Coin Metrics’ State of the Network: Issue 74 – Fundamentals Show Bitcoin Is Poised for Takeoff

Weekly Feature

Fundamentals Show Bitcoin Is Poised for Takeoff

By Nate Maddrey and the Coin Metrics Team

The following is an excerpt from a full-length report which has been truncated due to space limitations. Read the full report here.

On October 21st Bitcoin (BTC) broke out, rising by about $1,000 on the day. Since then it has topped $13,000 and set new 2020 highs. 

For crypto veterans this is a somewhat familiar story. BTC is notoriously volatile and has had many crazy price swings throughout its history. 

But something is different this time around. Ever since the March crypto crash, BTC has been growing in ways that we have not seen in previous bull runs. On-chain fundamentals hint that it could be poised for its biggest breakout yet. 

Source: Coin Metrics Network Data Charts

Digital Gold

BTC has had a low correlation with both gold and the U.S. dollar throughout most of its history. But things changed on March 12th. As panic over COVID-19 rapidly set in, equities around the world crashed. Crypto went down with the rest of the markets, with BTC and ETH price both dropping about 50%. Since then, BTC’s correlation with gold has been near all-time highs while it’s correlation with the dollar has been at all-time lows. 

Source: Coin Metrics Correlation Charts

BTC has often been referred to as digital gold, and evidence is increasingly supporting that claim. In the past few months public companies such as MicroStrategy and Square have announced that they are buying and holding BTC as a treasury reserve asset. Additionally, on-chain data shows that since March 12th BTC holding (aka HODLing) has increased while price has risen, signaling that BTC is increasingly being used as a store of value, similar to gold. 

One signal of on-chain holding is the percent of supply held for at least one year (or in other words, the percent of supply that has not been moved on-chain as part of a transaction). As of October 25th about 62.5% of the total BTC supply had been held for at least 1 year, which is close to all-time highs. Historically, the percent of supply unmoved for at least 1 year has peaked during periods where price has been at local lows, as seen in the below chart. 

Source: Coin Metrics Network Data Charts

BTC’s velocity is also at its lowest levels since 2011. Velocity measures the amount of times an average unit of supply has been transferred in the last year. High velocity means relatively high turnover.  A decreasing velocity suggests BTC is trending towards being used as a store of value as opposed to a medium of exchange. 

Source: Coin Metrics Network Data Charts

Increasing Holders

There also appear to be more holders than ever. The number of addresses holding at least $100 worth of BTC hit a new all-time high of 9.74M on October 22nd. A single person or entity can control multiple addresses, so this only shows an approximation of usage. But the trend suggests that the amount of BTC holders is increasing, which is a positive signal for BTC’s long-term adoption.

Source: Coin Metrics Network Data Charts

BTC supply is increasingly being moved off of centralized exchanges, and presumably held by individuals. While there are many factors involved in exchange supply, this could signal that more and more BTC investors want to hold and custody their own BTC. As the old saying goes: not your keys, not your Bitcoin.

Continue reading “Fundamentals Show Bitcoin Is Poised for Takeoff” here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) on-chain metrics were overwhelmingly in the green this past week, driven by price reaching 2020 highs. BTC active addresses increased by 5.8% week-over-week and transaction fees exploded, increasing by 82.5%. Additionally, transfer sizes are growing. Adjusted transfer value grew by 46.7% while transfer count only grew by 0.7%. 

Hash rate was the one outlier. After recently hitting new all-time highs, BTC hash rate dropped by 7.9% on the week. However the recent price and translation fees surge should incentivize more miners to join the network, driving hash rate back up in the near future. 

Network Highlights

On October 22nd BTC’s average transaction fee shot up to $6.35, eclipsing ETH’s average fee of $1.69. ETH average transaction fee was higher than BTC’s for most of September, after ETH transaction fees exploded over the summer due to the rapid rise of DeFi. But the momentum has shifted back towards BTC. 

Source: Coin Metrics Network Data Charts

Although DeFi mania has subsided, Ethereum ERC-20 tokens are still on a hot streak. ERC-20 token transactions have continued to surge in October after a strong September. The following chart shows ERC-20 token transaction count smoothed using a 7-day rolling average. 

Source: Coin Metrics Network Data Charts

Market Data Insights

There have been some shifts in market structure since OKEx suspended digital currency withdrawals 11 days ago. Traders who have funds locked in the exchange have been continuing to trade. However, there are some signs of stress that can be seen in a number of key markets. 

The distribution above is truncated to +/- 0.02% to highlight the slight shift.

Source: Coin Metrics Market Data Feed

One sign that traders are looking to reduce risk in their OKEx accounts is the recent premium given to USDT in the BTC market relative to its peers. This can be observed in the BTC-USDT market when comparing the volume weighted average of BTC’s Price in the 10 days before and after the suspension of withdrawals. The median discount given to BTC increased from -0.00089% to -0.00187%, an increase of ~110%.

Source: Coin Metrics Market Data Feed

The quarterly futures contract for BTC expiring in December also showed some temporary stress. Following the announcement, open interest declined by roughly 20%. However, when BTC saw positive price action later in the week, the spread between the futures contract and spot increased causing additional interest to be opened by traders looking to take advantage of the difference. 

Data above as of UTC close on 2020-10-25

This is notable as even though spot BTC is trading at a discount, it appears that the quarterly contract is trading at a premium to other exchanges. This is likely due to reluctance traders may have about bringing additional capital on the exchange to sell the futures contracts down. However, to traders confident in the ability to withdraw funds in the future, this may appear as a great opportunity.

CM Bletchley Indexes (CMBI) Insights

The market was once again led by the large cap assets this week, in particular Bitcoin which continued to capture headlines as more institutional investors and public companies build direct or indirect exposure to the asset. The CMBI Bitcoin Index was the best performer of the week, closing up 13.9% at $13,039.03, its best week since May. The CMBI Ethereum performed strongly as well, closing at $408.00, up 8.56% for the week. The small cap assets again performed the weakest during the week with the B40 being the only index that finished the week down.

Source: Coin Metrics CMBI

The CMBI Bitcoin Hash Rate spent most of the week up, before falling over the past 24 hours to finish the week down under 120 exahashes per second. Despite the increased difficulty last weekend which may have indicated a slowdown in hash rate throughout the week, marginal miners seemed to have found some renewed profitability with the increase in Bitcoin’s price. 

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • We’re excited to announce the new Coin Metrics mobile app. View real-time cryptoasset pricing and relevant on-chain data in a single app!  Download for free here: https://coinmetrics.io/mobile-app/

As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]

Subscribe and Past Issues

Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.

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.

Fundamentals Show Bitcoin Is Poised for Takeoff

By Nate Maddrey and the Coin Metrics Team

On October 21st Bitcoin (BTC) broke out, rising by about $1,000 on the day. Since then it has topped $13,000 and set new 2020 highs. 

For crypto veterans this is a somewhat familiar story. BTC is notoriously volatile and has had many crazy price swings throughout its history. 

But something is different this time around. Ever since the March crypto crash, BTC has been growing in ways that we have not seen in previous bull runs. On-chain fundamentals hint that it could be poised for its biggest breakout yet. 

Source: Coin Metrics Network Data Charts

Digital Gold

BTC has had a low correlation with both gold and the U.S. dollar throughout most of its history. But things changed on March 12th. As panic over COVID-19 rapidly set in, equities around the world crashed. Crypto went down with the rest of the markets, with BTC and ETH price both dropping about 50%. Since then, BTC’s correlation with gold has been near all-time highs while it’s correlation with the dollar has been at all-time lows. 

Source: Coin Metrics Correlation Charts

BTC has often been referred to as digital gold, and data is increasingly supporting that claim. In the past few months public companies such as MicroStrategy and Square have announced that they are buying and holding BTC as a treasury reserve asset. Additionally, on-chain data shows that since March 12th BTC holding (aka HODLing) has increased while price has risen, signalling that BTC is increasingly being used as a store of value, similar to gold. 

One signal of on-chain holding is the percent of supply held for at least one year (or in other words, the percent of supply that has not been moved on-chain as part of a transaction). As of October 25th about 62.5% of the total BTC supply had been held for at least 1 year, which is close to all-time highs. Historically, the percent of supply unmoved for at least 1 year has peaked during periods where price has been at local lows, as seen in the below chart. 

Source: Coin Metrics Network Data Charts

BTC’s velocity is also at its lowest levels since 2011. Velocity measures the amount of times an average unit of supply has been transferred in the last year. High velocity means relatively high turnover.  A decreasing velocity suggests BTC is trending towards being used as a store of value as opposed to a medium of exchange. 

Source: Coin Metrics Network Data Charts

Increasing Holders

There also appear to be more holders than ever. The number of addresses holding at least $100 worth of BTC hit a new all-time high of 9.74M on October 22nd. A single person or entity can control multiple addresses, so this only shows an approximation of usage. But the trend suggests that the amount of BTC holders is increasing, which is a positive signal for BTC’s long-term adoption.

