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.

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.

Coin Metrics’ State of the Network: Issue 70 – How DeFi Is Fueling Ethereum’s Growth

Weekly Feature

Ethereum’s DeFi Evolution: How DeFi Is Fueling Ethereum’s Growth

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.

Decentralized finance reached new heights over the last few months as dozens of projects launched and large amounts of capital flowed in. A majority of decentralized finance (DeFi) apps have been built on Ethereum, and DeFi’s explosion has rippled across the network. DeFi has pushed Ethereum to its limits but is also accelerating the pace of innovation and experimentation. In this piece we look at how four DeFi token launches affected Ethereum and how the network is evolving as a result. 

DEX Dominance 

The rise of DeFi has brought on a wave of new tokens including some breakouts. The start of ETH’s summer bull run coincided with the launch of yearn.finance’s governance token YFI. But there have also been some big collapses, like the rapid rise and fall of the YAM token. The below chart shows ETH’s price following four of the largest DeFi token launches to date: YFI, YAM, SUSHI, and UNI. 

Source: Coin Metrics Reference Rates

Uniswap, the largest decentralized exchange (DEX) on Ethereum, has been the engine for DeFi token trading. Uniswap trading volume has increased from about $1M a day in early June to close to $1B a day in the beginning of September. Unlike centralized exchanges like Coinbase or Binance, Uniswap trading occurs entirely on-chain. This means that transactions must be sent and settled on Ethereum each time a Uniswap trade is made. On-chain trading has quickly become one of Ethereum’s biggest use cases. 

Source: Uniswap.info

With the rise of Uniswap and other DeFi dapps the amount of Ethereum smart contract calls hit  new all-time highs over the summer. Tokens moving around the ecosystem are increasingly controlled by code, creating a whole new level of efficiency and opportunities for automation. But it also introduces more complexity, as DeFi smart contracts can interact with each other and automatically route tokens through multiple platforms. 

Source: Coin Metrics Network Data Pro

Another result of DEX growth is the rise of wrapped ETH. Wrapped ETH (WETH) is basically a way to use ETH as an ERC-20 token. DeFi tokens are built on Ethereum’s ERC-20 token standard, which makes it easy to exchange one token for another. But the ERC-20 token standard was introduced after ETH was launched, which means ETH itself does not abide by these standards. To create WETH, ETH is locked up into a smart contract in exchange for WETH tokens.

WETH supply has soared to new all-time highs following the launch of YFI. 

Continue reading Ethereum’s DeFi Evolution

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Ethereum (ETH) network metrics mostly dipped this past week. ETH adjusted transfer value continued to tumble after surging to two year highs in early September. On a positive note, ETH active addresses stabilized after falling after the launch and collapse of the SUSHI token. 

Bitcoin (BTC) network metrics, on the other hand, were mostly positive on the week. BTC daily active addresses remain near all-time highs, topping 1.14M on September 25th. 

Network Highlights

Total stablecoin supply has reached $20B. While Tether still has a large fraction of supply share, other stablecoins are starting to make up ground. USDC growth has been outpacing Tether, causing Tether’s dominance to dip below 80% for the first time in the modern era of stablecoins.

Source: Coin Metrics Formula Builder

Stablecoin transfer value also continues to grow compared to BTC. BTC has historically dominated transfers, but since July stablecoins have taken over as the main method of transferring value on-chain. The rise of stablecoin on-chain transfer value coincides with the rise of DeFi, as highlighted in this week’s Weekly Feature.

Source: Coin Metrics Formula Builder

While stablecoins are increasingly being used for value transfer, Bitcoin is apparently increasingly being used as a store of value. The percent of BTC supply held for at least one year recently hit 63.5%, its highest level since 2010.

Source: Coin Metrics Formula Builder

Market Data Insights

Some of the euphoria of recent months appears to be fading. Week over week, 72% of the roughly 250 assets that we calculate reference rates for have declined in price. Month over month that number increases to 93%. This is a significant shift from the sentiment that was felt in the bull market only a few weeks ago. 

