Coin Metrics is pleased to announce the launch of block-by-block data for its popular institutional network data product, CM Network Data Pro.
This Real-Time Block-by-Block feed features 83 metrics aggregated across every block. Metrics include transactions, transfers, active addresses, fees and miner revenue, on-chain exchange flows, and more.
Today’s launch features all historical block-by-block data for Bitcoin and Ethereum available via REST API with streaming updates delayed by 1 hour.
Real-time Websocket connectivity is coming later this month and future releases will add more assets and metrics.
Whether you’re a quantitative fund, fundamental fund, custodian, exchange, or other network data user, block-by-block data gives you the sample size and timeliness needed to source signals, create actionable strategies and monitor network events and trends as they occur.
The Real-Time Block-by-Block feed complements Coin Metrics’ end-of-day Daily Macro feed (192 metrics across 70 assets) to form the leading structured network data solution for institutions.
Please reach out to Coin Metrics ([email protected]) for more information on the CM Network Data products.
We are happy to announce several enhancements to the CM Market Data WebSocket API including creation of the Order Books endpoint, faster Quotes endpoint, and minor changes for Quotes and Trades messages.
The latest documentation for the websocket feed can be accessed here. We’ve detailed the changes below.
1. Order Book endpoint
A new feed endpoint was added that gives access to level 2 Order Books data.
The feed is structured as a full order book snapshot upon connection and all subsequent messages are deltas to the snapshot.
The amount field in the Order Book update message reflects the updated amount at that price level, not a delta.
An amount field of zero in the Order Book update message indicates that the price level has been removed from the Order Book.
2. Quotes endpoint
The Quotes endpoint now leverages the same WebSocket exchanges scrapers as the Order Book endpoint instead of HTTP exchange scrapers. This means that the Quotes endpoint is now much faster (amounts vary by exchange).
Added a cmSequenceId field. The cmSequenceId field is an always growing number, but can reset on feed restart. Every message is guaranteed to have cmSequenceId equal to cmSequenceId + 1 of the previous message, so if you see increments that are higher than 1, it means that you are missing some of the updates.
Removed the scraperSequenceId and scraperSessionId as they are redundant.
3. Trades endpoint
Added a cmSequenceId field. The cmSequenceId field is an always growing number, but can reset on feed restart. Every message is guaranteed to have cmSequenceId equal to cmSequenceId + 1 of the previous message, so if you see increments that are higher than 1, it means that you are missing some of the updates.
Please reach out to Coin Metrics ([email protected]) for more information on the CM Market Data Feed.
Welcome back to this week’s edition of Coin Metrics’ State of the Network, an unbiased, focused view of the crypto market informed by our own network (on-chain) and market data.
This week’s housekeeping items:
We recently released an in-depth research report on the major Bitcoin forks (BCH and BSV). Read the full report here!
Coin Metrics is hiring! Please check out our Careers page to view the openings.
As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]
Weekly Feature
Analyzing BitMEX Net Flow Since Investigation Announcement
On July 19th, Bloomberg reported that the CFTC is conducting a probe on BitMEX. Since then, BitMEX has had an aggregate net outflow of over $145,000,000. But after a large outflow on the 19th, the net flow (i.e. the net amount sent and withdrawn) appears to have stabilized. The net flow on July 27th and 28th were $9,019,262 and -$2,131,269, respectively.
The following chart shows the daily net flow (i.e. the net amount sent and withdrawn) from BitMEX in USD since July 19th:
On July 19th, over $67,000,000 was transferred out of BitMEX. This was BitMEX’s largest daily outflow (i.e. daily withdrawal) of 2019, as seen in the below chart (July 19th is marked in red).
However, after the 19th, BitMEX’s daily outflow returned to relatively normal levels. About $12,500,000 was withdrawn from BitMEX on July 28th:
BitMEX daily inflow (i.e. amount sent to the exchange) has decreased slightly since July 19th, which is marked in red below. Daily inflow for July 27th and July 28th was $18,283,823 and $10,436,451, respectively, compared to $22,981,818 on July 19th:
BitMEX has had the largest aggregate net outflow since July 19th ($145,000,000) out of all the exchanges we track. Bitfinex came in second, with a net outflow of $71,247,801 over that same period:
BitMEX holds a little more than 171,000 BTC as of July 28th, down from a peak of 245,964.85 on March 4th, 2019:
Network Data Insights
Summary Metrics
After another market retreat, network data metrics were mostly down over the past week.
Adjusted transfer value is down in all five of the biggest crypto assets. Leading the way, XRP’s adjusted transfer value is down 55% from last week.
Active addresses also fell, down 12% for both XRP and LTC, and 18% for BCH. BTC and ETH’s daily active addresses also declined, but not as severely. BTC active addresses dropped 5% from last week, while ETH dropped 3%.
Despite a drop in most other metrics, BTC hash rate and mining revenue continue to hold steady. Mining revenue grew by 1%, to a daily average of $19.4M, while hash rate grew 7% over the past week.
Network Highlights
On July 26th, Coinbase added a new lesson to their “Earn” education platform that allowed users to earn up to $14 worth of DAI. Since then, DAI user activity has grown dramatically. On July 28th, there were 52,575 addresses that held some DAI balance, compared to 38,450 on July 25th:
Bitcoin is closing in on one billion dollars worth of cumulative transaction fees. As of July 28th, BTC has $955,797,817 of cumulative fees:
Market Data Insights
An Examination of Market Efficiency in TRON
Justin Sun, the founder of the cryptocurrency platform TRON, has been making headlines over the past week for cancelling a scheduled lunch with Warren Buffet. This sequence of events allows for a contemporary case study of market efficiency in cryptocurrency markets in which a large price decline was observed in TRON, an asset with intermediate levels of volume and liquidity.
Moreover, news was released through the various mediums and languages, including traditional financial media sources and social media channels, with varying levels of clarity. How fast are market-moving announcements priced in by market participants?
This study examines three events that occurred between July 22 and July 24 in which TRON experienced a peak-to-trough decline of 23 percent:
At 2019-07-22 21:28:00 UTC, the TRON Foundation Twitter account announces the postponement of Justin Sun’s lunch with Warren Buffet after Justin Sun falls ill with kidney stones. In the subsequent minutes, Bloomberg would write an article summarizing the contents of the tweet at 21:35:00, Justin Sun would announce on Weibo to his 1.2 million followers that he was canceling the lunch with Warren Buffet at 21:49:00, and Dovey Wan would tweet an English translation of Justin Sun’s announcement at 22:39:00.
At 2019-07-23 14:45:00 UTC, Beijing-based Caixin first reports that Justin Sun is under border control and unable to leave China. This article would be syndicated to many other Chinese media publications over the next fifteen minutes.
At 2019-07-23 17:45:00 UTC, Justin Sun tweets a picture of himself timestamped with a TRON blockchain hash in front of San Francisco’s Bay Bridge, proving to his followers that he is residing abroad. Approximately 10 minutes later, he livestreams himself with the Bay Bridge in the background.
In each case, the market reacts relatively swiftly to each announcement, regardless of the medium and language of announcement. Major markets in TRON traded in a very tight spread during this period of price discovery. This is empirical evidence that cryptocurrency markets have reached a level of maturity where market participants are able to efficiently and swiftly price in unexpected and material events.
A closer look at each of the three events reveals the limitations of the current state of market efficiency, however. Below we examine TRON’s intraday price two hours before and two hours after each event. The initial announcement of Justin Sun falling ill with kidney stones and the postponement of the lunch with Warren Buffet was not immediately acted on by market participants. Price movement in the initial hour of publication was muted, despite an article by Bloomberg and a post by Justin Sun. In fact, the price did not start to violently react until nearly an hour after publication.