Source: Coin Metrics Network Data Charts

BTC supply is increasingly being moved off of centralized exchanges, and presumably held by individuals. While there are many factors involved in exchange supply, this could signal that more and more BTC holders want to hold and custody their own BTC. As the old saying goes: not your keys, not your Bitcoin.

Source: Coin Metrics Network Data Charts

Shrinking Supply Issuance

While holding activity has been increasing, BTC’s supply inflation has been decreasing. Every four years, Bitcoin has a halving event where supply issued through block rewards is cut in half. Bitcoin’s third halving happened on May 11th, 2020. The following chart shows daily BTC issuance (green line, right-hand axis) vs price (red line, left-hand axis), using a log scale. 

Source: Coin Metrics Network Data Charts

Historically, BTC price has hit a local peak within 1.5 years of each previous halving. With holding activity increasing and the halving less than six months in the rearview, all signs are signaling that BTC is poised for takeoff. 

To view the charts used in this piece and explore many more assets and metrics check out our network data charting tool and correlation charting tool.

Coin Metrics’ State of the Network: Issue 73 – Q3 Refresh of Trusted Spot Volume Framework

Weekly Feature

Q3 Refresh of Trusted Spot Volume Framework

By Jon Geenty and the Coin Metrics Team

The following is an excerpt from a full-length report which has been truncated due to space limitations. Read the full report here.

This post is designed to be a follow up to our ‘trusted volume’ framework post (link) earlier this summer. We have made a few adjustments to take into account changes in the industry as well as reader feedback. 

In the original post, we used a three pronged approach to measure the reporting quality of an exchange’s volume. This included volume correlation between the exchange and a group of ‘benchmark’ exchanges, an analysis of key ratios including web traffic and trading volume, and a blended score to quantify more qualitative features of an exchange such as developer tools, trading rules, and KYC thresholds.

One aspect that we would like to clarify is that the purpose of this framework is to lay a foundation for more dependable asset level metrics based on volume. It is not to discredit any exchanges.  For example, this more conservative definition of trading volume can help institutions considering ETFs to more confidently gauge an asset’s daily spot trading volume for market sizing.

In this post we’ll cover a number of updates to our original framework, including: 

  • Removing potential Western bias in correlation and qualitative measures
  • Adding BitMEX to the benchmark set
  • Including volume of perpetual futures in correlation tests
  • Changing the weightings of web traffic data

Removing Western Bias

We’re constantly working to make our frameworks as objective as possible, and remove any unforeseen biases that may crop up. With that in mind, we made a few changes to make our framework less biased towards Western countries and less location sensitive. 

One of the initial changes that we made was to the correlated volume metrics. To reduce some of the seasonality differences in hourly volume that may present itself when comparing Eastern vs. Western exchanges, we have now used daily volume. This should create a more holistic image of daily trading as opposed to hourly trends they may negatively impact by exchanges located in timezone outside of the control group.

Above is a look at the correlations between the volume from exchanges and the volume from our ‘trusted’ control group for a few of the more well known assets, sorted by the correlation in the Bitcoin markets. 

Additionally, we felt that the qualitative parameter regarding a U.S. headquarter was unnecessarily bringing down the scores of exchanges that are reputable. Other parameters regarding regulatory oversight, trading rules, KYC and other compliance based features were being taken into account independently of an exchange’s legal residence. The country on an exchange’s legal documents may give some  general idea of “trading fairness” but it is not an efficient or precise measure. This change in methodology evened the qualitative scores between the U.S. and non-U.S. exchanges we reviewed.

Continue reading “Q3 Refresh of Trusted Spot Volume Framework” here…

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) usage was a little down on the week, with active addresses dropping 2.7% and transactions decreasing by 3.1%. BTC daily transaction fees also fell back down to earth, dropping by 31% week-over-week after averaging $1M a day the previous week. 

Ethereum (ETH) active addresses grew by 27% week-over-week, topping 600K per day from October 15th-18th. The last time ETH had at least 600K active addresses for at least three consecutive days was in January 2018. 

ETH’s active address growth was driven by stablecoins, as USDC and Tether also had large spikes in active addresses. USDC active addresses reached 40,112 on October 15th, which is only the second time USDC active addresses have ever topped 40K in a day.

Network Highlights

Stablecoin active addresses hit a new all-time high on October 15th. Led by surges in USDC and Tether, the total amount of stablecoin daily active addresses topped 265K. The following chart is smoothed using a 7-day rolling average. 

Source: Coin Metrics Network Data Charts

The number of addresses holding at least $1 worth of BTC topped 24M for the first time ever on October 13th. After rapid growth in August ETH is not too far behind, with 21.2M addresses holding at least $1 worth of ETH. 

Source: Coin Metrics Network Data Charts

But the gap between BTC and ETH addresses holding at least $10 is much wider. There are about 16.45M BTC addresses holding at least $10 vs about 6.51M for ETH. This means there are close to 15M ETH addresses holding between $1 and $10 compared to about 7.55M for BTC. 

Source: Coin Metrics Formula Builder

Market Data Insights

Bitcoin (BTC) and Ethereum (ETH) picked up momentum mid-week and finished the week strong, up 7% and 6% respectively. Most other mid-cap cryptoassets followed suit, with a majority finishing the week up 6-9%. 

Privacy coins Monero (XMR) and Zcash (ZEC) continued their hot streaks, with XMR up 19% and ZEC up 15% on the week. Privacy coin network metrics have also shown recent signs of momentum, with XMR and ZEC on-chain transfers both reaching two-year highs (as covered in last week’s SOTN).

CM Bletchley Indexes (CMBI) Insights

This week was mixed across the board, but it was the large cap assets that again proved to perform best during market uncertainty. This was evidenced by the relatively strong performance of the CMBI Bitcoin which closed the week at $11,450.58, up 0.8%. Interestingly, despite the CMBI 10 closing the week up 0.4%, the CMBI 10 Excluding Bitcoin finished down which indicates that most of the large cap strength is attributable to Bitcoin. The small cap assets (Bletchley 40) bore the brunt of uncertain markets this week, falling 4.8% as investors seemingly moved into large cap assets.

The CMBI Bitcoin Hash rate again reached all time highs this week, peaking at 158 exahashes per second. This was short lived however, as Bitcoin underwent a difficulty adjustment over the weekend which has since resulted in hash rate falling 20% to close the week at 125 exahashes per second. 

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • We’re excited to announce the new Coin Metrics mobile app. View real-time cryptoasset pricing and relevant on-chain data in a single app!  Download for free here: https://coinmetrics.io/mobile-app/

As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]

Subscribe and Past Issues

Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.

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.

Q3 Refresh of Trusted Spot Volume Framework

By Jon Geenty and the Coin Metrics Team

This post is designed to be a follow up to our ‘trusted volume’ framework post (link) earlier this summer. We have made a few adjustments to take into account changes in the industry as well as reader feedback. 

In the original post, we used a three pronged approach to measure the reporting quality of an exhchange’s volume. This included volume correlation between the exchange and a group of ‘benchmark’ exchanges, an analysis of key ratios including web traffic and trading volume, and a blended score to quantify more qualitative features of an exchange such as developer tools, trading rules, and KYC thresholds.

One aspect that we would like to clarify is that the purpose of this framework is to lay a foundation for more dependable asset level metrics based on volume. It is not to discredit any exchanges.  For example, this more conservative definition of trading volume can help institutions considering ETFs to more confidently gauge an asset’s daily spot trading volume for market sizing.

In this post we’ll cover a number of updates to our original framework, including: 

  • Removing potential Western bias in correlation and qualitative measures
  • Adding BitMEX to the benchmark set
  • Including volume of perpetual futures in correlation tests
  • Changing the weightings of web traffic data

Removing Western Bias

We’re constantly working to make our frameworks as objective as possible, and remove any unforeseen biases that may crop up. With that in mind, we made a few changes to make our framework less biased towards Western countries and less location sensitive. 

One of the initial changes that we made was to the correlated volume metrics. To reduce some of the seasonality differences in hourly volume that may present itself when comparing Eastern vs. Western exchanges, we have now used daily volume. This should create a more holistic image of daily trading as opposed to hourly trends they may negatively impact by exchanges located in timezone outside of the control group.

Above is a look at the correlations between the volume from exchanges and the volume from our ‘trusted’ control group for a few of the more well known assets, sorted by the correlation in the Bitcoin markets. 

Additionally, we felt that the qualitative parameter regarding a U.S. headquarter was unnecessarily bringing down the scores of exchanges that are reputable. Other parameters regarding regulatory oversight, trading rules, KYC and other compliance based features were being taken into account independently of an exchange’s legal residence. The country on an exchange’s legal documents may give some  general idea of “trading fairness” but it is not an efficient or precise measure. This change in methodology evened the qualitative scores between the U.S. and non-U.S. exchanges we reviewed.

