Bitcoin and Ether do not meet the criteria of the Howey Test.

The application of the “Howey Test” may trigger the next bullish move in cryptocurrencies. The definition of what is and is not a security has become essential in the growing regulatory scrutiny targeting the sector. A public and transparent definition of what constitutes a security is a net positive for crypto markets. The Howey Test is used to determine what is and is not a security, using four prongs. If an asset meets all four prongs of the Howey Test, then it’s a security and is required to register with the SEC. The SEC has placed the securities label on a number of cryptocurrencies, putting those assets and any group facilitating their transfer under the SEC’s jurisdiction. Bitcoin and ether, the two largest cryptos in market value, appear to fall outside this growing scrutiny if applying the Howey test. The SEC conspicuously omitted both assets from any lists potentially categorizing them as securities. The Howey Test’s seeming inapplicability may ultimately provide confidence for newer investors and leave the SEC focus on a shrinking piece of the pie.

Time to Monitor Crypto Liquidity

In the crypto market, there is a lot of focus on analyzing price movements, which sometimes overlooks the importance of underlying liquidity trends. Viewing the market through this lens can help participants navigate it better and understand where we are in the cycle.

Price movements on low trading volumes usually indicate a weaker signal than those with higher trading volumes. Low volume signifies limited market participation at a specific price level, which can lead to increased price volatility and reduced market depth. In contrast, higher trading volumes reflect broader market participation that indicates a more robust consensus and provides a more reliable foundation for price movements, thus enhancing the credibility of the signal.

As shown below, crypto trading volumes have generally been declining for spot (left) and futures (right).

Some of these declines are due to changes in market structure and not investor preferences, such as the significant decrease in BTC volumes in March 2023 after Binance ended its zero-fee trading policy for some key market pairs.

Other declines reflect a shift in market preferences. With few exceptions, trading volumes of assets aside from BTC and ETH have dropped most sharply, as investors rotate to more battle-tested investment cases. Among the more prominent names, the shrinking liquidity trend has been especially evident for DOGE, Litecoin (LTC), and SOL.

Interestingly, however, these liquidity trends are showing early signs of stabilization or even reversal in some cases.

Spot trading volumes, which were hit hardest in 2023, have been slightly recovering and now stand slightly above 2022 volume lows. This is an improvement from the recent volume prints that marked the lowest levels since late 2020.

This slight recovery in spot volumes has been accompanied by market depth. Orderbook depth, another critical liquidity metric, has improved since the beginning of May for BTC and ETH (more so for the latter than the former). This recovery is noteworthy because it follows extensive reports of two top crypto liquidity providers curtailing their U.S. trading activity, which would, all else equal, imply a deterioration of order book depth instead of the improvement we have seen. Among non-BTC and non-ETH assets, the market’s focus on liquidity is related to the impact on some of the assets mentioned in the SEC charges against Coinbase and Binance. Two weeks since the news broke, trading volumes in the five most prominent assets by market capitalization (SOL, ADA, MATIC, FIL, and ATOM) have not changed significantly. The most notable shift in these assets has been how trading activity seems to have moved from the U.S. to international markets since the beginning of the year, as the chart below shows.

Bear markets tend to end not with a bang but with a whimper. Indifference and apathy are the typical defining signatures of the last stage of the bear market psychology framework –denial, anger, bargaining, depression, and acceptance –that we borrowed from psychologists.

Judging from the state of crypto market liquidity, we are deep in the fifth stage of grief territory. But some of the early signals of potential stabilization, or even a timid reversal, are interesting. Sustained recoveries in crypto market liquidity have been early confirmation signals of bull markets in the past two cycles. We are not seeing such signals just yet, but the time to start monitoring them could be now.

-David Lawant, FalconX


From blockchain Managing Editor Markets The Americas James Rubin, here’s some news worth reading:

  • THE SURGE: Bitcoin broke $30,000 for the second time this year amid bullish sentiment in the market following a number of traditional finance (TradFi) players pushing further into crypto.
  • BLACKROCK SEEKS A SPOT: The iShares unit of fund management giant BlackRock (BLK) filed paperwork Thursday afternoon with the U.S. Securities and Exchange Commission (SEC) for the formation of a spot bitcoin ( BTC ) ETF.
  • DEUTSCHE APPLICATION: Financial services giant Deutsche Bank AG has applied for regulatory permission to operate as a crypto custodian in Germany, the bank said Tuesday. The move came just days after asset management giant BlackRock filed with the SEC to create a spot bitcoin ETF. “I can confirm that we applied for the BaFin license for crypto custody,” a Deutsche Bank spokesperson told blockchain, referring to Germany’s financial regulator.
  • TOKENS AS SECURITIES?: blockchain columnist Daniel Kuhn asks “what could users do with a token that’s been labeled a ‘security?’” Kuhn writes that if a blockchain is “sufficiently decentralized,” then consumers should be able to trade the token and use its source code. “So what can a user do with a token that is a security?” Kuhn asks. “Everything you could with a token before it was declared a security.”

Edited by James Rubin.

(No translation needed as the text is already in English)