To better gauge the sentiment, we look at a rolling 7 day metric using a ratio of assets making new 30 day highs less a ratio of those making new 30 day lows. This shows us at a bearish level not seen since the selloff in March of this year.

This past week’s options expiration was fairly uneventful, with Bitcoin staying within the max pain range of $10-11k and Ethereum staying between $300-400. Volatility still remains relatively muted compared with historical ranges. 

CM Bletchley Indexes (CMBI) Insights

Most of the CMBI and Bletchley Indexes finished this week down slightly, with the CMBI Ethereum Index closing the week at $353.10, down 4.9%. The CMBI Bitcoin Index had another relatively flat week, closing at $10,724.67, down 1.4%. 

Multi-asset market cap weighted indexes were also all down for the week, with the Bletchley 40 (small caps) again the worst performer during this recent negative market sentiment, closing down 2.4%. Interestingly, the Bletchley 10 Even closed the week up, despite the negative performance of the CMBI Bitcoin Index, the CMBI Ethereum Index, and the Bletchley 10. This is largely attributed to the weekly performance of Cardano (up 13%) and BSV (up 10%).

As many expected, Bitcoin’s Hash Rate retraced after Bitcoin’s 11.35% difficulty adjustment last week. However, this retrace was short lived and for the third week running, the CMBI Bitcoin Hash Rate Index reached all time highs, above 150 exahashes per second. Hash rate has been on a roll during the Chinese wet season. But the wet season is coming to an end shortly, potentially resulting in a slowdown of the recent rate of increase of hash rate. 

More performance information can be found here:

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.

Coin Metrics’ State of the Network: Issue 69 – Bitcoin: A Novel Economic Institution

Weekly Feature

Bitcoin: A Novel Economic Institution

Below is an excerpt of a research report authored by ARK Invest and Coin Metrics. In Part 1 of this research, we described how we believe Bitcoin satisfies the four assurances that maximize the probability of a robust and predictable financial system. In Part 2, we explore bitcoin as an emerging asset. The following is an excerpt from Part 2 of the report.

Bitcoin’s Opportunity

With little more than a 10-year price history, bitcoin has been the best performing asset of the 21st century. Five years ago, a $10,000 investment in bitcoin would have delivered a 119% compound annual rate of return and would be worth roughly $500,000 today. In fact, during any yearly holding period since inception through September 1, 2020, bitcoin’s return has been positive, significantly so in most cases, as shown in Figure 2.

Despite its run, our analysis suggests bitcoin is early on its path to monetization, with substantial appreciation potential. In our view, Bitcoin’s $200 billion market capitalization – or network value – will scale more than an order of magnitude to the trillions during the next decade.

In the next section, we will discuss bitcoin’s largest market opportunities. Consistent with these opportunities, we estimate Bitcoin could reach a $3 trillion market cap by 2025.

Bitcoin As A Global Settlement Network

We believe Bitcoin could become a settlement system for banks and businesses. Unlike traditional settlement systems, the Bitcoin network is global, it cannot censor transactions, and its money cannot be inflated by institutions like central banks. Instead of facilitating a large volume of low- value transactions at point of sale, Bitcoin could evolve to handle large transactions between and among financial intermediaries. Today, most dollar-based international payments must settle through the Federal Reserve’s Real Time Gross Settlement (RTGS), or Fedwire.

Supporting both senders and receivers, the Bitcoin network obviates the need for counterparties to mediate and settle transactions and is capable of settling high value transactions irrevocably every few hours. It can facilitate 2,000 global settling transactions roughly every ten minutes from anywhere at any time. As noted in Economics of Bitcoin as a Settlement Network, the Bitcoin network could settle one transaction daily with every other bank in a global network of 850 banks. In the United States alone, deposits totaling $14.7 trillion generate $1.3 quadrillion in settlement volumes between and among banks each year. If it were to capture 10% of those settlement volumes at a similar deposit velocity, we believe the Bitcoin network would scale more than 7-fold from roughly $200 billion to $1.5 trillion in value, as shown below.