Adding BitMEX to the Benchmark Set

Regardless of recent news (see last week’s SOTN), BitMEX has served as one of the longest running and has historically been considered the most active crypto currency derivatives exchange. Even though this analysis focuses on spot volume we believe that it is important to consider BitMEX’s volume in the benchmark group of exchanges. This addition will help to reduce bias in the analysis. Primarily it will add another data point that is not considered to be Western or U.S. centric. Secondly, it will add trading data related to liquidations and other related futures activities that will reduce any bias against exchanges that see primary activity related to futures products.

Similar to our first version, above is a series of distributions with each row representing the dispersion of the correlation between an exchange’s markets and the trusted markets.  The further right the distribution, the more closely correlated it is with the trusted market’s volume. The further to the left, the less correlated. These markets are sorted by the median correlation of all of the exchange’s qualifying markets. The ‘trusted volume’ benchmark set also includes BitMEX’s Perpetual contracts. For our test on correlation we used data from the entire month of September.

Related to the addition of BitMEX’s perpetual volume was the addition of the trading volume for perpetual contracts listed on our sample of exchanges. This alteration in the methodology was put into place to better represent the activity on those exchanges with respect to the broader set. For example, an exchange that supports both spot and futures trading may see a majority of trading volume occur in their futures market and only a fraction within their spot markets. Comparing just the spot volume to the benchmark set that includes perpetual contract volume would not be fairly representing the venue.

Again, in order to make this measurement better represent the exchanges’ overall volumes we create an aggregated volume weighted correlation based on the relative volumes of the exchanges’ markets (in simpler terms: a volume weighted correlation). This was accomplished by taking the volumes for the month of September 2020 and calculating the percentage that each base asset made up of the exchange’s total qualified volume. The result is the table above.

Web Traffic

We have continued to use web traffic data in our analysis. Similar to last time, we used third party data on web traffic from Alexa and SimilarWeb. Page visit metrics from these providers will be our proxy for exchange customers. 

A small change that we have made is to rely less on the page view data. This data was reducing the scores of exchanges that offered margin trading, where traders would be able to trade greater amounts than usual due to the use of leverage. 

We have modified this test to be more forgiving on exchanges that may fall outside of the “normal” ratios due to margin access. An exchange now only needs to have either less than $50 of volume per pageview or less than $250 volume per visit.

Room for Improvement

A known gap in our methodology that we are working to address is the addition of a liquidity aspect. We are currently collecting a wide range of orderbook data from hundreds of markets across the exchanges that we cover. Our initial assumption is that volume is largely dependent on liquidity and that this dataset will allow us a much clearer understanding of the relationship between the two. We may also consider the correlation between market liquidity across exchanges in addition to volume correlation.

Conclusion

With the updated framework we are able to add five new exchanges: FTX, LBank, Liquid, The Rock Trading, and Upbit. This does not mean that those that did not pass have fake volume, just that they did not meet our parameters to be included. 

The entire list as of Q3 2020 is as follows:

  • Binance and Binance.us
  • Bitbank
  • Bitfinex
  • Bitflyer
  • Bitstamp
  • Bittrex
  • CEX.io
  • Coinbase
  • FTX (New)
  • Gate.io
  • Gemini
  • itBit
  • Kraken
  • Lbank (New)
  • Liquid (New)
  • Poloniex
  • The Rock Trading (New)
  • UpBit (New)

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Since 2017, Coin Metrics has been the leading provider of on-chain cryptoasset data.  We run over 100  blockchain full nodes, collect their underlying data and then calculate a curated set of on-chain metrics to help our users better understand cryptonetworks. Tens of thousands of users across the globe access this data through our community and professional offerings. 

COMING SOON:

Coin Metrics’ new offering, ATLAS™ search, was designed to grant users access to a universe of blockchains via a single blockchain explorer API.  ATLAS™ search provides a uniform way to query raw data from several cryptonetworks using our Universal Blockchain Data Model (UBDM); a novel approach that translates complex blockchain data into the universal double-entry accounting format. In a world where each blockchain features unique characteristics,  ATLAS™ is the bridge that standardizes and simplifies access to the data of any blockchain.

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Of course, our on-chain metrics will continue to be available, for users who prefer blockchain network data in an aggregated format.  In fact, we have lot of new metrics in the works. Visit our site for more information.


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Coin Metrics’ State of the Network: Issue 72 – Analyzing the Fallout from the BitMEX Lawsuits

Weekly Feature

Analyzing the Fallout from the BitMEX Lawsuits

By Antoine Le CalvezTimo, and the Coin Metrics Team

On October 1st, the CFTC and Department of Justice jointly announced charges filed against BitMEX’s owners and operators. The CFTC is alleging they were illegally operating a derivatives trading platform and the Department of Justice that they violated various parts of the Bank Secrecy Act. BitMEX’s CTO, Samuel Reed, was arrested and released on a $5M bail the same day in Massachusetts.

The red line represents when the filings were made public

In this feature, we’ll look at the impact of these filings on BitMEX and the broader cryptocurrency ecosystem from different perspectives.

Not Your Keys, Not Your Coins

BitMEX stands out amongst cryptocurrency exchanges by how it stores its bitcoin. Instead of using the common hot/cold wallets structure, all the coins are held in cold storage. Withdrawals are processed once a day, usually around 1 PM UTC, and signed by 2 of the 3 BitMEX founders. A blog post by BitMEX details how this works and plays together with their broader security efforts.

From a technical point of view, each BitMEX address is a multisignature address that requires 3-of-4 keys to spend from. Three of the four keys are owned by one founder each. The fourth key is “mined” to ensure that each BitMEX’s addresses starts with a vanity prefix (either 3BMEX or 3BiTMEX). The latter key, also called “vanity key”, always signs the withdrawal transactions; then only 2 of the 3 founders are required to approve a withdrawal (it could also be that all 3 founders approve and the vanity key doesn’t sign, but this hasn’t happened in the last months we observed).

While the identities of the founders are known, it is not trivial to associate the public keys with its real life owner. By collecting the recent BitMEX withdrawals and identifying which keys signed for which withdrawal batch, we can make an educated guess which public key belongs to which founder.

Activity map showing which key signed for which withdrawal batch. The four additional off-cycle withdrawal batches not at 1 PM UTC are highlighted in red.

Most interestingly, key A didn’t sign on Oct 1st, when Samuel Reed was in custody. It has signed twice since the publication of the filings against BitMEX, both times presumably after Samuel Reed was released on bail. We further presume that key B belongs to Ben Delo and key C to Arthur Hayes.

The fact that all three founder keys have signed following the publication of the filings is reassuring for traders with funds on BitMEX. Had Mr Reed not been released on bail, any incapacitation of any of the two remaining founders could have meant a freeze of all the funds on the platform.

Samuel Reed’s bail prevents him from contacting the co-defendants without counsel being present. However, since his release on Oct 1st, all founder keys signed withdrawals. While Bitcoin multisignature is technically a non-interactive protocol, signing BitMEX withdrawals probably requires some level of interaction between the founders involved.

What remains unknown is whether the founder keys changed ownership since the publication of the filings. The fact that the 3 original founders stepped down from their executive roles at 100x, the parent company of BitMEX, seem to indicate such a transition has happened, or will happen soon.

Impact on BitMEX’s Wallet

Right after the publication of the filings and the arrest of BitMEX’s CTO, thousands of users withdrew funds from the platform. BitMEX also broke from its traditional once-a-day withdrawal processing and did 6 batches in 2 days to reassure traders that the funds were “SAFU”.

Using our database of tagged addresses, we can dig deeper into the direct destination of these withdrawals:

Platforms with products similar to BitMEX (Binance, Okex, Deribit, and Huobi) feature prominently in the list of destinations, along with traditional exchanges like Gemini, Bitstamp, et al.

Impact on Derivatives Market

BitMEX ruled for many years as Bitcoin’s emergent derivatives market. Its perpetual inverse swap saw trillions of dollars in volume and generated hundreds of millions in trading fees. But in 2020 it’s dominant position in the market became challenged by many competitors and BitMEX’s troubles in handling the March 12th crash marked its peak.

The recent filings are another blow to BitMEX’s standing:

While BitMEX’s competitors have gained market share, it remains to be seen whether the CFTC and DoJ will stop at BitMEX or continue going down the list of unregistered exchanges.

Conclusion

As indicated by the market’s tepid reaction to the publication of the CFTC and DoJ’s filing, BitMEX’s legal troubles were predictable. Other recent events like John McAfee’s arrest show that the US legal system is starting to crack down on the cryptocurrency ecosystem.