As events unfolded, market efficiency increased due to widespread reporting by media sources and focused trader attention. An article published by Beijing-based Caixin in Chinese had almost immediate market impact as the story was syndicated across more media outlets. For this material event, strong market impact was felt within 15 minutes of publication.
The impact of Justin Sun’s selfie in front of San Francisco’s Bay Bridge, refuting widespread rumors that he is unable to leave China, reveals that cryptocurrency markets can be highly efficient under the proper circumstances. In this case, market impact was felt immediately.
TRON paints a picture of moderate market efficiency in cryptocurrency markets. Under normal market conditions in which news is unexpected, it can take a meaningful period of time for market participants to price in the impact of material developments. This stands in contrast to equity markets in which new developments are priced in nearly instantaneously. But as events unfold over the course of several hours or days, markets can become highly efficient in connection with increased news reporting and focused trader attention.
Engineered Price Movements Continue
Recent price movements over the past week reveal that engineered price movements designed to trigger stop losses, margin calls, and forced liquidations of leveraged positions continue with high frequency. Cryptocurrency prices have been characterized by periods of low trading activity and price movement interspersed with extremely concentrated trading designed for maximum market impact. Weekends can be targeted by traders seeking to engineer these price movements because there is strong seasonality in trading volume with much lower trading volume on Saturdays and Sundays, particularly in the morning hours in the UTC timezone.
Volatility Continues to Increase
The maximum volatility experienced by Bitcoin has continued a long-term secular decline as the asset class matures. However, despite continued increases in trading volume, market participant sophistication, and trading infrastructure, the lower range of recent volatility appears elevated relative to historical minimums.
This is driven by increased fragmentation of liquidity across trading venues (whereas in the past, trading was concentrated only on a handful of large exchanges) and the increasing popularity of margin and derivatives trading, both of which can trigger forced liquidations during times of large market movements.
Recent three-month annualized volatility is at 101%, a level rarely reached in the past five years, and continues to increase. Volatility is not far from it’s most recent local high of 135%, last reached in early 2018, immediately following the peak of the bubble.
CM Bletchley Indexes (CMBI) Insights
Correlation charts can provide interesting insight into the expected price relationship between assets. A correlation of 1 or -1 implies a perfect positive or negative relationship between two assets. Through assessing the correlation of Bletchley assets we can derive insight into how the market has been behaving.
During the bear market of 2018, generally speaking, much of crypto was correlated with Bletchley Indexes all having a correlation score >0.9 (i.e. If any of the Indexes increased, the most likely scenario was that the others increased as well, the same can be said for a decrease). However, since the beginning of the year Bitcoin has continually outperformed most of its peers. Since the Bletchley 10 is comprised ~70% of Bitcoin, the performance of the Bletchley 10 has outperformed the Bletchley 20 and Bletchley 40. Additionally, the level of correlation between them has reduced to around 0.7. This demonstrates a lower relationship between the price movement of the Bletchley 10 with the Bletchley 20 and Bletchley 40. However, more recently there is a flattening and even a slight increase in correlation, potentially signalling an improvement in short term strength for mid and low market cap assets.
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Bitcoin (BTC) has had many forks over the years, most of which have faded into obscurity. But one fork in particular has separated from the pack: Bitcoin Cash (BCH).
In August 2017, BCH forked from BTC with a goal of “fulfilling the original promise of Bitcoin as ‘Peer-to-Peer Electronic Cash.’” Proponents of BCH believed that BTC was increasingly becoming a store of value as opposed to a medium of exchange, the latter of which they saw as the original purpose of BTC. To achieve this, they argued that it was necessary to increase BTC’s block size from 1 MB to 8 MB (and eventually to 32 MB), which would allow for more transactions per block and lower transaction fees (only a limited amount of data can be added to each block — the smaller the block size the more users are incentivized to pay fees to make sure their transactions are included in a timely manner).
In contrast, opponents of the BCH fork argued that increasing block size would ultimately lead to greater centralization. Larger block sizes mean that the total size of the ledger grows at a faster rate. Each full node operator (which includes, but is not limited to, miners, merchants, and auditors) needs to be able to download and store the entire ledger. They also need to propagate blocks across the peer to peer network. If the ledger grows too large too fast it becomes increasingly difficult for average full node operators to maintain the necessary hardware and internet bandwidth, which can lead to concentration of power.
In November, 2018, a new fork split from BCH: Bitcoin Satoshi’s Vision (BSV). BSV forked from BCH with a similar goal of returning to Satoshi’s “original vision” (hence the name) of Bitcoin as peer-to-peer electronic cash. BSV expanded BCH’s scope, and further increased block size to 128 MB. Additionally, BSV eliminated the size restriction on OP_RETURN transactions, which resulted in a higher capacity for data storage on the BSV blockchain. BSV also elected not to adopt the OP_CHECKDATASIG opcode (which extends the scripting language to enable verification of signatures of arbitrary data), which was added by BCH. Ultimately, BSV aimed to “replace every payment system in the world with a better user experience, a cheaper merchant cost, and a safer level of security.”
BCH and BSV currently have the 5th and 11th highest realized cap, respectively, out of all of the assets that we compute this metric for. Realized cap is calculated by valuing each piece of the supply at the price it last moved. In other words, it prices the supply at the time holders “realized” their gains or losses. The below chart shows realized cap for BTC, BCH, and BSV on a log scale:
In this piece, we compare on-chain activity for BTC, BCH and BSV, and analyze whether the two forks have achieved their proponents’ stated goals. First, we examine if there is evidence that they are being used as “peer-to-peer electronic cash,” which we henceforth refer to as a “medium of exchange.” Next, we look at differences in block size, and analyze whether and how the increased block space is being utilized. Finally, we examine security, and analyze the effects the forks have had on metrics like hash rate and mining revenue.
Medium of Exchange Analysis
In this section we examine on-chain activity for BCH, BSV, and BTC, and analyze the degree to which these assets are being used as a medium of exchange. Although there’s no exact definition of how to measure a “medium of exchange” asset, we expect a medium of exchange asset to have relatively low fees, a high number of transactions, and large amount of value transferred. Additionally, there should be a high number of unique users actively using the network. We analyze various metrics, including adjusted transfer value, transaction count, and active addresses to gauge economic usage of each of the three assets.
Fees
BSV and BCH are both designed to be low fee blockchains. Low fees are an important aspect of medium of exchange tokens, because users are less likely to use an asset for regular payments if they are forced to pay significant fees each time.
BSV and BCH have both had a median transaction fee of $0 for a majority of 2019. BTC’s median fee dipped to as low as $0.03 in early 2019, but has mostly remained between $1 and $3 over the last three months:
But low fees can also be a long-term security risk. Miners are rewarded by a combination of block rewards and transaction fees. Fees become increasingly important as block reward issuance decreases. If total fees are too low, miners may not be incentivized to keep securing the chain after block rewards go to zero.
BTC’s total daily fees regularly top $1M, while BSV and BCH’s total fees have remained below $1,000 a day for the majority of 2019:
Transaction Count
BTC also has a lead in terms of total transaction count. But BSV and BCH are not quite as far behind. Specifically, BSV has a high number of transactions starting from November 2018 through early 2019. The following chart shows daily total transaction count for each of the three assets on a log scale:
However, a majority of BCH and BSV transactions do not transfer any value. Instead, they store data on the blockchain as part of an OP_RETURN output.
Although blockchains are predominantly used to record value transfers, they can also be used as a distributed, immutable database for non-transaction related data. Short messages (Bitcoin OP_RETURN messages must be less than 80 bytes), like “The weather in New York City on July 15 was 80 degrees,” can be written onto the blockchain and stored forever.
