stayed there, if they want to keep the stability of the USD, they’re not [00:13:00] withdrawing out to USD. That money looks like it’s staying within the ecosystem, even if there is a flight to stablecoins during unstable times.
The second thing to talk about is something that I think very few people are talking about, and that is how most aggregators are doubling reported crypto volumes. When we count volume globally, we believe that the right way to do this is to take all the [00:13:30] trading pairs or all the markets that exist. A market is a trading pair on an exchange and adds those up. All the volume that flows across each market, all those markets added up, that’s total volume.
What we’re seeing a lot of people do is an interesting, and maybe even accidental, manipulation of the data where what they do is they take all the volume for Bitcoin, then add that to all the [00:14:00] volume for Ethereum, and then add all the volume of Tether. The problem is that Tether’s volume is being included in Bitcoin’s volume, Ethereum’s volume is being involved in Bitcoin’s volume, and all of the Tether markets that include Bitcoin or Ethereum, that volume is counting both towards Ethereum and Bitcoin.
Galen: Right, you’re double-counting those BTC/ETH pairs, for example.
Galen: Wait a minute. I want to ask a fundamental question about this. It’s fascinating to me that we don’t have even a really clear picture [00:14:30] of what volume is. Even the transparent percentage that you guys provide, I’m sure significantly undercounts the real volume in the market because exchanges like [OB and OK] are excluded. But for the investor, to what extent does it actually matter? If you’re going to be sophisticated about thinking about volume, you’re probably going to develop your own ways of calculating and thinking about it. To what extent does it matter what the volume of the whole market I guess is the question.
Clay: That’s an interesting philosophical question. I think that one of the issues in this space [00:15:00] is that exchanges aren’t regulated. You could start a 0X decentralized exchange in an hour if you wanted to. You wouldn’t have liquidity, but you could start one. When you start thinking about dark pools, OTC desks, bulletin board services, and decentralized exchanges, it’s almost impossible to get a perfectly accurate number here, then add wash trading or incentivized trading, it’s hard. [00:15:30] Despite the fact that it’s really hard to come up with a great number here, the methodologies should be correct.
Mike: That concludes Clay’s presentation at Consensus: Distributed. We hope you enjoyed it. Once again, full slide deck and video replay are available at [00:16:00] flippening.com/consensus.
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To subscribe, go to news.nomics.com. Again, that’s news.nomics.com.
All right, that‘s all for this week. Stay tuned for next week’s episode. Until then, take care.
Clay: That’s it for this week. To sign-up for our free crypto investing newsletter, listen to other episodes, or get the show notes [01:13:00] from this episode, please visit flippening.com. I also invite you to check out the startup that funds this podcast, Nomics at nomics.com. Finally, if you got value from the show, the biggest thing you can do to help us out is to leave a five-star review with some comments and feedback on iTunes, Stitcher, or wherever you listen to podcasts. Thanks for listening and see you next week.