Bitcoin As Digital Gold

As part of the transition toward a digital economy, bitcoin could challenge gold as a global store of value. Economic history suggests that an asset accrues value as the demand for it increases relative to the supply. Demand is a function of an asset’s ability to serve the three roles of money: store of value, medium of exchange, and unit of account.

For thousands of years, the world has recognized gold as the most sustainable form of money. Through a process of natural selection, goods competed with each other for dominance until gold evolved as the global monetary standard. While gold has maintained its status as a store of value, its limitations to serve as a medium of exchange and unit of account began to surface in the 20th century.

Supporters often refer to bitcoin as digital gold because it improves upon many of physical gold’s characteristics. Not only is bitcoin scarce and durable, but it also is divisible, verifiable, portable, and transferable, all of which protect from the threat of centralization. According to our research, if it were to take 10% share of the physical gold market, bitcoin’s network value could increase nearly $1 trillion, as shown below, 5 times its $200 billion base today.

This is an excerpt of “Bitcoin: A Novel Economic Institution,” a research report authored by ARK Invest and Coin Metrics.Continue reading the full report here: Part 1 and Part 2.

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Network metrics were slightly up this past week before Monday’s decline. Ethereum (ETH) transaction fees are back on the rise following the surprise launch of Uniswap’s UNI token. ETH active addresses also rebounded thanks to UNI, after dropping to a 4-month low on September 11th. Bitcoin (BTC) daily active addresses also remained strong, averaging 978K over the past week. 

Network Highlights

ETH daily transaction count hit a new all-time high of 1.41M on September 17th, following the launch of Uniswap’s UNI token the previous day. 

Source: Coin Metrics Network Data Charts

The amount of transactions sent to Ethereum smart contracts also hit a new all-time high of 915.56K on September 17th as users sent transactions to Uniswap contracts to claim and trade UNI tokens. Transactions sent to contracts have surged since July, as decentralized finance (DeFi) has taken over Ethereum activity. This signals that Ethereum is being used more and more as a smart contracts platform as DeFi continues to evolve. 

The following chart shows the daily amount of transactions sent to contracts vs non-contract addresses, smoothed using a 7-day rolling average.  

Source: Coin Metrics Network Data Formula Builder

Similarly, the amount of ETH transferred by smart contracts (non-adjusted) shot up to a new all-time high of $3.07B on September 17th. The following chart is smoothed using a 7-day rolling average. 

Source: Coin Metrics Network Data Charts

As a result, the overall amount of ETH transferred has climbed to its highest levels since January 2018. ETH’s adjusted transfer value 7-day average passed BTC’s on September 6th. ETH has increased its lead following UNI’s launch.

Source: Coin Metrics Network Data Charts

Market Data Insights

Volatility has returned to ETH following the recent selloff and last week’s UNI debut. This is significant because it follows a period of sustained levels of low volatility not seen since mid-2019. This increase in volatility precedes some significant events, namely the launch of the first phase of ETH 2.0 and, more urgently, the September 25th options expiration. 

Source: Coin Metrics Market Data Feed

The options for ETH expiring on Friday make up almost $450m in open interest. This will be the largest expiration date for Ethereum for the options exchange Deribit, currently the largest venue (by open interest) offering these contracts. This event will likely add additional volatility to price action throughout the week, as traders look to hedge exposure on these positions, work out of them, or possibly take action in the spot market in anticipation.

CM Bletchley Indexes (CMBI) Insights

CMBI and Bletchley Indexes had a mixed week, with the large cap assets performing best. In particular the CMBI Bitcoin Index had a strong showing and closed the week up 5.6%, at $10,879.71. The CMBI Ethereum Index also finished the week up 2.4%, at $371.44. The performance of these two indexes carried through to the positive performance of the Bletchley 10, which finished the week up 2.5%, despite many of the other assets experiencing losses for the week.