As a result, blockchains can be used as notaries or time stamping services (e.g. Proof of Existence). To do this, users need to create a cryptographic hash (which serves as a unique cryptographical identifier) of a document that they want to timestamp, and include that hash as part of a transaction. The transaction then serves as proof that the document existed at that time, since it is included as part of a specific block on the Bitcoin blockchain. This can then be used to disprove plagiarizers; if someone comes in at a later date and tries to claim that they created the document, the document’s original creator can use their transaction as proof that they already created the document at an earlier date.
To use the blockchain as a database, users need to be able to include arbitrary data as part of a transaction. Bitcoin added the OP_RETURN script opcode in 2013 to allow users to do this. OP_RETURN transactions can be used to record metadata on-chain, but cannot be used to effectively exchange value. Any outputs with OP_RETURN are unspendable.
BSV transactions are increasingly including OP_RETURN. The below chart shows the daily count of BSV transaction with OP_RETURN, vs BSV transactions without OP_RETURN:
As of July 1st, over 94% of daily BSV transaction include an OP_RETURN:
Any app or user can use OP_RETURN to arbitrarily record data, for a variety of different reasons. A large portion of BSV’s OP_RETURN transactions, for example, come from a weather app called “WeatherSV.” WeatherSV records and retrieves climate data on the BSV ledger. According to the WeatherSV website, a weather channel “can be activated for $5 AUD and includes approximately 142 days of hourly broadcasts, based on current fees.”
The following chart shows the percent of total BSV OP_RETURN transactions sent by individual applications. Since May, a majority of BSV OP_RETURN transactions have been sent by WeatherSV:
In fact, a majority of BSV’s overall transactions (including transactions with and without OP_RETURNS) are now coming from WeatherSV. As of July 14th, over 94% of all BSV transactions are being sent by WeatherSV:
Similarly, BCH is increasingly trending towards transactions with OP_RETURN. The following chart shows the daily count of BCH transaction with OP_RETURN, vs BCH transactions without OP_RETURN:
As of July 1st, over 67% of daily BCH transaction include an OP_RETURN:
Comparatively, only about 25% of BTC transactions include an OP_RETURN:
A majority of BTC’s OP_RETURN transactions come from Omni and Veriblock. The below chart shows OP_RETURN transaction count for each:
Relative to BTC, BSV and BCH are increasingly being used as a way to store data, as opposed to as a medium of exchange. Additionally, BCH or BSV could potentially become a data storage layer for other blockchains, as recently proposed by Ethereum’s Vitalik Buterin.
Adjusted Transfer Value
Total value transferred gives an approximation of total goods exchanged. We define value transfer as “movements of native units from one ledger entity to another distinct ledger entity.” Only transfers that are the result of a transaction and that have a positive (non-zero) value are counted. Total transfer value therefore serves as a proxy for total economic activity.
However, it’s not a perfect measure; not every value transfer is necessarily a true exchange of economic goods. For example, many transfers are due to users cycling assets between various addresses that they own.
To account for this, we use a metric which we call ‘adjusted transfer value,’ which attempts to remove non-economic activity and other artifacts like self-sends and deliberate spamming. BTC dominates in terms of total amount of value transferred. The below chart shows total adjusted transfer value for BTC, BSV, and BCH:
BSV and BCH’s adjusted transfer value have both been growing. BSV’s 2019 daily adjusted transfer recently value peaked at $144.2M on June 26th, 2019, while BCH reached its 2019 peak of $325.5M on June 27th, 2019. However, this is still orders of magnitude less than BTC, which reached $3.58B daily adjusted transfer value on June 20th, 2019.
During the month of June, BTC had over 85% of the total market share (between the three assets) of adjusted transfer value, as seen below:
Median Transfer Value
BTC’s median transfer value is also significantly higher than both BCH and BSV. While BTC’s median transfer value has fluctuated between $50 and $100 USD over the course of 2019, BSV and BCH’s median transfer value has mostly stayed between $1 and $10. BSV, in particular, has been relatively volatile over the past few months, dropping to a median transfer value of $0 on several separate days:
A larger total transfer value or median transfer value doesn’t necessarily mean that an asset is being used more as a medium of exchange while another is not; perhaps BSV is being used for small exchanges and/or microtransactions (similar to Kin, which we investigated in a previous research report), while BTC is being used to exchange more valuable goods and services. But it will be an important metric to monitor moving forwards, as it can shed more light on what these assets are actually being used for.
Active Addresses
Active addresses are a way to get an approximate measure of the total number of unique people using a crypto asset. We define “active addresses” as the count of unique addresses that were active in the network (either as a recipient or originator of a ledger change) that day. Active addresses represent a maximum number of potential daily unique users, assuming that each user needs at least one address. However, it’s important to note that many users control multiple addresses, which means the actual amount of unique users may be significantly lower than the total amount of unique addresses. Addresses can be one person to many addresses or many people to one address (like an exchange wallet).
BTC once again dominates in terms of active addresses. The below chart shows daily active addresses on a log scale. While BTC has fluctuated between 600,000 and 1,000,000 daily unique active addresses for most of 2019, BCH and BSV have remained below 100,000 and 50,000, respectively (outside of a few outliers):
Address Balance Distribution Bands (USD)
Address balance distribution bands show the count of unique addresses holding a specific amount of dollars worth of currency at the end of that day.
This metric also represents a proxy of potential unique users, again assuming that each user needs at least one address holding a non-negligible amount of value. BTC is approaching 20M unique addresses with at least $1 (and growing), while as of July 1st BCH and BSV had 5.05M and 4.19M, respectively
The below charts show the amount of unique addresses holding at least $1, $100, $1k, $10k, $100k, and $1M:
Medium of Exchange Summary
Although BSV and BCH have some of the desirable features of a medium of exchange asset, like low fees, this has not yet led to a large increase in activity as compared to BTC. Both BCH and BSV still only have a small fraction of the usage of BTC when measured by metrics like adjusted transfer value and active addresses.
Furthermore, BSV and BCH are increasingly being used as ways to store data on chain, and not as a medium of exchange. BSV, in particular, is predominantly being used as a way to record data on-chain, with over 94% of transactions containing OP_RETURN, a majority of which come from a single weather application. BSV may ultimately be used as a data storage blockchain, likely due to their removal of the size restriction on OP_RETURN transactions.
As of now, BCH and BSV are not gaining real usage over BTC as a medium of exchange. It remains to be seen whether they can take more of BTC’s market share moving forward.
Block Size Analysis
Block size was a main point of contention for both the BCH and BSV fork. After much debate, BCH increased block size to 32MB, and BSV increased it once again to 128MB. Theoretically, bigger block size allows for more transactions per block. But is this increased block size being utilized? In this section, we analyze various metrics related to block size and block fullness.
Total Block Size (Bytes)
In terms of total block size, BTC still leads both BSV and BCH, despite having a smaller maximum block size. The below chart shows total block size (the sum of the size, in bytes, of all blocks created) on a daily basis. Much of BSV’s total block size is due to the proliferation of transactions with OP_RETURN, as noted in the “medium of exchange” section.:
Mean Block Size (Bytes)
BTC also leads both BSV and BCH in terms of mean bytes per block. WhileBTC has consistently remained around an average of 1MB per block, BSV and BCH have for the most part remained well below the 1MB per block threshold. BSV has had full blocks, but has not yet had consistently full blocks over the course of a day.
Full BSV blocks also led to several orphanings. Orphan blocks are valid blocks that do not end up getting included in the main chain. Orphan blocks occur when multiple miners successfully mine a new block at approximately the same time. One of the blocks gets accepted to the blockchain, while the other is “orphaned,” and does not get accepted. This is exacerbated by larger blocks, because larger blocks take significantly longer to propagate and validate, which can lead to miners getting out of sync. In April, 2019, six consecutive BSV blocks were orphaned, which included a 128 MB block.