With only one of the three founders arrested, BitMEX avoided a solvency problem and managed to process the numerous withdrawal requests in a timely manner. As many precedents, like MtGox or QuadrigaCX, show, it is just a question of time until the arrest or death of crypto custodians triggers another solvency problem. 

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) and Ethereum (ETH) network metrics had relatively stable weeks, apart from large swings in transaction fees. ETH fees continued to plummet following the unprecedented DeFi-driven growth over the summer. BTC fees went in the opposite direction, growing by 15.2% week-over-week and averaging about $1M per day.

Ethereum hash rate hit a new all-time high of 254.36 TH/s on October 6th. Ethereum hash rate has been growing since mid-July thanks to the rise of DeFi. The large increase in fees meant more revenue for miners, which incentivized more miners to join the network and caused hash rate to grow. 

USDC also had a big week with supply growing by about 200M to a total of over 2.8B. USDC continues to grow faster than Tether, which was relatively flat this past week. However, Tether still dominates in terms of usage, with active addresses growing an additional 9.5% week-over-week compared to a 7.8% drop for USDC. 

Network Highlights

Privacy coins are back on the rise. Monero’s (XMR) market cap just hit its highest level since September, 2018. And XMR on-chain activity is surging as well. XMR transfer count is just shy of setting new all-time highs.

The following charts are smoothed using 7-day rolling averages. 

Source: Coin Metrics Network Data Charts

Zcash (ZEC) transfers are also on the rise. Part of ZEC’s growth may be related to DeFi – similar to wrapped BTC and wrapped ETH, wrapped ZEC has been growing since June. ZEC transfers have been growing since mid-July, which coincides with the rise of DeFi. 

Source: Coin Metrics Network Data Charts

Market Data Insights

Bitcoin closed this past week with a weekly candle of up $686.77 or ~6.4%. This was well above the three year average weekly candle of 1.1% and median of 0.79%. 

The main news the market is attributing the price action to is Square’s announcement of around a $50m purchase of Bitcoin. However, this is unlikely to be the full reason as Microstrategy’s $500m purchase did not have an impact of this magnitude. This move appears to be relatively healthy, as it was still within the standard deviation of the weekly candles in the past three years.

Source: Coin Metrics Market Data Feed

Ethereum also saw a bigger than normal weekly gain of $21.48 or ~ 6.0%. This is much larger than the three year average of 1.1% and median of 1.8% but also still within the standard deviation. 

Source: Coin Metrics Market Data Feed

CM Bletchley Indexes (CMBI) Insights

A very strong week for all CMBI and Bletchley Indexes led by the large cap assets. There was a strong level of correlation in the markets this week with the large cap assets moving in lock step while some of the mid and small cap assets tended to lag. The CMBI Bitcoin Performed the best of the CMBI Indexes closing the week at $11,365.32, up 6.4%. The CMBI Ethereum also closed the week strong at $373.85, up 6.1%.

The large cap indexes, CMBI 10 and Bletchley 10, also performed strongly and mostly in line with Bitcoin, returning 6.4% and 6.9% respectively. The difference in returns can largely be attributed to the different close time of the indexes (CMBI close is at 4pm NY Time, Bletchley close is at midnight UTC). The other difference is the methodologies, where CMBI utilized free float and a stricter eligibility criteria for asset selection.

Source: Coin Metrics CMBI

The CMBI Bitcoin Hash Rate again broke all time highs this week, peaking mid week at 153 EH per second before closing the week down 3% at 137 EH per second. Despite hash rate closing down, the CMBI Bitcoin Observed Work closed the week up 1.7%, with an implied 84,028 zetahashes being conducted during the week.

More performance information on each of the CMBI products can be found in our factsheets:

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • We’re excited to announce the new Coin Metrics mobile app. View real-time cryptoasset pricing and relevant on-chain data in a single app!  Download for free here: https://coinmetrics.io/mobile-app/

As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]

Subscribe and Past Issues

Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.

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.

Analyzing the Fallout from the BitMEX Lawsuits

By Antoine Le Calvez, Timo, and the Coin Metrics Team

On October 1st, the CFTC and Department of Justice jointly announced charges filed against BitMEX’s owners and operators. The CFTC is alleging they were illegally operating a derivatives trading platform and the Department of Justice that they violated various parts of the Bank Secrecy Act. BitMEX’s CTO, Samuel Reed, was arrested and released on a $5M bail the same day in Massachusetts.

The red line represents when the filings were made public

In this feature, we’ll look at the impact of these filings on BitMEX and the broader cryptocurrency ecosystem from different perspectives.

Not Your Keys, Not Your Coins

BitMEX stands out amongst cryptocurrency exchanges by how it stores its bitcoin. Instead of using the common hot/cold wallets structure, all the coins are held in cold storage. Withdrawals are processed once a day, usually around 1 PM UTC, and signed by 2 of the 3 BitMEX founders. A blog post by BitMEX details how this works and plays together with their broader security efforts.

From a technical point of view, each BitMEX address is a multisignature address that requires 3-of-4 keys to spend from. Three of the four keys are owned by one founder each. The fourth key is “mined” to ensure that each BitMEX’s addresses starts with a vanity prefix (either 3BMEX or 3BiTMEX). The latter key, also called “vanity key”, always signs the withdrawal transactions; then only 2 of the 3 founders are required to approve a withdrawal (it could also be that all 3 founders approve and the vanity key doesn’t sign, but this hasn’t happened in the last months we observed).

While the identities of the founders are known, it is not trivial to associate the public keys with its real life owner. By collecting the recent BitMEX withdrawals and identifying which keys signed for which withdrawal batch, we can make an educated guess which public key belongs to which founder.

Activity map showing which key signed for which withdrawal batch. The four additional off-cycle withdrawal batches not at 1 PM UTC are highlighted in red.

Most interestingly, key A didn’t sign on Oct 1st, when Samuel Reed was in custody. It has signed twice since the publication of the filings against BitMEX, both times presumably after Samuel Reed was released on bail. We further presume that key B belongs to Ben Delo and key C to Arthur Hayes.

The fact that all three founder keys have signed following the publication of the filings is reassuring for traders with funds on BitMEX. Had Mr Reed not been released on bail, any incapacitation of any of the two remaining founders could have meant a freeze of all the funds on the platform.

Samuel Reed’s bail prevents him from contacting the co-defendants without counsel being present. However, since his release on Oct 1st, all founder keys signed withdrawals. While Bitcoin multisignature is technically a non-interactive protocol, signing BitMEX withdrawals probably requires some level of interaction between the founders involved.

What remains unknown is whether the founder keys changed ownership since the publication of the filings. The fact that the 3 original founders stepped down from their executive roles at 100x, the parent company of BitMEX, seem to indicate such a transition has happened, or will happen soon.

Impact on BitMEX’s Wallet

Right after the publication of the filings and the arrest of BitMEX’s CTO, thousands of users withdrew funds from the platform. BitMEX also broke from its traditional once-a-day withdrawal processing and did 6 batches in 2 days to reassure traders that the funds were “SAFU”.

Using our database of tagged addresses, we can dig deeper into the direct destination of these withdrawals:

Platforms with products similar to BitMEX (Binance, Okex, Deribit, and Huobi) feature prominently in the list of destinations, along with traditional exchanges like Gemini, Bitstamp, et al.

Impact on Derivatives Market

BitMEX ruled for many years as Bitcoin’s emergent derivatives market. Its perpetual inverse swap saw trillions of dollars in volume and generated hundreds of millions in trading fees. But in 2020 it’s dominant position in the market became challenged by many competitors and BitMEX’s troubles in handling the March 12th crash marked its peak.

The recent filings are another blow to BitMEX’s standing:

While BitMEX’s competitors have gained market share, it remains to be seen whether the CFTC and DoJ will stop at BitMEX or continue going down the list of unregistered exchanges.

Conclusion

As indicated by the market’s tepid reaction to the publication of the CFTC and DoJ’s filing, BitMEX’s legal troubles were predictable. Other recent events like John McAfee’s arrest show that the US legal system is starting to crack down on the cryptocurrency ecosystem.

With only one of the three founders arrested, BitMEX avoided a solvency problem and managed to process the numerous withdrawal requests in a timely manner. As many precedents, like MtGox or QuadrigaCX, show, it is just a question of time until the arrest or death of crypto custodians triggers another solvency problem. 

Coin Metrics brings even more functionality to the mobile apps

Coin Metrics’s mobile apps just released a ton of new features.  

So, what’s new?

  • Chart Cryptoasset On-Chain Data:  View our best-in-class network data, including Realized Market Cap, MVRV (market cap/realized cap), CM’s Free Float Supply, Active Address Count, 1 Year Active Supply, Transaction Count, Total Fees, etc. at a point-in-time and overtime via our charting functionality.
  • View Coin Metrics Bletchley Indexes:  Our ten CMBI indexes, including our multi-asset (CMBI10) and hashrate and observed work indexes are available in our app.  See levels in real-time and view key statistics like performance, volatility and Sharpe ratios.
  • Tag/View Favorites:  Only interested in a few cryptoassets, no problem.  Tag your favorites or filter your view to include only the cryptoassets you most care about.