The mid and small cap indexes experienced the worst of the market sentiment this week, with the Bletchley 20 and Bletchley 40 closing down 5.7% and 7.8% respectively. This performance comes after several weeks of these indexes outperforming the large cap cryptoassets. 

Source: Coin Metrics CMBI

During the week the CMBI Bitcoin Hash Rate Index yet again experienced all time high levels, peaking at 151,760 petahashes on Friday. The sustained high levels of hash rate can be evidenced through the CMBI Bitcoin Observed Work Index, whose weekly levels indicate that 85,506 zettahashes were conducted by miners during the week (up 14.3% from 2 weeks ago). These record levels of hash rate resulted in Bitcoin’s difficulty increasing 11.35% on Sunday.

More performance information can be found here:

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.

Coin Metrics’ State of the Network: Issue 68 – Measuring Bitcoin’s Decentralization

Weekly Feature

Measuring Bitcoin’s Decentralization

By Karim Helmy 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.

Over the last eleven years, Bitcoin has managed to function relatively seamlessly in the face of a large number of threats, largely due to its lack of a single controlling entity. This trait, known as decentralization, encompasses a large number of loosely-coupled characteristics. Some of these traits are difficult to describe and measure, but others lend themselves well to direct analysis. 

One directly observable feature is the dispersion of funds across addresses. The distribution of wealth is a critical factor in any economy, roughly coinciding to the distribution of economic influence. For cryptoassets, which often grant large token allocations to the founding team, it’s also a severely underexplored one.

Another characteristic, the distribution of hashpower, is arguably even more important. Bitcoin relies on decentralization at this level in order to meet its goals of sustaining a secure, censorship-resistant payments and savings system. 

Bitcoin is also highly exposed to the market share distribution of exchanges, which exercise an outsized influence on the network’s economy. The distribution of volume on fiat-quoted spot pairs is particularly important, since these represent on- and off-ramps to and from the world at large.

In this week’s feature, we’ll quantify Bitcoin’s decentralization along these three verticals and track how it’s progressed over time. 

Dispersion

The presence of whales, or users with large quantities of funds held in the asset, is a concern for the viability of many cryptocurrencies. A particularly unequal distribution of funds could grant a small set of users significant influence over the direction of an asset’s markets and protocol development and call into question the asset’s viability as a store of value or medium of exchange.

Since Bitcoin balances are easily auditable, dispersion can be assessed with on-chain data. Because funds held by custodians in omnibus accounts cannot be attributed to their owner and address reuse is generally discouraged, these estimates are imperfect. However, the degree of transparency afforded is still unprecedented when compared to the legacy financial system.

Bitcoin still has whales, but since the network’s inception, its supply has become more evenly distributed, with smaller accounts comprising an increasing proportion of the aggregate supply.

Source: Coin Metrics Network Data Pro

In addition to controlling an increasing proportion of supply, addresses with smaller balances continue to represent the majority of accounts. In the face of a fluctuating dollar-denominated price, most addresses still control less than $100 worth of Bitcoin.

Mining

In addition to on-chain dispersion and activity, Bitcoin’s effective decentralization depends on the distribution of computational power, or hashpower, among miners.

Bitcoin relies on miners to secure the network and add new blocks to the blockchain. These miners compete to find the next block by computing a large number of energy-intensive hashes, and often aggregate into loose coalitions known as mining pools.

The amount of hashpower securing the Bitcoin network has generally grown exponentially throughout the network’s history.

Source: Coin Metrics Network Data Pro

In addition to the amount of raw hashpower securing the network, the distribution of hashpower is also important. A malicious actor who controls more than half of the network’s hashpower could 51%-attack the network and perform a double-spend, and an attacker with considerably less resources could censor transactions through feather forks.

An attacker would need to double-spend a large amount of money in order to make a 51%-attack profitable. In majority-hashpower ASIC-mined coins like Bitcoin, which require significant capital expenditure by miners, it would be difficult for a rational miner to perform a 51% attack, though these attacks are made somewhat more feasible by the presence of hashpower marketplaces.