Both BSV and BCH have occasionally surpassed a 1MB per block daily average, as seen in the below chart (on a log scale):
Mean Transaction Size (Bytes)
Broken down by individual transactions, BSV actually has more mean bytes per transaction than both BCH and BTC. This again is most likely related to OP_RETURNS; many BSV transactions contain arbitrary data, which increases the overall transaction size:
Block Size Summary
Although both BCH and BSV have larger maximum block sizes than BTC, they have not yet utilized that extra space. For the most part, BCH and BSV’s daily average block size has remained well below BTC’s 1MB average.
Both BSV and BCH have had blocks that have exceeded BTC’s largest blocks. BSV blocks, in particular, are increasingly being filled by OP_RETURN transactions, as alluded to in the “medium of exchange” section.
BSV and BCH’s increased block size may become a factor if either gain adoption as a data storage blockchain. But it does not appear to currently be a factor in terms of being used as a medium of exchange.
Security and Mining; Impact of Hash Rate
Network security is arguably the most important consideration for any blockchain. A major security failure has the potential to destroy a crypto asset’s value in a very short period of time. In this section we analyze metrics like hash rate and total mining revenue, to measure the security of each of the three crypto networks.
Hash Rate
When blockchains go through a contentious hard fork (where the hashing algorithm stays the same for both off-shoots), their hash rate is inevitably affected. Hash rate is the speed at which proof of work computations are being completed across all miners in the network, and serves as a proxy for energy expenditure. Miners choose whether to stay on the original chain, or to leave and start mining the new forked chain. Hash rate increases as more miners join the network, and when more powerful mining hardware is used. Conversely, it decreases if miners leave the network and are not replaced by either new miners or more efficient hardware.
BTC has a huge hash rate lead over both BCH and BSV. Although BCH temporarily rivaled BTC’s hash rate in late 2017 (due to miners gaming the BCH difficult adjustment algorithm), BTC has since decisively pulled away. Furthermore, BCH’s hash rate decreased significantly when BSV forked in November 2018.
The below chart shows the daily mean daily hash rate for BTC, BCH, and BSV on a log scale. BTC’s hash rate recently peaked at 74.55M TH/s on July 5th, while BCH and BSV’s peak daily hash rate of the year (2019) so far have been 2.7M and 1.49M, respectively:
Overall, BTC still has a huge majority of hash rate compared to both BSV and BCH. As seen below, BTC has over 95% of the hash rate market share (amongst BTC, BCH, and BSV) as of July, 2019:
Mining revenue
Mining revenue is another important security metric. We define mining revenue as “the sum USD value of all miner revenue (fees plus newly issued native units, i.e. block rewards) on a given day.” Mining revenue represents the incentive pool for miners; increase in mining revenue incentivizes more miners to join the market.
The below chart shows total mining revenue of the three blockchains. BTC has millions more dollars of daily mining revenue than both BCH and BSV combined:
Transaction fees are an increasingly important part of total mining revenue. The BTC (and by extension, BCH and BSV) block reward halves every 210,000 blocks, with the next halving expected to occur in May 2020. As block rewards move towards zero, transaction fees become a larger proportion of mining revenue. This will be an especially important consideration for BCH and BSV, both of which currently have less than $500 of daily total fees.
The below chart shows daily mining revenue, on a log scale:
Rewrite Time
We also looked at the amount of time it would take BTC miners to rewrite ten days of the BCH and BSV blockchains. In this theoretical attack, all BTC miners stop mining the BTC blockchain, and instead collectively work to rewrite one of the other two chains. It would take BTC miners three hours to rewrite ten days of the BSV blockchain, and seven hours to rewrite ten days of the BCH blockchain (if BTC miners performed the same attack on BTC, it would take them approximately ten days to rewrite ten days worth of history):
On BCH, this attack is only theoretical as the developers introduced a deep reorg protection. Any fork starting deeper than 10 blocks ago has to accumulate much more work than the main chain to be accepted.
Security Summary
BTC currently has a big lead over BCH and BSV in the four metrics we used to measure security. Although BCH briefly threatened BTC’s hash rate, it has since declined, and was further hurt by a hash rate split at the time of the BSV fork. BTC has over 95% of the hash rate market share (amongst BTC, BCH, and BSV) as of July, 2019.
BTC also dominates in terms of daily mining revenue. BTC has over 30 and 60 times more daily mining revenue than BCH and BSV, respectively. This will become even more of an issue as block rewards continue to halve, as BCH and BSV’s total transaction fees are negligible compared to BTC’s.
We also found that if BTC miners were to theoretically attack BCH they could rewrite ten days of the blockchain in 7 hours. If they were instead to attack BSV, they could rewrite it in 3 hours.
Ultimately, BTC remains a much more secure blockchain than both BCH and BSV. Both are currently losing ground on BTC, and have a long way to go to catch up.
Summary
Although BSV and BCH have some of the desirable features of a medium of exchange asset, like low transaction fees, this has not yet led to a large increase in activity as compared to BTC. Both BCH and BSV still only have a small fraction of the usage of BTC when measured by metrics like adjusted transfer value and active addresses.
Furthermore, BSV and BCH are increasingly being used as ways to store data on chain (often without an associated economic transaction), and not as a medium of exchange. BSV, in particular, is predominantly being used as a way to record data on-chain, with over 94% of transactions containing OP_RETURN, a majority of which come from a single weather application. BSV may ultimately be used as a data storage blockchain, likely due to their removal of the size restriction on OP_RETURN transactions.
Additionally, although both BCH and BSV have larger maximum block sizes than BTC, they have not yet utilized that extra space. For the most part, BCH and BSV’s daily average block size has remained well below BTC’s 1MB average.
Both BSV and BCH have had blocks that have exceeded BTC’s maximum blocks. BSV blocks, in particular, are increasingly being filled by OP_RETURN transactions. BSV and BCH’s increased block size may become a factor if either gain adoption as a data storage blockchain. But it does not appear to currently be a factor in terms of being used as a medium of exchange.
Additionally, BTC currently has a big lead over BCH and BSV in the four metrics we used to measure security. BTC has over 95% of the hash rate market share (amongst BTC, BCH, and BSV) as of July, 2019.
BTC also dominates in terms of daily mining revenue. BTC has over 30 and 60 times more daily mining revenue than BCH and BSV, respectively. This will become even more of an issue as block rewards continue to halve, as BCH and BSV’s total transaction fees are negligible compared to BTC’s.
We also found that if BTC miners were to theoretically attack BCH they could rewrite ten days of the blockchain in 7 hours. If they were instead to attack BSV, they could rewrite it in 3 hours.
As of now, BCH and BSV are not gaining real usage over BTC as a medium of exchange, and are not utilizing their larger block sizes. BTC also remains a much more secure blockchain than both BCH and BSV. It remains to be seen whether BCH and BSV can take more of BTC’s market share moving forward.
Welcome back to this week’s edition of Coin Metrics’ State of the Network, an unbiased, focused view of the crypto market informed by our own network (on-chain) and market data.
This week’s housekeeping items:
Coin Metrics’ legacy Community API was deprecated on July 15th and replaced with our new Community API. If you are an existing legacy Community API user, you must switch to the new API. You can find more info here.
Coin Metrics is hiring! Please check out our Careers page to view the openings.
We have been working on an in-depth research report on the major Bitcoin forks (BCH and BSV). Keep an eye out for it next week!
