The third metric on Chainalysis Market Intel is trade intensity.
Trade intensity compares the value of order book spot trades to exchange inflows.It is a ratio of how many times a newly received asset is traded. It is an average, as trades are not for a specific underlying asset.
The ratio shows the level of demand for an asset relative to its supply. When the ratio is high, so there are many trades per asset, there are more market participants wanting to buy than there are assets to sell. In this case the underlying asset changes hands many times, giving a high ratio.
We show three values for trade intensity on Market Intel: the median trade intensity of the 15 exchanges that had the highest inflows that day (and have spot markets for which we have data), and the 1st and 3rd quartile trade intensity of this set. As there are 15 exchanges, the 1st quartile, median, and 3rd quartile are the exchanges with the 4th, 8th and 12th highest trade intensity respectively.
We choose the top 15 exchanges as they represent the majority of the well-functioning market, and their trade volumes are generally reliable. We take the median and 1st and 3rd quartiles to show the range while excluding outliers due to exchange specific events, such as outages.
Given this selection, trade intensity shown on Market Intel reflects the general market conditions. When analysed at an exchange level, and typically for exchanges out of the top 15, trade intensity can be used to identify fake volumes, as we describe here: https://blog.chainalysis.com/reports/fake-trade-volume-cryptocurrency-exchanges
We calculate the trade volume for an exchange as the total of spot volumes for all pairs where the asset is the quote or base asset. Assets such as bitcoin are typically the base asset in fiat or stablecoin pairs, and typically the quote asset in other cryptocurrency pairs. Including both cases in trade volumes means we capture all trades of the asset.
This means that crypto-to-crypto exchanges typically have a higher trade intensity. This is because bitcoin is one side of many more crypto-to-crypto trades, which are less common on crypto-to-fiat exchanges.
Trade volume can be low if an exchange is used as a custodian, so asset inflows go into storage rather than being traded, or if the exchange facilities Over The Counter (OTC) trades, so assets flow in but their trade is not recorded on the central order book.
Across the cryptocurrencies, bitcoin has the lowest median trade intensity on average in the last 180 days, at 5.1 bitcoin traded for every bitcoin inflow. Ethereum has a 180 day median trade intensity of 8.9, for Litecoin it is 9.8, for Tether it is 13.7, and for Bitcoin Cash it is 25.3. The high trade intensity of Tether reflects its widespread use as a trading pair. However the high trade intensity of Bitcoin Cash suggests an illiquid market, as inflows are also low. That is to say that trade volumes for Bitcoin Cash are low, but inflows to supply that trading are even lower.
Recently, trade intensity jumped across cryptocurrencies on 25 July, as prices started to rise but assets had yet to flow into exchanges. Increasing trade intensity and increasing prices suggests that demand was strong so the rally would continue. Even though prices were going up, more people wanted to buy than there were assets available. Market makers could profit by buying and then immediately selling.
However, trade intensity has declined across cryptocurrencies since 25 July, except for Litecoin. This is due to large inflows to exchanges, which increased the supply of assets relative to demand. When this happened price increases started slowing, suggesting the market is finding an equilibrium. It will be interesting to see if the Litecoin trade intensity stays high, and if the Litecoin price continues to rise at the same time.