Today, Bitcoin’s mining industry is competitive. The plot below, which is subject to a degree of survivorship bias, shows mining to be a thriving, distributed ecosystem.

Continue reading Measuring Bitcoin’s Decentralization…

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Network metrics were mostly down this past week as Bitcoin (BTC) and Ethereum (ETH) market caps tumbled over the first half of the week. ETH had bigger downturns in most categories as DeFi enthusiasm temporarily waned following the latest food related controversy. ETH active addresses dropped to about 356K on September 11th, which is the lowest daily total since May.  

Network Highlights

USDC supply has nearly doubled since the beginning of August. It took almost two years for USDC supply to go from zero to 1 billion. It only took about two months to go from 1 billion to 2 billion. 

Source: Coin Metrics Network Data Charts

Tether supply exploded after the March 12th market crash. But since July, USDC supply has been growing at a faster rate. Fueled by the rapid rise of decentralized finance (DeFi), USDC is increasingly being used in liquidity pools on Uniswap and Curve Finance. Uniswap clone SushiSwap has also added to USDC’s rise, as USDC is one of the main underlying tokens that is staked to earn SUSHI. USDC’s lead has grown in September, as USDC supply issuance continues to accelerate. The following chart shows growth since March 1st. 

Source: Coin Metrics Formula Builder

Tether still has a large lead in terms of total supply. As of September 13th, the total supply of Tether is approaching 15 billion, compared to about 3 billion for all other stablecoins combined. But USDC’s sudden surge might finally start to threaten Tether’s market dominance. Tether’s share of the total stablecoin supply peaked at about 87% on August 10th. Since then, it has dropped down to about 83%, its lowest level since April. 

Source: Coin Metrics Formula Builder

USDC’s median transfer value has also started to rise in August and September. DAI’s median transfer value has risen as well compared to Paxos (PAX) and Ethereum-issued Tether (USDT_ETH). This is also likely a result of DeFi, as USDC and DAI are increasingly used for staking. 

Source: Coin Metrics Network Data Charts

Market Data Insights

As the summer of DeFi rages on price action around Bitcoin has been relatively subdued. Realized volatility remains around 50%. This is interesting because in the past when Bitcoin broke out of this range into more volatile trading this measure reached levels over 100%. However, this past breakout did not reach nearly as elevated levels with the rolling 30 day average not surpassing the 60% mark. This is potentially due to a reduction in leveraged Bitcoin positions relative to the market size or a growing efficiency in the price action of the markets.

Source: Coin Metrics Market Data Feed

Another sign of growing efficiencies in the market is the reduction of offset seen between the market value of Tether and the U.S. Dollar. This chart below shows a rolling 30 day average price of Tether since 2018. You can observe that in 2018 and 2019 there were periods with large differences between the two and that this offset has been reduced over time.

Source: Coin Metrics Market Data Feed

CM Bletchley Indexes (CMBI) Insights

This week, CMBI Indexes recovered a fraction of last week’s market wash, all closing the week in the green. After last week’s big move, most indexes experienced a reduction in volatility this week, trading within a relatively tight range. The CMBI Bitcoin Index only finished slightly up, closing at $10,302.48 (up 0.4%), whilst the CMBI Ethereum Index performed slightly better closing at $362.63 (up 2.4%).

As has been a trend through most of Q3, the small cap (Bletchley 40) and mid cap (Bletchley 20) indexes were the best performers of the week. 

Source: Coin Metrics CMBI

The CMBI Bitcoin Hash Rate Index continues to reach new weekly highs, closing the week at 142,275 Petahashes per second, up 13%. This led to miners doing an observed 81,057 Zettahashes over the last week, 10.5% more than expected based on the previous week’s performance.

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.

Coin Metrics’ State of the Network: Issue 67 – An Overview of the Basis Trade

Weekly Feature

Improving your Futures Roll: An Overview of the Basis Trade

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.