As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]
Weekly Feature
The Amount of Bitcoin Untouched for At Least 5 Years is at an All-Time High
The amount of Bitcoin (BTC) supply that has been untouched (i.e. not transferred) for at least five years recently reached an all-time high. This potentially signals that BTC is increasingly becoming a store of value, as opposed to a medium of exchange. On July 19th, there were 3,847,859 BTC that had not moved since at least five years prior:
We calculate total untouched supply by looking at the total active supply (we define “active supply” as the amount of unique supply that transacted at least once over a specific time period) and subtracting it from the total current supply. Although the size of the BTC supply has been consistently growing, the percent of the overall supply of BTC that has been untouched for at least five years also recently reached a five year high of 21.6%:
Untouched supply tends to mirror price movements. The below chart shows supply that has been untouched for at least 180 days, 1 year, and 2 years, relative to BTC price USD (shown on a log scale). The untouched supply tends to peak towards the bottom of a price trough, and vice versa:
Network Data Insights
Summary Metrics
Network metrics fell across the board over the past week. ETH’s market cap is down 21% compared to last week (computed by taking the seven day average from this week and comparing it to the seven day average of the previous week), which is the biggest drop out of the largest five assets. Unsurprisingly, ETH’s adjusted transfer value also dropped significantly, down 30% from the week prior.
On a positive note, BTC’s realized cap grew slightly over the past week. Realized cap is calculated by valuing each piece of the supply at the price it last moved. In other words, it prices the supply at the time holders “realized” their gains or losses. Although BTC’s market cap fell by 11%, the amount of “realized” dollars invested in BTC grew by 1%.
Network Highlights
The number of BTC held by BitMEX continues to drop following the disclosure of a CFTC probe into the presence of US traders on the platform. As of July 21st, BitMEX’s BTC supply dropped to 174.9k, down from a peak of 246.0k on 3/4/19:
Funds have been increasingly flowing out of BitMEX since the 19th, when the news about the CFTC probe first came out. Over the course of July 19th, 20th, and 21st, $135,361,144.30 of BTC was withdrawn from BitMEX, while $38,978,107.34 flowed in. The below chart shows BitMEX’s daily BTC inflow and outflow in USD. Daily outflow is in red, and daily inflow is in blue:
Market Data Insights
Sharp Declines in Most Assets Over the Past Month
Over the past month, Bitcoin has experienced two local peaks in price: first in late June where Bitcoin reached $13,800 before experiencing a sharp correction, and another in early July where Bitcoin reached $13,000 before experiencing a similar short-lived correction under $10,000.
Although asset prices are substantially higher than the lows reached early this year, compared to Bitcoin, most assets have participated less strongly on the upside and more strongly on the downside. Over the past month, almost all assets have experienced a steep correction in price with some major assets down over 40%. During this volatile period of price discovery, Bitcoin has remained nearly unchanged, with a decline of only 2% in the same period.
Notable underperformers include EOS (-44%), Cosmos (-41%), and Cardano (-37%). Tezos (-6%), VeChain (-10%) and Binance Coin (-19%) outperformed this cohort of assets although still with a negative return.
An examination of the rolling drawdown highlights how most assets have given up a substantial portion of their gains this year and some assets are extremely close to their maximum drawdown. Binance Coin (-22%) and Bitcoin Cash SV (-26%) are notable in that they have already exceeded their prior all-time highs recently. Bitcoin’s drawdown now stands at only -46%.
Bitcoin Outperformance Driven by Regulatory, Geopolitical, and Macroeconomic Factors
Several narratives explain the strong relative outperformance in bitcoin over this period:
Although there have been few public announcements by U.S. regulators, the body of evidence that U.S. regulators are exerting more pressure on market participants continues to grow. Earlier this year, Poloniex, Bittrex, and Binance all took steps to restrict U.S. traders from participating in certain markets. In June, the SEC filed a lawsuit in connection with Kin’s token offering in a clear indication that the SEC will be unyielding in its interpretation of existing securities law. The CFTC has also begun an investigation into BitMEX and whether it has allowed U.S. investors to trade on its platform.
U.S. Treasury Secretary Mnuchin recently stated in a White House press briefing that he had “very serious concerns” about cryptocurrencies and stated that crypto businesses must comply with the Bank Secrecy Act and register with the Financial Crimes Enforcement Network. And Facebook’s launch of Libra has sparked congressional scrutiny with two separate Senate committees holding hearings about Libra and cryptocurrencies.
The net impact of these events is to drive crypto capital towards Bitcoin, which thus far has the most regulatory clarity.
Additionally, heightened geopolitical tensions and a growing acceptance that Bitcoin serves as a digital store of value and hedge in uncertain times has provided support. The recent increase in geopolitical risk has been driven primarily by the U.S.-China trade dispute, but also by the increased threat of disruption of global oil supplies in the Middle East, the resurgence of Eurozone fragmentation risk (particularly increased risk that Italy may leave), and growing tensions in Hong Kong.
The correlation between Bitcoin and gold has been particularly strong over the recent past as investors increasingly seek haven assets. Gold recently has exceeded key technical price levels and reached a six-year high.
Lastly, the macroeconomic environment has decisively shifted over the past several months in the direction of more monetary easing. Specifically, real interest rates (inflation-adjusted interest rates) have come down across the board in major developed world countries and across most durations. Pockets of weakness in forward-looking macroeconomic indicators have increased market participants’ expectations of a recession and combined with the dramatic shift in forward guidance by major central banks, interest rates have sharply declined. It now seems nearly certain that the four major central banks of the world (the Federal Reserve, the European Central Bank, the Bank of Japan, and the People’s Bank of China) are on the cusp of another monetary easing cycle. As real interest rates decline, the opportunity cost of holding non-yield producing assets like Bitcoin declines. Moreover, since many short-term interest rates around the world are close to the effective lower bound, central banks will once again have to consider the use of quantitative easing and other unconventional monetary tools that risk long-term instability.
Although the empirical evidence around Bitcoin’s reaction function to changes in future monetary policy and expectations in growth and inflation is mixed, on balance, this factor should provide further long-term support to Bitcoin prices.
Subscribe and Past Issues
If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.
Check out the Coin Metrics Blog for more in depth research and analysis.
Welcome back to this week’s edition of Coin Metrics’ State of the Network, an unbiased, focused view of the crypto market informed by our own network (on-chain) and market data.
This week’s housekeeping items:
Coin Metrics’ legacy Community API was deprecated on July 15th and replaced with our new Community API. If you are an existing legacy Community API user, you must switch to the new API. You can find more info here.
Coin Metrics is hiring! Please check out our Careers page to view the openings.
As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]
Weekly Feature
A Majority of BSV Transactions are Coming From a Weather App
Recently, we have been researching the on-chain activity of Bitcoin (BTC), Bitcoin Cash (BCH), and Bitcoin SV (BSV) as part of an upcoming report on Bitcoin forks. As part of that research, we found that over 94% of daily BSV transactions (as of July 14th) are being generated by a weather app.
BSV’s overall transaction count has been growing. The following chart shows the total daily transaction count for BTC, BCH, and BSV (on a log scale):
However we found that a majority of these transactions include OP_RETURNS.
OP_RETURN is a Bitcoin script opcode that is commonly used to write arbitrary data onto the blockchain. Any outputs with OP_RETURNS are unspendable. Therefore OP_RETURNS can be used to record metadata on-chain, but cannot be used to effectively exchange value.
BSV transactions are increasingly including OP_RETURNS. The below chart shows the daily count of BSV transaction with OP_RETURN, vs BSV transactions without OP_RETURN:
On July 14th, over 96% of BSV transactions included an OP_RETURN:
Any app or user can use OP_RETURNS to record arbitrary data on-chain, for a variety of different reasons. A large portion of BSV’s OP_RETURNS, for example, come from a weather app called “WeatherSV.” WeatherSV records and retrieves climate data on the BSV ledger. According to the WeatherSV website, a weather channel “can be activated for $5 AUD and includes approximately 142 days of hourly broadcasts, based on current fees.”
