Why Did Bitcoin Trading Volume Decrease in 2023?

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"On average, Bitcoin transactions involving centralized exchanges generated a trading volume of about $7 billion this year, significantly lower than the figures of $13.8 billion and $11 billion in 2021 and 2022, respectively.

The decrease in Bitcoin trading volume in 2023 can be attributed to several factors. In 2023, Bitcoin is different from what it used to be. Record-low volatility, weak trading volume, and apathy among daily traders have become the norm for many who accumulated wealth in the asset class during the 2020-21 bull market. James Butterfill, Director of Research at the digital asset investment firm Coinshares, highlighted that market makers and retail traders have been exiting exchanges over the past few months. ""Some people are no longer working every day but only five days a week,"" added Butterfill. Just look at the daily trading volume in 2023. On average, Bitcoin transactions involving centralized exchanges generated a trading volume of about $7 billion, significantly lower than the figures of $13.8 billion and $11 billion in 2021 and 2022, respectively. The trading volume has significantly dropped, especially since the second quarter of 2023, reminiscent of the pre-2019-20 bull market era.

While emphasizing some interesting findings about the reasons behind the decline in trading activity, Butterfill pointed out some intriguing discoveries when explaining the fundamental reasons for the decrease in trading activity.
Reduced Demand for USD-Backed Stablecoins
As shown, the initial stages of the 2021 bull market were supported by altcoin and fiat trading. However, by the end of 2021, there was a sudden surge in demand for USD-backed stablecoins. This trend continued into 2022 and the first quarter of 2023.

The demand for stablecoins and USD increased amid the beginning of the Federal Reserve's interest rate hike cycle. In March 2022, the central bank approved its first rate hike in over three years as part of efforts to combat inflation.
Due to the Fed's interest rate hikes, foreign investors increased their demand for USD, putting significant upward pressure on the US Dollar Index (DXY). Of course, the strengthening of the USD led to global investors liquidating their Bitcoin assets in favor of stablecoins. It's worth noting that there is a strong correlation between the market share of stablecoins in Bitcoin trading volume during this period and the performance of the DXY.

However, in 2023, U.S. inflation relatively slowed down, causing a sharp decline in the US Dollar Index, and the high trading volume of stablecoins rapidly decreased, as the Federal Reserve's aggressive tightening cycle is expected to come to an end.
Binance Leading the Decline
Low Bitcoin spot trading volumes are part of the reason for the reduced trading activity in Bitcoin, but there are other noteworthy factors. Ironically, Binance, the world's largest cryptocurrency exchange, is one of the major contributors to the decline.

This decline is attributed to Binance's termination of its free trading program earlier this year. According to a previous report by Kaiko, as of mid-2023, free trading accounted for a significant portion of Binance's total trading volume, close to 66%. It's worth noting that Binance managed to capture a sizable share of the market after launching attractive initiatives, outcompeting its rivals.

Furthermore, the stricter stance taken by U.S. regulatory agencies towards cryptocurrency participants has also had an impact. Binance came under scrutiny by the U.S. Securities and Exchange Commission (SEC) in 2023, with the commission filing a lawsuit against the crypto giant in June.

Many people were excluded from the exchange due to concerns about a situation similar to FTX's, leading to a gradual exodus from Binance. Additionally, due to regulatory intervention, the trading volume of Binance USD (BUSD) significantly decreased, putting Binance in a challenging position in 2023."