The ‘Basis’ Trade

One of the most popular trades for any commodity futures is the basis trade. This is when traders build a strategy around the difference between the spot price and futures contract price of a commodity. This exists in corn, soybean, oil and of course, Bitcoin.

There are a few different approaches you can take. If you expect that the difference between the spot and futures price will grow then you are long the basis, and inversely if you believe it will shrink then you are short the basis. 

As a contract gets closer to expiration the uncertainty around its settlement price is reduced and theoretically should converge with spot. On the futures market in crypto this is generally measured as the difference between the perpetual or ‘perp’ contract and the futures contract. The perpetual contract is generally priced similar to spot with slight variations due to aspects such as the collateral allowed on the exchange and the funding rate which can vary in magnitude and direction based on the difference between the exchange’s mark price and underlying index price. For an overview of the Bitcoin perpetual swap market check out State of the Network Issue 62.

Why does this trade matter to the average crypto investor or market participant? As shown by the recent volatility and selloff over the Labor Day weekend, a lot of the volatility in the space can be exaggerated by changes in open interest of the futures contract. For example, if a trader has a long Bitcoin futures position with Bitcoin as collateral, a swift downturn in the market can force them out of their position (read: liquidate) and create additional selling pressure. The basis trade is one way to hedge that risk by taking an asset neutral approach. 

The premium/discount that the front contract has traded to the perpetual

Source: Coin Metrics Market Data Feed

Improving the Roll

For the purposes of this research we are going to look at the historical data from the Bitcoin futures on BitMEX due to the longer timeline and historical majority of volume.  Similar futures are also listed on Deribit, FTX, Huobi, and OKEx. There are many futures contracts that currently exist and Bitcoin is one of many. As always, this is not investment advice. 

A significant consideration about putting on a futures position is dealing with the expiry or settlement. You may recall the jokes earlier this year about oil futures going negative during the shock to demand and lack of parties wanting to take delivery. While traders of Bitcoin don’t have to worry about barrels showing up at their homes since all Bitcoin futures are cash-settled, they may want to roll their basis trade onto the next contract to avoid closing it out altogether. 

From here on, when we refer to the “front” contract we are referring to the contract with the soonest expiration date. When we refer to the “next” contract, we are referring to the contract with the expiration date following the front contract. For example, if the date was September 1, 2020 and there was a contract with a Sept. 25 expiration, Dec 25 expiration and March 25 expiration, these could be referred to as the “front”, “belly”, and “back” contracts. For our purposes, the “next” contract would be the December 25th tenor. Below is a look at the spread between the perpetual and front month contract with the data points colored by days to expiration.

Source: Coin Metrics Market Data Feed

As you can see in the visual above, the premium or discount of the front contract to the perpetual is reduced as we get closer to the front contract’s expiration date.

Continue reading “Improving Your Futures Roll” here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) and Ethereum (ETH) network fundamentals continue to look strong despite a drop in market cap. Daily transaction fees continue to grow across the board, with ETH fees reaching a new all-time high on September 1st. Increased fees lead to higher profits for miners and as a result hash rate is on the rise. BTC hash rate grew another 4.2% week-over-week and is on pace to once again reach new all-time highs. ETH hash rate also showed strong growth, rising 7% week-over-week. 

Network Highlights

ETH’s 7-day average adjusted transfer value has flipped BTC’s. 

On September 5th, ETH’s 7-day average adjusted transfer value reached $3.08B, compared to $3.01B for BTC. ETH’s average transfer value also remained above BTC’s for the following two days.

Source: Coin Metrics Network Data Charts

This is the first time since early 2018 that ETH’s 7-day average adjusted transfer value has topped BTC’s. ETH is increasingly being transferred between decentralized finance (DeFi) applications as DeFi apps built on top of Ethereum continue their rapid rise. Adding fuel to the fire, yearn.finance recently launched their yETH vault which allows users to earn interest on locked ETH. At time of writing over 200,000 ETH has been locked into the yETH vault. 