The following chart shows the percent of total BSV OP_RETURN transactions sent by individual applications. Since May, a majority of BSV OP_RETURN transactions have been sent by WeatherSV:
In fact, a majority of BSV’s overall transactions (including transactions with and without OP_RETURNS) are now coming from WeatherSV. As of July 14th, over 94% of all BSV transactions are being sent by WeatherSV:
We will be releasing more on this and comparing BSV directly to BTC and BCH in our upcoming report on Bitcoin forks.
Network Data Insights
Summary Metrics
BTC’s realized cap continued to rise over the last week (realized cap is calculated by valuing each unit of the supply at the price at the last time it moved on-chain). After hitting an all-time high on July 9th, BTC realized cap reached another all-time high of $93.55B on July 13th. Realized cap represents a proxy of the total amount of USD currently invested in an asset, so its growth represents a positive signal for the overall market.
BTC, ETH, and LTC adjusted transfer value (which we define as the USD value of the sum of native units transferred that day removing noise and certain artifacts like self-sends or deliberate spammy behavior) bounced back this week, after being down 21%, 40%, and 61%, respectively, the previous week.
Total transactions, however, fell by 6% for both BTC and ETH. This is likely what led to a decrease in daily transaction fees for each; more transactions leads to fuller blocks, which leads to higher fees.
Network Highlights
BCH and BSV’s combined hash rate as a percentage of total Bitcoin-related hash rate reached a 2019 low on July 12th. BCH and BSV combined now have 5% of the total hash rate between the three assets (BTC, BCH, and BSV).
Gemini Dollar’s (GUSD) market cap continues to plummet. It fell to $9,148,128 on July 14th, which is its lowest since November 11th, 2018:
Market Data Insights
On July 14, 2019, a sharp decline in Bitstamp’s ETH-USD was observed that resulted in a $60 spread in dollar terms (equivalent to a 25 percent spread) between Bitstamp and other major exchanges. This event has many similarities to a similar market movement on Bitstamp’s BTC-USD market on May 17, 2019. Although one possible explanation is trader error, this event is more likely another example of deliberate selling designed to trigger forced liquidations on long futures positions, margin calls on long margin positions, and stop losses on spot markets.
Bitstamp is one of three constituents in BitMEX’s Ethereum price index which is the price index that BitMEX’s Ethereum perpetual futures contract is priced on. Due to the presence of up to 100x leverage on BitMEX (and other exchanges that offer cryptocurrency futures products) and the outsized impact that futures products have on spot markets, the incentive to engineer price movements is clear. During a three minute window between 09:51 and 09:54, a total of 10,186 Ethereum was market sold, clearing the order book, and causing a large spread between Bitstamp’s market and other major exchanges. This quantity of Ethereum only amounts to approximately $2.7 million in U.S. dollar terms using prices immediately prior to the event.
Since Bitstamp’s ETH-USD is one of three constituents in BitMEX’s price index, the sudden drop in price caused roughly $17 million in notional value to be forcibly liquidated on BitMEX’s ETH-USD perpetual futures contract. More troubling is that this engineered price movement seemed to be a catalyst of a broader market sell-off which affected other assets including Bitcoin. Major BTC-USD markets simultaneously sold off during this time including forced liquidations of roughly $60 million in notional value in BitMEX’s BTC-USD perpetual futures contract. The overall market would continue to sell-off through the remainder of the day with Bitcoin momentarily reaching below $10,000.
The chain of causation is not immediately clear and there may be some confounding factors, but the following is one possible explanation. Ethereum, along with Bitcoin and Tether, consist of the three major quote-currencies across exchanges in markets for smaller assets. When there is a sharp decline in Ethereum prices, particularly on Bitstamp, smaller assets that are quoted in both Bitcoin and Ethereum present a momentary arbitrage opportunity – the asset is relatively cheap in the Ethereum-quoted market and relatively expensive in the Bitcoin-quoted market. Market participants can capitalize on this opportunity by buying Ethereum using U.S. dollars, selling it for the smaller asset, then selling it for Bitcoin, and selling Bitcoin for U.S. dollars (causing market-wide selling pressure). Since both Bitcoin and Ethereum serve the critical position of major quote-currencies in cryptocurrency markets, weakness in one asset’s U.S.-quoted market can spill over to the other.
An alternative explanation is the nature of BitMEX’s perpetual futures contracts. BitMEX is an exchange that only accepts Bitcoin deposits, and Bitcoin is the only currency that can serve as margin for all futures contracts, regardless of the underlying. BitMEX also offers two types of margin: isolated margin and cross margin. Isolated margin assigns margin to a specific position – maximum losses associated with this specific position are limited to this margin amount. Cross margin, on the other hand, utilizes the full amount of funds in the account, and this margin is shared between all positions. Cross margin is the default margin selection. Therefore, traders on BitMEX who have leveraged long positions on both the BTC and ETH perpetual futures contract with cross margin selected are susceptible to simultaneous forced liquidations in both contracts when one of the assets suddenly drops in price. These forced liquidations places selling pressure on the underlying and can in turn trigger further forced liquidations as the price declines, even if the trader has selected isolated margin.
This market movement is the first known instance that Ethereum markets were targeted. This and the similar market movement on May 17, 2019 (shown above) are perhaps the clearest indication that market participants are intentionally engineering price movements.
CM Bletchley Indexes (CMBI) Insights
After a stellar first half to the year, Bletchley Indexes retraced 10-20% this week. The whole market continues to be dominated by the movements of Bitcoin, with many alt assets experiencing small gains or slight sell-offs during a bitcoin run, and deep sell-offs during a Bitcoin retrace. This effect can best be observed when comparing the returns of indexes in USD terms and BTC terms.
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Today, Coin Metrics is happy to announce the release of CM Reference Rates Methodology v2.0. This is a substantial update to our CM Reference Rates product, and we are excited to share the details with you below.
Ongoing Hourly Rates publication: Going forward, CM Reference Rates will increase Publication Fixing Times from daily, at midnight UTC, to every hour.
Historical Hourly Rates publication: In addition to hourly publication going forward, we are publishing all historical hourly reference rates. The historical daily reference rate has been replaced by the hourly reference rate for midnight UTC. Note that while these two rates are almost always equal, in certain limited circumstances, the new 2.0 historical daily rate may differ slightly from the 1.0 rate during periods of low liquidity. In the circumstances where the prices did change, the median absolute percentage change in was 0.1 percent for both Bitcoin and Ethereum. Other assets received similar minor changes.
Human Oversight Fixings: Under the previous methodology, Coin Metrics applied both automated and human oversight to the single, published Fixing Time at midnight UTC. In the new methodology, Coin Metrics will apply automated oversight to every hourly publication but shift human oversight from the midnight UTC Fixing Time to New York Close Fixing Time at 4:00 PM EST.
Expanded Coverage Universe: Added 93 assets to provide coverage of over 200 of the top crypto assets.
Previous methodology updates can be found at the links below:
Welcome back to this week’s edition of Coin Metrics’ State of the Network, an unbiased, focused view of the crypto market informed by our own network (on-chain) and market data.
Coin Metrics is hiring! Please check out our Careers page to view the openings
As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]
Weekly Feature
Introducing the RVTC Ratio
Metrics for evaluating crypto assets are still evolving. Initially, metrics from traditional equity markets, like float adjusted market cap, quickly became the norm. However the unique features of crypto assets allow analysts and observers to build new, more insightful, valuation metrics and ratios.
