Bitcoin's Spot-to-Derivatives Trading Volume Ratio Slides to Lowest in 11 Months

The ratio between bitcoin's (BTC) daily trading volumes in spot and derivatives markets has slipped to an 11-month low, signaling renewed speculative activity in the crypto market.

The ratio has tanked by nearly 80% in three months, reaching a low of 0.117, the level last seen on May 16, 2022, according to data tracked by South Korea-based blockchain analytics firm CryptoQuant.

The decline comes amid a 70% year-to-date rise in bitcoin's price and indicates improved risk appetite in the crypto market and potential for price volatility.

The slide has been quite sharp since bitcoin first ran into crucial resistance above $28,500 on March 21. It shows speculators have recently piled into bitcoin at a faster rate relative to retail investors and long-term holders.

"The theory that the 2023 crypto rally is driven by a diversification out of the [U.S. dollar] and the associated bank credit risk might be standing on weak ground if the rally was indeed purely driven by an increase in leverage," Markus Thielen, head of research and strategy at Matrixport, said, noting the decline in the volume ratio.

"As the on-ramp from fiat into crypto has become materially more difficult with the likes of Silvergate and Signature Bank being taken over by the regulators. This would suggest that the amount of liquidity has remained the same within crypto but has been allocated to higher leverage products," Thielen added. [Silvergate Bank was closed. Signature and Silicon Valley Banks were taken over by regulators.]

The spot market is a platform for trading financial instruments for immediate delivery. Derivatives are contracts of a group of products, including futures and options with values dependent or derived from an underlying asset and involve leverage that magnifies both profits and losses. Derivatives are traded for future delivery.

The spot market activity is usually equated with long-term investors. At the same time, derivatives are considered a proxy for sophisticated traders and speculators who have ample capital supply and make risky leveraged bets to magnify returns.

UPDATE (April 5, 2023 15:00 UTC): Notes that Silvergate Bank was not taken over by regulators in the sixth paragraph.