Source: Coin Metrics Network Data Charts

Similarly, USDC 7-day average adjusted transfer value soared to a new all-time high this past week. USDC is used heavily in DeFi applications like Uniswap and Curve Finance.

Source: Coin Metrics Network Data Charts

Market Data Insights

After months of positive growth the major crypto markets fell back to late July levels this past week. As tech stocks came crashing back down to earth on September 2nd and 3rd, BTC and the rest of crypto began to drop as well. 

Fueled by DeFi, ETH led the way over much of the summer. But the fast paced DeFi ethos has also led to some major implosions. Following in YAM’s footsteps, Uniswap clone SushiSwap gained over $1B of locked value in less than two weeks. But over the weekend SushiSwap’s pseudonymous founder cashed out their 2.5M SUSHI for about $13M worth of ETH, blindsiding the community and leaving the project in disarray. As a result, ETH fell harder than BTC this past week, dropping by 18% compared to a 12% decline for BTC.

Source: Coin Metrics Reference Rates

After selling out, SushiSwap’s founder transferred control of the project to FTX. FTX SUSHI-PERP open interest fell after the founder sold out, but has since somewhat rebounded, as seen in the below chart.  

Source: Coin Metrics Market Data Feed

CM Bletchley Indexes (CMBI) Insights

It was a tough week for all cryptoassets, demonstrated through the poor performance of all CMBI and Bletchley Indexes. As has historically been the case during deep market sell-offs, Bitcoin has been one of the most consistent outperforming assets. This was demonstrated this past week by the returns of the CMBI Bitcoin Index, which only fell 11.9% relative to the CMBI Ethereum Index which fell 16.9% during the period. 

The Bletchley 40, which has been the star performer throughout 2020 and is still up almost 150% YTD, had a week to forget. It was the worst performer of the indexes, falling 23.8%.

Source: Coin Metrics CMBI

Despite the weak performance of the price indexes, the CMBI Bitcoin Hash Rate Index and CMBI Bitcoin Observed Work Index, which measure the performance of miners, continued to trade near all-time highs. At least in the short term, this demonstrates that miners remain unphased by the recent market price action.

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.

Coin Metrics’ State of the Network: Issue 66 – The Privacy Issue

Weekly Feature

The Privacy Issue

By Antoine Le Calvez and the Coin Metrics Team

The early 1990’s saw the dissemination of two great forces that would come to shape the next decades: the Internet, and strong cryptography.

In a seminal manifesto written in 1993, Eric Hughes condensed the ethos of a young movement born at the intersection of these two technologies: the Cypherpunk. Determined to defend privacy in an age of already ever-growing surveillance, their tools would be cryptography and software: cypher + cyberpunk.

“We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures, and with electronic money.”

Satoshi Nakamoto provided the cypherpunks with lasting electronic money 15 years later. In its wake, many other anonymous electronic money systems would be created, incorporating the latest developments in cryptography.

In this feature, we’ll look into how the current anonymous transactions systems, aka crypto-currencies, compare to the privacy hopes of their cypherpunk forefathers.

Selectively revealing oneself

“Privacy is the power to selectively reveal oneself to the world.” – “A Cypherpunk’s Manifesto”

Compared to traditional transaction systems involving fiat currencies, crypto-currencies offer a lot of privacy. Freed from the need of proving the identities of those involved and the source and usage of funds, crypto-currencies only require its participants to reveal very little, if any, information about themselves. Yet, over time, even this proved to be too much as many attacks that de-anonymize Bitcoin transactions have been found.

Some of these shortcomings were foreseen by its creator, like the need to never reuse public keys, or the information that multi-inputs transactions leak, making it possible to associate many public keys to the same owner.

Over time, techniques that improve the privacy of Bitcoin users were developed, most notably CoinJoin, which allows users to “mix” their bitcoins together, making tracing their transaction history nigh impossible.

Quantifying CoinJoin is not easy since it is beneficial for its users to conceal it, but so far its usage is far from generalized.