Last December, Coin Metrics introduced one such crypto-native valuation metric: the Realized Capitalization. A crypto asset’s realized cap is calculated by valuing each piece of the supply at the price at the last time it moved. In other words, it prices the supply at the time holders “realized” their gains or losses. Compared to market cap, the realized cap is smoother and changes much less abruptly:
Another crypto-native valuation metric is the “thermocap” (which is a reference to the total amount of energy expended by miners), which we define as the sum of all revenue (denominated in USD) that miners earned over the lifetime of the asset. It gives an estimate of the net fiat inflow into the asset.
The idea behind this is that miners should in theory operate slightly above breakeven. Miners’ costs are all denominated in their local fiat currency, but their revenue is only in crypto assets. Therefore, they must sell most of their newly mined assets and find fiat buyers for them. This idea mostly holds for Bitcoin and Ethereum. For smaller altcoins, miners probably first exchange for Bitcoin or a stable coin, and then for fiat.
Compared to Realized Cap, or market cap, thermocap is even more smoothed out as it can only grow as fast as the asset’s monetary policy allows. For most assets, this monetary policy entails ever decreasing issuance (in native units), which also affects the growth rate of the thermocap.
Rapidly after the introduction of Realized Cap, people began to study its ratio with the market cap. Adaptive Capital wrote that the fluctuations in the MVRV (market value vs realized value) could be used to determine whether a crypto asset is underpriced (if its market cap is much below the realized cap) or overpriced (if the realized cap is way above the market cap).
Studying the ratio of the realized value and thermocap (RVTC: realized value to thermocap) also turns out to yield valuable insights, and is much smoother than the MVRV. It’s particularly effective at picking out periods when an asset’s market becomes overheated.
Each peak in the RVTC locates the high of previous bubbles (one in 2011, two in 2013 and one in 2017). For Bitcoin, the ratio has a natural tendency to go up over time, as the ever decreasing issuance limits the growth of the thermocap.
The current value of this ratio confirms the consensus view among investors and participants in Bitcoin markets: the worst of the current bear market seems to be over.
Comparing the two ratios yields more insights. One thing to notice is that MVRV seems to build up before a spike, as the market price increases, the MVRV ratio goes up automatically while the RVTC ratio spikes very rapidly as on chain movements impact the realized cap.
Looking at the past months, the MVRV went from a bottom of 0.8 to 2.2 (+175%) while the RVTC went from 6.5 to 7 (+8%). This indicates that the recent price movement could continue, despite the realized cap being very close to its ATH.
This ratio can be extended to any asset that has mining, for example, Ethereum. Applying it to forks is still an open question as their thermocap only includes post-fork issuance whereas the realized cap still encapsulates some of the pre-fork history.
For Ethereum, the early months of the RVTC are omitted as they are very high. This is due to the fact that Ethereum started not from a blank state, but with already most of its supply issued. The realized cap was therefore very high compared to the thermocap.
We will continue to monitor the RVTC ratio moving forward, and expect it to keep yielding valuable insights over the upcoming months.
Network Data Insights
Summary Metrics
Crypto network activity declined over the first week of July, after a strong surge at the end of June. BTC, BCH, LTC, and XRP active addresses (which we define as the count of unique addresses that were active in the network either as a recipient or originator of a ledger change that day) all fell at least 13% week over week. ETH’s active addresses, however, remained steady at 333.6k, despite a 6% drop in total market cap.
On a positive note, hash rate continued to rise. Leading the way, BTC’s hash rate grow an additional 7%, even though BTC mining revenue declined by 4%. The decline in mining revenue is due to a 44% decline in transaction fees (mining revenue is composed of fees plus block rewards) as well as a decline in price.
Adjusted transfer value (which we define as the USD value of the sum of native units transferred that day removing noise and certain artifacts like self-sends or deliberate spammy behavior), however, dropped significantly. ETH’s adjusted transfer value is down 40%, which is the second biggest drop behind only LTC’s 61% decline.
Network Highlights
USDT-ETH’s active addresses reached an all-time high of 10,030 on July 4th, continuing its strong growth. USDT-ETH’s growth, however, has come at the expense of USDT (Omni), as we highlighted in State of the Network Issue 3:
Similarly, Paxos (PAX) activity has also been on the rise. PAX has seen a steady increase in daily active addresses since the beginning of May. This is likely due to PAX’s addition to Blockchain.com wallets, which was officially announced on May 1st:
Market Data Insights
Larger capitalization assets continue outperformance of smaller capitalization assets over the past week with Bitcoin (+9%), Ethereum (+5%), Binance Coin (+6%) and Monero (+14%) leading the way. Smaller capitalization assets, however, have only experienced modest gains or even losses over the same period, indicating that the irrational exuberance of the past may have subsided.
Bitcoin, in particular, has been positioned to receive capital flows from two sources: as the primary on-ramp for fiat-based flows and as one of the primary quote currencies in markets for smaller assets. The slowing pace of new assets coming to market through initial exchange offerings has kept the growth in global supply muted. Capital and investor interest has remained mostly concentrated in Bitcoin:
This cycle has been quite strong relative to previous cycles with both Bitcoin and Ethereum entering their sixth consecutive month of positive returns. If this month were to close with a positive return, this would tie the longest historical streak of positive monthly returns. Six consecutive months of positive returns has only happened three times in Bitcoin’s history and once in Ethereum’s, although shorter streaks of positive and negative returns are quite common in prices, highlighting the strong momentum effect in cryptocurrency markets.
CM Bletchley Indexes (CMBI) Insights
The CM Bletchley Indexes provide further evidence that the large cap crypto assets are still leading the market with the smaller less liquid assets struggling to keep up. This is demonstrated by the Bletchley 10 outperformed the Bletchley 20 which outperformed the Bletchley 40. Further, all indexes continued to lose value against Bitcoin and Ether, which both outperformed every index for the week:
Subscribe and Past Issues
If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.
Check out the Coin Metrics Blog for more in depth research and analysis.
Welcome back to this week’s edition of Coin Metrics’ State of the Network, an unbiased, focused view of the crypto market informed by our own network (on-chain) and market data.
This week’s housekeeping items:
Coin Metrics is hiring! Please check out our Careers page to view the openings.
For those in the U.S., have a happy Fourth of July!
As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]
Weekly Feature
Litecoin Will Test the Block Reward Reduction Theory in August 2019
Litecoin’s block reward halving, anticipated to occur in August 2019, will test the effect that halvings have on prices and market cycles. Additionally, it serves as a catalyst for a series of events that affect both miner and market participant behavior.
The Litecoin issuance model is identical to Bitcoin’s except that blocks are produced every 2.5 minutes, and the total amount of Litecoin is capped at 84 million. The block reward initially started at 50 units per block in October 2011 and halved to 25 units per block in August 2015. The block reward is anticipated to be halved again to 12.5 units in August 2019.
Bitcoin has experienced two halvings and Ethereum has similarly experienced two reductions in its block reward. Although the short history and infrequent block reward reductions prevent us from drawing strong conclusions, the limited track record of a block reward reduction’s impact on prices (principally for Bitcoin) is quite strong. Because of this, an upcoming block reward reduction is often cited as a reason to be bullish about an asset’s future price appreciation. Litecoin will test this theory in the coming months.
Market Participants Price in the Impact of Block Reward Halvings
Market participants anticipate the impact of the block reward halving by bidding up prices in advance. This occurs because they understand the impact of reduced mining-led selling pressure post-halving. Market participants also position in advance because, much like technical analysis, they believe others will act similarly in response to this event, thus becoming self-fulfilling.
During Litecoin’s first block reward halving in August 2015, prices had bottomed 7 months earlier with peak-to-trough price gains over 600% — far exceeding the gains in Bitcoin and other assets. Although other assets that experienced halvings managed to sustain these price gains post-halving, the reaction in Litecoin’s prices were confounded due to suspicious on-chain activity immediately preceding the halving. Nearly 9 million Litecoin cycled through a single address, representing about 22% of all Litecoin in existence. There was widespread speculation that a Chinese ponzi scheme was behind the address, but this has not been confirmed. Transactions from this address peaked in July 2015 — the same month that Litecoin experienced a local peak in prices. Significantly, prices stemmed their declines immediately after the first halving and recovered slightly in the months that followed.