And, Many Other New Features:  Choose Market Cap or Realized Cap for your default asset sort, sort assets via header, toggle to dark mode in-app, and see greater granularity in charted pricing (Reference Rate) data.

Available on the App Store and Google Play.  

Learn more at https://coinmetrics.io/mobile-app.


ABOUT COIN METRICS

Coin Metrics is a leading provider of transparent and actionable cryptoasset market and network data. Coin Metrics delivers mature data across multiple formats to various industry stakeholders, including financial enterprises, funds, media and research outlets, and data/application providers. Coin Metrics’ data empowers its clients and the public to better understand, value, use, and ultimately steward public crypto networks.

Q3 2020 Supply Transparency Report

The Supply Transparency Report brings visibility to the actions of the key categories of a cryptoasset’s holders that are deemed to restrict supply from the market, as defined in the CMBI Float Adjustment Methodology.

The current universe of cryptoassets that are covered in this report is reflective of those that Coin Metrics administers Free Float Supply values for, which includes: 0x, Basic Attention Token, Bitcoin, Bitcoin Cash, Bitcoin Gold, Bitcoin SV, Cardano, Chainlink, Crypto.com Coin, DASH, Decred, Digibyte, Dogecoin, Ethereum, Ethereum Classic, FTX Token, Huobi Token, Litecoin, MakerDAO, NEO, Stellar, Tezos, XRP and Zcash.

Note, for all of the monthly and quarterly U.S. Dollar values herein, an approximate aggregate quarterly value has been calculated by taking the net supply added or removed each day and multiplying it by that specific date’s Coin Metrics End of Day (00:00 UTC) Reference Rate.

The additional net value added to cryptoasset markets through Q3 2020 was $1.17B, down 14% from the previous quarter ($1.36B). The largest contributors to Q3’s increase in value can be attributed to Bitcoin ($402M), XRP ($304M) and NEO ($113M). 

The cryptoassets with the highest free float annual inflation rate over the last year were FTX Coin (256%), Crypto.com Coin (142%), Zcash (41%) and 0x (24%). Over the same period, Huobi Token (-22%), MakerDAO (-4.8%), Dogecoin (0.3%) and Bitcoin (1.9%) had the lowest annual inflation rate.

Note: In March 2020, Huobi conducted an irregular burn of 54.8M HT from the Investor Protection Fund

The net value of cryptoassets that moved outside of identified Foundation/Company controlled addresses was $590M during Q3 2020, down from $743M during the previous quarter (21% or $153M less). The primary reason for the reduction this quarter is attributed to the reduction in transfers from Company owned Crypto.com Coin addresses, which moved $113M in Q3 compared to $459M in Q2. The largest net changes to Foundation/Company controlled addresses in Q3 2020 were XRP ($199M), Crypto.com Coin ($113M), NEO ($111M) and FTX Coin ($59M).

Note: Company/Foundation asset sales can be conducted for many reasons, including but not limited to operating expenses, team member/advisor vesting, strategic long term partnership/BD, scheduled and unscheduled token burns, strategic investments and treasury management. Companies/Foundations may also behave differently, either choosing to issue large volumes infrequently or issue on an as needs basis. Further, movement of assets from Foundation/Company controlled addresses does not necessarily mean assets have been sold (e.g. distribution to team members, burns, strategic placements, community incentive programs, etc).

Note 1: In March 2020, Huobi Foundation burned $422M worth of HT
Note 2: In November 2019, Stellar Foundation burned $4.14B worth of XLM

The net value of cryptoassets that moved outside of identified Company Team addresses was $77.3M during Q3 2020, up a staggering $67.9M from the previous quarter (724%). However, during the Q2 there were $84.6M CRO deposited into Crypto.com Coin team addresses, without which the net value of cryptoassets that moved outside of Company Team controlled addresses would have been $161.8M, up from $76.5M in Q2 if you also exclude the Crypto.com Coin team address deposits of $67.1M. The largest net changes to Team controlled addresses in Q3 2020 were XRP ($105M), Chainlink ($58.8M), Ethereum ($4.5M) and Crypto.com Coin (-$84.6M).

Note: Movement out of Team controlled addresses does not necessarily mean assets have been sold, but rather can be an indication of activity (e.g. movement to passive yield generating tools such as Compound).

Free Float Supply Overview

0x (ZRX)

During Q3 2020, ZRX Foundation transactions resulted in a total of 44.9M ZRX leaving company controlled addresses. This value was largely in line with Q1 and Q2, where ZRX that left foundation controlled addresses was 46.1M and 39.8M respectively. Similar to Q2, whilst this value left foundation addresses, a significant portion (30M) was sent to the Compound smart contracts to presumably earn yield on treasury assets (observed here and here).

Identified core team member/contributor addresses significantly reduced their activity in Q3, with net transactions resulting in a reduction of only 304K ZRX. By contrast, during the first two quarters, team member activity resulted in 10.6M ZRX being removed from team member addresses. 

The net impact of Foundation and Team ZRX transactions was an increase to the Free Float Supply of 45.2M ZRX, a slight decrease from the previous quarter (45.9M) but a significant increase from the same quarter in 2019 (1.8M).

Basic Attention Token (BAT)

Throughout Q3, the rate of Basic Attention Token free float inflation continued to increase, with 37.8M new BAT entering circulation. This quarter’s net outflows of restricted supply represent the fourth consecutive increase and represent over twice the amount transacted from restricted addresses in Q3 2019 (17.0M BAT). 

The majority of restricted supply that entered the market can be attributed to the ‘BAT: UPG Reserve’, which withdrew a total of 34.7M BAT, sending the majority to Uphold.com tagged addresses. This is the most foundation addresses have withdrawn since Q4 2018. By contrast, identified team addresses activity was the lowest this year with the net outflows of 3.0M BAT, down from 7.1M BAT in Q2 and 4.5M BAT in Q1.

Bitcoin (BTC)

Q3 2020 was the first quarter where the full impacts of the recent Bitcoin halving can be observed from the new supply that came into the market through mining related activities. During the quarter, only 85,256 new BTC was mined, down from 121K in Q2 and 164K in Q1.

Despite 85.3K BTC entering the market, Bitcoin’s Free Float Supply only increased 38.8K, bringing the total free float supply to 14.36M at the end of the quarter. 

The reason for this is that during Q3, 46,488 BTC became supply that is considered restricted to markets as defined in the CMBI Adjusted Free Float Methodology. The underlying reason for this is that UTXOs that consisted of 46,488 BTC aged over 5 years. Under the methodology, these are now considered to be restricted from markets and belonging to either long term strategic investors, or lost. 

Bitcoin Cash (BCH)

Bitcoin Cash had its first full quarter where the full impacts of the recent Bitcoin Cash halving can be observed. During the quarter, 82.6M BCH entered free float supply through mining related activities. 

Bitcoin Cash’s free float supply increased 116.0K through Q3, which also represents 33.4K BCH that became activated for the first time ever since the Bitcoin/Bitcoin Cash fork in August 2017. This represents a relatively small amount of BCH activated, down from a quarterly average of 68.0K over the last year.

Bitcoin Gold (BTG)

Bitcoin Gold Free Float increased the most of all Bitcoin forks, rising 261.5K BTG throughout Q3. Similar to the other Bitcoin’s only 82.5K BTG entered the market through mining activities, a slow down from previous quarters due to the halving that took place during Q2. However, it was the large amount of BTG (179.0K) that became active for the first time ever since the Bitcoin/Bitcoin Gold fork that resulted in the large increase in free float. This number is up significantly from Q2 (32.1K), but in line with the quarterly average over the last year (169.9K). 

Bitcoin SV (BSV)

Bitcoin SV’s free float supply increased 160.8K during Q3 2020. The new issuance of Bitcoin SV from mining related activities was 82.6K BSV during Q3. As with all Bitcoin forks, this was the first quarter where only 6.25 BSV were mined per block, representing a 50% reduction from prior to the halving. The other 78.2K BSV was from new supply that was only activated for the first time since the Bitcoin Cash/Bitcoin SV fork. This amount is in line with Q2, but is significantly less than the quarterly average over the last year (256K).

Cardano (ADA)

Cardano underwent a significant protocol change this quarter, Shelley, which introduced a Proof of Stake consensus and a mechanism for inflation that previously did not exist. This resulted in the total on-chain supply of Cardano increasing for the first time in its history, up 552.7M ADA from the previous quarter. Previously quarterly on-chain supply decreased as a result of the burning of transaction fees.

The free float supply of Cardano increased 616.5M during Q3, a significant increase from the quarterly average of the prior 3 quarters (110M). The net outflows from foundation identified addresses of 158.5M represented a 148% increase from the previous quarter, but was less than in Q1 of 2020 (175.7M). However, of this, Coin Metrics identified a potential distribution to team members after the launch of Shelley, worth 64.7M ADA.  

Chainlink (LINK)

Chainlink’s Free Float Supply increased 5.0M LINK throughout Q3, an increase of 2.0M from the previous quarter. The entirety of the increase in free float supply can be attributed to transactions from team identified addresses. This represents the largest quarterly amount of LINK that team addresses have withdrawn in the last year, but not as much as Q3 of 2019 where team addresses withdrew 12.6M LINK.

Crypto.com Coin (CRO)

During Q2 2020, the Free Float Supply of CRO increased 186.2M, significantly less and the quarterly average (2.1B) over the last year. This quarterly reduction in free float inflation is largely due to lower activity levels from Company identified addresses, which had net outflows of 679.2M, down from 7.1B in the previous quarter. 

DASH (DASH)

DASH’s issuance rate adjusted to ~6.0% during Q2 which resulted in the lowest amount of new supply from mining related activity, 159.5K DASH. During the quarter, supply that has been inactive for over 5 years and identified as belonging to long term strategic investors or lost supply was 22.8K. The net result of the two aforementioned factors was an increase in DASH’s free float supply of 136.7K for the quarter.

Decred (DCR)

Another 375.8K DCR was added to the Free Float Supply during Q3 2020, with 381.5K coming from newly mined DCR. After three quarters of net outflows from foundation wallets, Foundation controlled addresses increased their DCR supply 5.7K during Q3.

For the second month running, identified Decred team member’s addresses did not have any deposit or withdrawals during the quarter.

Digibyte (DGB)

The Free Float Supply of Digibyte increased 398.0M DGB in Q3, an increase of 157% from Q2 and above the last year’s quarterly average of 284.2M. This increase above previous quarters is largely the result of a net outflow from long term strategic holder balances of 93.7M DGB. This along with the 304.2M DGB that entered supply from mining related activity were the two contributors to the increase in free float.

Dogecoin (DOGE)

Dogecoin returned to deflation during Q3, with 138.0M DOGE removed from its free float supply. Whilst new DOGE continues to be mined every block, to the sum of 1.3B during the Q3, addresses with a total of 1.4B DOGE were identified as inactive for over 5 years during the quarter. This supply is considered to belong to long term strategic holders or lost, as defined in the CMBI Adjusted Free Float Methodology.

Ethereum (ETH)

For the first time since 2015, Ethereum’s Free Float Supply decreased during Q3 2020, falling 640.9K ETH, a stark contrast to the 5 consecutive quarters of ~1.2M ETH growth per quarter. As flagged in last quarter’s report, Ethereum turned 5 years old this quarter, which ushered in the first of its supply (1.9M ETH) to be categorized as belonging to long term strategic investors or lost supply and restricted from liquid markets. 

With the increase in hash rate during the quarter, 1.25M new on-chain ETH was created through mining activities, up 4% for the quarter. Nominal amounts of ETH totaling 23K were transacted from foundation and team addresses during the quarter.

Ethereum Classic (ETC)

The Free Float Supply of Ethereum Classic increased 2.0M ETC during Q3 2020. Over 99% of this came from new issuance from mining activities, whilst only 7K ETC was activated for the first time since the fork.

FTX Token (FTT)

During Q3, the free float supply of FTX Token increased 12.7M, in line with the quarterly average over the last year. FTX continues to conduct weekly off-chain burns, which resulted in a reduction in the on-chain supply of 1.3M FTT. As has been the case for the last year, despite the burns, the increase in free float has been the result of FTX Treasury continuing to incur net outflows which totaled 14.0M FTT during the quarter. 

Huobi Token (HT)

Huobi Token’s Free Float Supply reduced by 7.6M during Q3 2020. Huobi continues to burn HT on-chain, sending tokens to the 0x0000000000000000000000000000000000000000 burn address which received 10.2M HT during the quarter. This is slightly less than the previous three quarters which saw an average of ~13M HT sent to the burn address, noting that there was also a one off burn of 147M HT from the Platform Operations and the Investor Protection Fund in Q1 2020. Also contributing to the free float supply was Huobi Global identified addresses, which had net outflows of 2.5M HT.

Litecoin (LTC)

Litecoin’s free float supply increased 533.7K LTC during Q3, an increase from the previous quarter (400.3K), but in line with the quarterly average over the previous year (504.6K). The newly mined supply of LTC from mining related activities was in line with Q2, totaling 665.9K LTC, but there were 132.2K LTC that was held in addresses that aged 5 years without having demonstrated activity. 

MakerDAO (MKR)

The Free Float Supply of MakerDAO fell by 1.1K MKR during Q3 2020. The largest contributing category of stakeholders to this change was a net increase of 11.1K MKR in participation in the ‘Maker: Governance Contract’, which is considered to restrict supply, as defined in the CMBI Adjusted Free Float Methodology. However, offsetting this was net outflows of 10,000 MKR from the MkarDAO foundation in Q3. 

Unlike the previous two quarters, there was no change to the amount of MKR issued on-chain.

NEO (NEO)

The NEO free float supply had its largest quarterly increase ever during Q3, with 5.5M NEO entering the markets. This new supply came in large from Foundation owned and controlled addresses which experienced net outflows of 5.4M (of a total 41.9M). Most of this 5.5M from the foundation address was sent to interact with NEO’s new DeFi application, Flamingo (largest foundation transaction here).

A further 50K NEO was withdrawn from team identified addresses which looks to have been sent to an exchange address. 

Stellar Lumens (XLM)

Stellar Lumen free float supply increased 583.3M XLM during Q3 2020, which was almost entirely the result of net XLM outflows from foundation controlled addresses to more liquid addresses (583.5M). During September, the Stellar Lumen network turned 5 years old, which resulted in the first addresses which have not displayed activity in 5 years appearing on-chain. This resulted in 0.2M XLM being removed from free float during the quarter.

Tezos (XTZ)

The Tezos total on-chain supply increased 20.0M during Q3 as a result of the Baking process and individuals that continue to claim from the ICO back in 2018. Of this, 1.8M was baked by Tezos Foundation addresses, resulting in an 18.2M increase to the free float supply throughout the quarter (+20.0M to current supply – 1.8M restricted supply belonging to the foundation).

XRP (XRP)

XRP free float supply increased 1.2B during Q3 2020, a slight decrease from the previous quarter where 1.35B entered free float supply. The largest contributor of extra liquidity to the market during the quarter was the Ripple Foundation, whose addresses had a net outflow of 0.8B tokens, a fairly significant portion of which ended up on exchanges. This represents a decrease in the Foundation net outflows which for the previous two quarters had been 1.1B. There was also a 33% increase this quarter in the amount of XRP that left addresses controlled by Founding Team members, up to 402.8M XRP from 307.3M in Q2 and 121.4M in Q1. There were also 5M XRP that were in addresses that became categorized as long term strategic holders/lost after having not displayed activity in over 5 years.

Zcash (ZEC)

Zcash free float supply increased 615.9K ZEC during Q3, its lowest quarterly change in the last year (average of 646K quarterly). There were 659.2K new ZEC issued on-chain through mining related activities, which is in line with previous quarters figures. However, it was the relatively low level of net outflows from foundation identified addresses that resulted in the reduction in free float supply. 

Foundation addresses, which are considered restricted supply, had net inflows of 43.3K ZEC during Q3. Each of the previous three quarters, the foundation addresses had net outflows, averaging 2K ZEC per quarter. Zcash foundation addresses receive 1.25 ZEC per block mined, which results in inflows of ~66K ZEC per quarter.

Detailed Free Float Breakdown

ABOUT COIN METRICS

Coin Metrics is a leading provider of transparent and actionable cryptoasset market and network data. Coin Metrics delivers mature data across multiple formats to various industry stakeholders, including financial enterprises, funds, media and research outlets, and data/application providers. Coin Metrics’ data empowers its clients and the public to better understand, value, use, and ultimately steward public crypto networks. Further Coin Metrics research can be found here.

ABOUT CMBI

Coin Metrics launched CMBI to bring independent and transparent index solutions to the cryptoasset investment community. In the nascent and often complex cryptoasset market, CMBI Indexes strive to be dynamic and adjust to the rapidly changing market conditions to design and maintain investable products. CMBI Indexes provide markets and customers with industry-leading solutions that aid in performance benchmarking and asset allocation.

Coin Metrics’ State of the Network: Issue 71 – Introducing the CMBI Multi Asset Series

Weekly Feature

Introducing the CMBI Multi Asset Series

By Ben Celermajer and the Coin Metrics Team

The following is an excerpt from a full-length report which has been truncated due to space limitations. Read the full report here.