As the second halving approaches, Litecoin is one of the best performing assets in the current market cycle. Litecoin has returned +52% over the past year and is only 68% below its all-time high.
Miners Are a Continuous Source of Selling Pressure
Miners represent a significant and continuous source of selling pressure for any proof-of-work coin. Because miners operate as large-scale businesses and face recurring fiat-denominated operational costs (primarily the cost of electricity), miners must regularly sell some of their block rewards to cover costs. And since mining represents a perfectly competitive industry where profits are constantly seeking a steady state of zero economic surplus, the majority of miner block rewards must be sold for fiat. The selling pressure from miners is significant. In 2018 alone, Litecoin miner revenue totaled nearly 5.3 million native units, equivalent to $561 million in U.S. dollars.
Current annualized inflation is 9% and is anticipated to decline to 4.4% post-halving. This represents a significant drop in miner-led selling pressure. Although the actual amount of Litecoin sold by miners varies depending on how breakeven costs evolve relative to current prices and the degree that miners speculate on future prices, the maximum amount that miners can sell will be halved, leading to a large reduction in selling pressure.
Thus, even if market participants rightly anticipate the impact of block reward halvings months in advance, once the halving actually occurs, the reduced selling pressure can lead to continued increases in prices post-halving.
Block Reward Halvings Force Inefficient Miners from the Network
At the instant that the halving occurs, block rewards will be reduced by 50% but the mining difficulty will, for the moment, remain constant. For a time, miners will have to expend the same amount of electricity to mine fewer Litecoin, drastically reducing profit margins for miners as a group and raising the breakeven cost above the cost of production for certain inefficient miners.
Unprofitable miners that cannot increase their mining efficiency will eventually leave the network. Litecoin adjusts its mining difficulty every 2016 blocks (roughly once every 3.5 days) to target a block production time of 2.5 minutes. For the first year after Litecoin’s first halving, mining difficulty growth was flat or negative, culminating in a miner capitulation in mid-2016. Due to increases in mining technology, any flat or negative difficult growth is an extremely rare event.
As inefficient miners leave the network, the aggregate efficiency of remaining miners rises. Thus, the block reward halving leads to a second-order effect that supports prices. Not only do halvings reduce the maximum amount of Litecoin that can be sold, it also increases the profit margins of miners that remain in the network once inefficient miners leave the network. Since the profit margin of miners is higher, they can sell less of their Litecoin to cover fiat-denominated expenses, further reducing selling pressure.
Summary
Block reward reductions play a key element in fueling cryptocurrency market cycles. Litecoin’s upcoming block halving should serve as a catalyst for a series of events:
First, market participants bid up prices in advance of a block reward reduction because of an increase in perceived scarcity and in anticipation of other market participants acting similarly to the event.
Second, miners are a large source of continuous selling pressure. The block reward reduction reduces the maximum amount that miners can sell, reducing selling pressure going forward.
Third, the block reward reduction forces inefficient miners from the network thereby raising the aggregate efficiency and profit margins of remaining miners. Miners begin selling less block rewards and retain more as profits, further reducing selling pressure.
So far, Litecoin is following the market cycle pattern established by other major assets that have experienced block reward reductions. As the block reward halving occurs, we expect the other events to occur.
Network Data Insights
Summary Metrics
Amidst the recent price surge, network activity increased across all five of the top crypto networks over the past week. Bitcoin led with surges in mining revenue, transfer value, and daily fees (growing 26%, 38%, and 55% respectively) during its 19% rise in market cap with Ethereum seeing the next most gains. Interestingly, Bitcoin Cash saw a decline in its hash rate of 11% while Bitcoin saw a rise of 8% perhaps suggesting that some miners switched from mining Bitcoin Cash to Bitcoin during BTC’s recent price increase.
Finally, the differences between transactions and transfers between Bitcoin and Ethereum are worth highlighting. Bitcoin has a much larger number of transfers compared to transactions whereas the opposite is true for Ethereum. What’s behind this?
Batching — defined as a transaction with three or more outputs — has become increasingly common as a way for mining pools and exchanges to save on fees and increase efficiency when transferring BTC. You can read more about batching at our blog here. Batching is the likely culprit behind the disparity between the number of transactions and transfers observed for Bitcoin (as a reminder, transfers measure the movements of native units from one address to another distinct address so one transaction can include multiple transfers). Conversely, because of the rise in contracts and ERC-20 tokens, Ethereum has a much higher transaction count than transfer count (note: only ETH transfers are counted) meaning users are conducting many more transactions that don’t involve the transfer of ETH than those that do (this could include transfers of tokens or non-transfer operations).
Network Highlights
Bitcoin addresses holding at least $1 are rapidly approaching an all-time high. Bitcoin addresses holding at least $1 peaked at 22,080,252 on 1/10/18. As of 6/30/19 there are 19,568,778, up from 14,535,957 on 1/1/19:
Similarly, BTC median transaction fees are on the rise. BTC median fees reached $3.50 on 6/27/19, which is the highest they have been since February 2018. This is still far off from the all-time high of over $33 on 12/23/17, but signals that the network is starting to trend towards larger transfers:
Market Data Insights
As the second quarter of 2019 comes to a close, we review the performance of major assets over the past three months. One of the critical narratives affecting prices this quarter is increased regulatory scrutiny, particularly in the United States. Although the SEC and other national regulators have maintained a cautious tone in public statements, exchanges have already begun responding.
This quarter, Poloinex, Bittrex, Binance, and Gate.io all took steps to restrict U.S. investors from investing in a number of smaller assets, citing regulatory uncertainty. In its most public demonstration that the SEC will be unyielding in its interpretation of existing securities law, it sued Kik for illegally raising $100 million in an unregistered securities offering.
This quarter, assets that are less at risk of being deemed a security outperformed by large margins. Bitcoin led major coins with a +144% return in the quarter, although other assets like Ethereum (+99%), Litecoin (+90%), Bitcoin Cash SV (+184%), and Ethereum Classic (+53%) all saw strong gains. ZCash and Monero, assets that are slightly less regulatory-friendly due to their privacy features, achieved moderate gains.
The laggards in this quarter were smaller assets that U.S. investors cannot access in the future. Most smaller assets only achieved modest gains despite the large rally in the large cap assets. Some assets like Tezos (-12%) and Maker (-18%) even declined during the quarter.
CM Bletchley Indexes (CMBI) Insights
After three consecutive weeks of positive price action for the Bletchley Indexes, this week (Sunday midnight UTC to Sunday midnight UTC) all but one index experienced a price correction. Interestingly, with the exclusion of Bitcoin, it was the large cap assets that fared the worst this week. This is evidenced by the Bletchley 10 Even performing the worst, returning -12% for the week.
As has been discussed in previous issues, June’s performance reflects the dominance of Bitcoin throughout the month compared to its peers. Further, the monthly performance of the Bletchley 20 and Bletchley 40 demonstrate how alt assets have largely not contributed to the positive performance of the market this month.
There is an odd result in both the weekly and monthly charts, the Bletchley 20. In both cases the Even index significantly outperformed the market cap weighted index and experienced positive returns. This can be explained by the exceptional performance of Chainlink (2.1% of Bletchley 20 and 5.0% of Bletchley 20 Even), which finished the week up 100% after a Coinbase listing and the month up near 300% after many partnership announcements.
Monthly rebalancing was completed as of 01:00 UTC on 7/1, with a cut-off date of 6/28. Changes to index constituents are as follows:
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