In this week’s State of the Network we are excited to announce the release of the CMBI Multi Asset Series, the first industry indexes that weigh cryptoassets by their Free Float Market Capitalization

We are particularly excited to bring these indexes to market after almost a year of design and methodology testing, and to share the design considerations and unique data constructs utilized in the index calculations. Cryptoassets are here to last, and as such, Coin Metrics determined it imperative to design a methodology that meets the standards of traditional capital markets and takes the next step towards professionalization of this asset class.

Throughout this feature, we will discuss the key and unique data components used in the determination of CMBI products, elaborate on the importance of each design consideration, and share the performance of the methodology relative to current standard practices.

The initial indexes that form part of the Coin Metrics Bletchley Index (CMBI) Multi Asset Series include:

These new indexes broaden Coin Metrics’ Index services, and join the already live CMBI Single Asset Series (CMBI Bitcoin and CMBI Ethereum) and CMBI Mining Series (CMBI Bitcoin Hash Rate and CMBI Bitcoin Observed Work).

The Need for Crypto Indexes

Well-designed and independently administered indexes are an important aspect of capital markets. They help to bring transparency and clarity to markets that investors wish to better understand and potentially invest in. This particularly rings true in the cryptoasset industry which can be confusing to new investors given its nascent form. The spot price of cryptoassets can vary globally, the on-chain characteristics of cryptoassets can be opaque, the market’s trading activity can be misrepresented, and many trading venues still operate in loosely regulated environments. 

The Coin Metrics Bletchley Indexes (CMBI), administered by Coin Metrics, have been designed to provide the cryptoasset market with a formalized, transparent and robust set of benchmarks on which to conduct research, measure performance, or create institutional quality financial products. The CMBI Principles outline the ethos and act as a guideline that informs the design of all CMBI products.

The most common path for many new retail and institutional investors looking to allocate to crypto is to first acquire Bitcoin and maybe Ethereum. As such, Coin Metrics’ first fore into indexes was to develop robust Bitcoin and Ethereum Indexes that were:

  • Designed in line with traditional capital markets best practices, such as the IOSCO Financial Benchmarking Principles.
  • Manipulation resistant to severe and outlier market conditions.
  • Transparent and rules based to enhance investor comfort.
  • Aligned with current regulatory concerns such as the potential for market close manipulative practices.

However, as investors become more familiar with cryptoassets, there is an increasing desire to broaden their exposure to multiple cryptoassets. This was most recently evidenced in Fidelity’s 2020 Institutional Digital Asset Investor Survey, which suggests as many as 2/3 institutional survey respondents indicated interest in diverse cryptoasset exposure. 

Granted this, the logical next step for Coin Metrics was to explore designing and developing a series of multi asset indexes for these investors to back-test strategies and allocate capital as and when they are ready to do so. 

Continue reading Introducing the CMBI Multi Asset Series…

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

After initial panic following the announcement of the BitMEX arrests, Bitcoin (BTC) and the other major cryptoassets have stabilized and started to recover. BTC managed to finish the week in the green (week-over-week) for most network metrics, buoyed by a strong start to the week.

Ethereum (ETH) activity continued to tumble following the deflation of end-of-summer DeFi hype. Active addresses fell another 5.1% week-over-week and dipped as low as 412.9K on September 30th. 

Network Highlights

On October 1st news broke that BitMEX executives had been charged with violating the Bank Secrecy Act, as well as willfully failing to establish and implement an adequate anti-money laundering program. BitMEX CTO Samuel Reed was arrested while the rest of the BitMEX executive team remains at large.

Crucially, BitMEX’s funds are held in multisig wallets that require a signature from multiple private keys in order to be unlocked. BitMEX’s three founders each hold a key, and two of three partners must sign each withdrawal. So the funds may have been unobtainable if multiple founders were arrested. 

The market reacted quickly. BitMEX had its largest daily BTC outflow ever, as investors rushed to remove their funds from the exchange. At least for now, there have been no issues with withdrawing funds. 

Source: Coin Metrics Network Data Charts

Zooming in, BitMEX had a net outflow of over 20K BTC on October 1st and an outflow of over 34K BTC on October 2nd. However, by October 3rd, as it became apparent that funds would not be locked on BitMEX (at least temporarily), things began to stabilize. BitMEX actually had a positive net inflow of about 472 BTC on October 4th.

Source: Coin Metrics Network Data Charts

As a result of the large outflows BitMEX’s BTC supply plummeted to its lowest levels since July 2018. In total, over $500M worth of BTC was withdrawn from the exchange between September 30th and October 3rd. But despite the drop, there is still close to $1.5B worth of BTC held on BitMEX. 

Source: Coin Metrics Network Data Charts

Market Data Insights

Last Thursday we saw a bit of a selloff following the arrest of Samuel Reed of BitMEX. Bitcoin fell roughly 5% in as the news broke but has retraced two-thirds of that decline in the time following.

Source: Coin Metrics Reference Rates

What has not recovered as quickly is the open interest in the XBT Perpetual contract on BitMEX. In parallel to the price drop roughly $130M in open interest on the contract was closed, falling from ~$590M to ~$460M. 

Source: Coin Metrics Market Data Feed

Other exchanges with similar contracts saw temporary declines in open interest as well, however most of them gained it back in the period following. This may be traders that intend to keep the position on and remove some risk by either moving some size to other exchanges or off of BitMEX entirely. 

CM Bletchley Indexes (CMBI) Insights

With the launch of our CMBI Indexes announced in this week’s feature we underwent our first rebalance for the CMBI Multi Asset Series. During the rebalance the CMBI10 added Polkadot and Binance and removed Cardano and Tezos.

A relatively quiet week for cryptoasset markets that saw all CMBI and Bletchley Indexes finish the week slightly down. The CMBI Ethereum was least impacted by the week’s movements, closing 0.2% down at $352.36. The CMBI Bitcoin also finished the week slightly down, falling 0.4% to close at $10,678.54. All Bletchley Indexes finished the week between 0.9% and 1.4% down, with the large caps (Bletchley 10) being the least impacted by this down week.

Source: Coin Metrics CMBI

More performance information on each of the CMBI products can be found in our factsheets:

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • We’re excited to announce the new Coin Metrics mobile app. View real-time cryptoasset pricing and relevant on-chain data in a single app!  Download for free here: https://coinmetrics.io/mobile-app/

As always, if you have any feedback or requests, don’t hesitate to reach out at [email protected]

Subscribe and Past Issues

Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.

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.

Introducing the CMBI Multi Asset Series

By Ben Celermajer and the Coin Metrics Team

In this week’s State of the Network we are excited to announce the release of the CMBI Multi Asset Series, the first industry indexes that weigh cryptoassets by their Free Float Market Capitalization

We are particularly excited to bring these indexes to market after almost a year of design and methodology testing, and to share the design considerations and unique data constructs utilized in the index calculations. Cryptoassets are here to last, and as such, Coin Metrics determined it imperative to design a methodology that meets the standards of traditional capital markets and takes the next step towards professionalization of this asset class.

Throughout this feature, we will discuss the key and unique data components used in the determination of CMBI products, elaborate on the importance of each design consideration, and share the performance of the methodology relative to current standard practices.

The initial indexes that form part of the Coin Metrics Bletchley Index (CMBI) Multi Asset Series include:

These new indexes broaden Coin Metrics’ Index services, and join the already live CMBI Single Asset Series (CMBI Bitcoin and CMBI Ethereum) and CMBI Mining Series (CMBI Bitcoin Hash Rate and CMBI Bitcoin Observed Work).

The Need for Crypto Indexes

Well-designed and independently administered indexes are an important aspect of capital markets. They help to bring transparency and clarity to markets that investors wish to better understand and potentially invest in. This particularly rings true in the cryptoasset industry which can be confusing to new investors given its nascent form. The spot price of cryptoassets can vary globally, the on-chain characteristics of cryptoassets can be opaque, the market’s trading activity can be misrepresented, and many trading venues still operate in loosely regulated environments. 

The Coin Metrics Bletchley Indexes (CMBI), administered by Coin Metrics, have been designed to provide the cryptoasset market with a formalized, transparent and robust set of benchmarks on which to conduct research, measure performance, or create institutional quality financial products. The CMBI Principles outline the ethos and act as a guideline that informs the design of all CMBI products.

The most common path for many new retail and institutional investors looking to allocate to crypto is to first acquire Bitcoin and maybe Ethereum. As such, Coin Metrics’ first fore into indexes was to develop robust Bitcoin and Ethereum Indexes that were:

  • Designed in line with traditional capital markets best practices, such as the IOSCO Financial Benchmarking Principles.
  • Manipulation resistant to severe and outlier market conditions.
  • Transparent and rules based to enhance investor comfort.
  • Aligned with current regulatory concerns such as the potential for market close manipulative practices.

However, as investors become more familiar with cryptoassets, there is an increasing desire to broaden their exposure to multiple cryptoassets. This was most recently evidenced in Fidelity’s 2020 Institutional Digital Asset Investor Survey, which suggests as many as 2/3 institutional survey respondents indicated interest in diverse cryptoasset exposure. 

Granted this, the logical next step for Coin Metrics was to explore designing and developing a series of multi asset indexes for these investors to back-test strategies and allocate capital as and when they are ready to do so. 

The Coin Metrics Approach to Index Design

Throughout the process of designing all of our indexes, Coin Metrics has continually challenged industry standards and processes to establish our own methodologies that align with the CMBI Principles. Whilst this approach has typically resulted in a slower time to market for our index products, we believe the improvements to index design and the increased transparency and consistent application of methodologies have resulted in more investable and robust indexes. 

Our vision for Indexes started in early 2018 when Coin Metrics acquired the Bletchley Indexes. Shortly after, whilst designing the CMBI Single Asset Series, it became imperative to better understand how Coin Metrics would determine a robust aggregate price of a cryptoasset. Perhaps even more importantly given institutional and regulatory concerns, was designing a robust, manipulation resistant and market representative ‘close’ price for indexes and financial products. This led to the design of both the CM Real Time Reference Rates for index intraday pricing and the CM Hourly Reference Rates for index close pricing. To understand how these methodologies perform in varying market conditions please refer to some of our previous blog posts (When Markets Misalign: Mispricings and Reference Rates and CM Real-Time Reference Rates Research Summary).

Designing the CMBI Multi Asset Series

The next logical step for Coin Metrics was to develop multi asset indexes and launch both a Bitcoin and Ethereum index as well as a market capitalization weighted large cap index (Top 10). Yet again, during our discovery phase, we found data gaps in the market that we felt needed to be overcome to meet the requirements of institutional investment markets. Specifically, we were not able to identify a consistent and standardized approach to estimating cryptoasset supply in markets. This led to the development of a standardized methodology for the determination of cryptoasset free float supply. The methodology was designed to leverage many of the lessons learned from supply determination in traditional capital markets (as described in this blog post), which we believe to ultimately provide a more consistent representation of liquidity and market supply dynamics. 

Applying such a methodology can yield different perspectives of supply available in the market by removing categories of tokens from the total supply that are deemed to not provide short-medium term liquidity to markets. Categories removed from free float supply include tokens that are: 

  • Inactive on-chain for over 5 years (considered to be held by long term strategic holders that do not provide liquidity to markets or lost)
  • Owned by company/foundation addresses
  • Owned by company team members and insiders
  • Visibly vesting on-chain
  • Provably lost (>0.1% of total supply)
  • Burned 
  • Forked and have been inactive since the time of the fork

Once free float supply had been designed and determined for the top cryptoassets, we were finally ready to launch the CMBI Multi Asset Series.

The CMBI Multi Asset Series

CMBI Bitcoin and Ethereum (CMBIBE)

After applying free float weightings, the new CMBIBE weighs Ethereum more heavily than a traditionally weighted index which utilizes total on chain market capitalization. This is primarily due to the large amount of Bitcoin that has been inactive on-chain for over 5 years and thus considered to be lost or belong to long term strategic holders that restrict supply from markets.

Note: Data as of October 1, 2020

CMBI 10

Similarly,  after applying the free float methodology to all assets, the CMBI 10 index results in quite different weightings to what the industry standard has been to date, as demonstrated below. 

AssetTickerCMBI 10 Weight
(Free Float Market Cap)
Reported Market Cap Weight
BitcoinBTC69.6%72.8%
EthereumETH17.6%14.7%
XRPXRP3.2%4.0%
PolkadotDOT1.7%1.4%
ChainlinkLINK1.7%1.2%
StellarXLM1.4%0.6%
LitecoinLTC1.4%1.1%
Bitcoin CashBCH1.3%1.5%
Binance CoinBNB1.3%1.5%
Bitcoin SVBSV0.8%1.2%

Note: Data as of October 1, 2020

The intention of most market cap weighted indexes is to be an accurate representation of a market, so that investors can passively obtain broad exposure to the underlying market. By taking this approach, Coin Metrics believes the CMBI Multi Asset Series provides a better representation of liquid markets, and helps to reduce management costs and tracking error. 

CMBI 10 Excluding Bitcoin (CMBI10EX)

Given the size dominance of Bitcoin in cryptoasset markets, most market cap indexes are naturally heavily weighted towards Bitcion (60-80%). Many institutional investors will initially get exposure to cryptoassets through Bitcoin only products (e.g. CME, Bakkt, Bitcoin only Funds). As such, if they decide to broaden their exposure and invest in non-Bitcoin cryptoassets, they might face potential diversification issues if most of the passive strategies are market cap weighted indexes with large exposure to Bitcoin (like the CMBI10 which is 70% Bitcoin). 

Recognizing this, Coin Metrics has also launched the CMBI10EX. The constituents of this index are the exact same as the CMBI 10, except as the name suggests, Bitcoin is excluded. Similarly to the CMBI 10, the CMBI10EX weights constituents by their free float market capitalization.

Note: Data as of October 1, 2020

This index is designed to help asset managers and investors allocate exposure to large cap assets outside of Bitcoin, without having to add a weight cap and potentially distort the market liquidity dynamics of an index. This way, investors can create their own customized weightings in Bitcoin and a non-Bitcoin cryptoasset basket as they desire. For example, an investor that only had exposure to Bitcoin could allocate new invested capital to the CMBI10EX to start to build exposure to alt coins without having to realize capital gains on their Bitcoin investment.

CMBI 10 Even (CMBI10E)

The CMBI10E is considered to be more of a benchmark index given the distorted weightings of assets relative to their size and liquidity in trading markets. The index constituents are the same as the CMBI 10, but each constituent is weighted equally (10%) at the start of every month.

Measuring Performance

Multi asset indexes tend to perform best during bull markets. This is evidenced by the outperformance of the CMBI multi asset indexes in the last year and since inception. The 2 year annualized performance, which captures most of the recent bear market, further demonstrates this, as indexes that most heavily weight Bitcoin performed the best.

Annualized returnsCMBIBTCCMBIBECMBI10CMBI10ECMBI10EX
1 Year29%39%36%57%56%
2 Year28%28%14%-3%-3%
Since CMBI10 Inception (Jan-3-2017)87%94%89%126%124%

Note: Data as of 4pm NY Time, 30 September  2020

Whilst cryptoassets are still largely correlated, the Sharpe Ratio of multi asset indexes indicate that there may be opportunistic times where a multi cryptoasset strategy provides greater risk adjusted returns than a Bitcoin only strategy. Such multi asset strategies seem to have historically performed best during bull markets, demonstrated below where the CMBI10E and the CMBI10EX have the highest 1 Year Sharpe ratios.

Over the longer term (~3.5 years), it is interesting to observe the closeness in Sharpe ratio between indexes despite the significantly higher annualized return of the CMBI10E and CMBI10EX. This highlights the additional volatility and subsequently risk associated with these returns.

Sharpe RatioCMBIBTCCMBIBECMBI10CMBI10ECMBI10EX
1 Year0.710.820.790.960.96
2 Year0.680.680.570.380.38
Since CMBI10 Inception (Jan-3-2017)1.141.181.141.291.27

Note: Data as of 4pm NY Time, 30 September  2020

Further, investigating the impacts of utilizing Coin Metrics’ design features such as free float supply, we see that there are additional benefits from both the net performance and the risk adjusted returns.


Annualized Returns
CMBIBECMBI10
Free Float WeightedReported Supply WeightedFree Float WeightedReported Supply Weighted
1 Year39.5%38.7%35.4%33.1%
2 Year28.0%27.6%18.7%14.4%
Since CMBI10 Inception (Jan-3-2017)93.7%93.4%88.5%89.1%

Note: Data as of 4pm NY Time, 30 September  2020


Sharpe Ratio
CMBIBECMBI10
Free Float WeightedReported Supply WeightedFree Float WeightedReported Supply Weighted
1 Year0.740.710.710.68
2 Year0.710.710.610.58
Since CMBI10 Inception (Jan-3-2017)1.311.301.261.27

Note: Data as of 4pm NY Time, 30 September  2020

Conclusion

As cryptoassets continue to capture the attention of traditional markets, it is important to ensure that financial products designed for investors meet high standards and practices to provide the truest representation of markets. Coin Metrics has developed tools like reference rates and free float supply to ensure that financial products can exist, be transparent, and be fair to market participants.

Through the launch of these 4 indexes, Coin Metrics is excited to be able to provide markets with new institutionally designed and investable multi asset indexes and benchmarks. If you are interested in talking with Coin Metrics about CMBI Indexes, please reach out to [email protected]