These issues, making Bitcoin a good-enough-but-not-ideal anonymous transactions system, led some Cypherpunks to do what they do best: write code. Many new crypto-currencies, focused on better privacy, have been created over the years. In this feature, we’ll focus on three:

Zcash

Zcash was created in 2016 as a codebase fork of Bitcoin. It integrated a recent development in cryptography: zk-SNARKs (Zero Knowledge Succinct Non-Interactive Arguments of Knowledge), which enables nodes to validate transactions without knowing their contents. Private Zcash transactions therefore do not reveal anything about who transacts or what amounts are exchanged. The protocol, however, allows for so-called transparent transactions which are identical to Bitcoin’s. This makes Zcash’s strong privacy features opt-in.

Zcash’s supply can be broken down into two types: shielded and transparent. The transparent supply is similar to Bitcoin’s and is fully auditable.  Zcash held in the shielded supply can be exchanged privately using zk-SNARKs. As of writing, only around 5% of all issued ZEC is currently shielded.

Since Zcash’s privacy features are opt-in, we can also measure what percentage of transactions make use of them:

Zcash’s transactions can be further divided into three categories:

  • Transparent transactions which only interact with transparent supply
  • Partially-private transactions which exchange ZEC between the shielded and transparent supplies
  • Fully-private transactions which only interact with the shielded supply

Less than 2% of transactions belong to the last category, despite a recent surge in activity.

Monero

Monero was created in 2014 and uses the CryptoNote technology built on top of ring signatures and Confidential Transactions. These allow someone to prove they belong to a group without revealing which member they are. Therefore, compared to Bitcoin, it is impossible to determine the sender of a Monero transaction: the multi-inputs transaction information leak is fixed. In 2017, Monero also adopted Bulletproofs, an even more recent cryptography advancement which hides (blinds) the amounts received. 

Grin

Grin is the youngest of these new crypto-currencies. It is an implementation of a 2016 innovation called MimbleWimble which leverages new advancements in cryptography to allow its users to conceal not only the amounts and public keys used, but also obfuscate the transaction graph: if Alice sends Bob money and Bob sends it to Charlie, the transaction can be rewritten as Alice -> Charlie without Bob’s intervention being visible on-chain.

On paper, these alternatives offer stronger privacy than Bitcoin, yet their combined daily transaction count only reaches around 6% of Bitcoin’s. For every transaction on one of these privacy assets there are 16 done on Bitcoin and countless more on assets that offer even less privacy.

Conclusion

“For privacy to be widespread it must be part of a social contract.” – “A Cypherpunk’s Manifesto”

User apathy towards privacy is probably the biggest shortcoming of the current anonymous transactions systems. Despite great technological advancements in crypto-currency privacy, uptake of privacy features and assets has been slow. As crypto-currencies continue to be adopted by the wider public, its original privacy-oriented ethos must be transmitted in order for it to survive.

Failing to do so could result in the original idea of anonymous transactions systems fading away and being superseded by other conceptions of what crypto-currencies are useful for.

On the bright side of things, the advent of Bitcoin renewed interest in research on the topic of cryptography, leading to new innovations like Bulletproofs and Mimblewimble. We can also note a renewed interest in CoinJoin with providers like Wasabi and Samurai’s Whirlpool which, despite representing a very small proportion of Bitcoin’s transaction volume, are growing quickly.

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Ethereum’s (ETH) activity continued to  moderate as average daily transactions fees decreased for the second week in row to $3.58M.   Bitcoin’s (BTC) average daily transaction fees saw an even more dramatic decrease (24%) to $1.04M.

Network Highlights

Bitcoin (BTC) age distribution bands, also known as “HODL waves,” show BTC’s supply grouped by the age it was last moved on-chain – or in other words, the age that it was last sent as part of a transaction. Introduced by Unchained Capital in 2018, HODL waves give a macroscopic view of how BTC’s supply has shifted over the years.  

Reading from the bottom of the chart up, the red and orange colored bands show the percent of supply that has been active relatively recently, ranging from less than 1 day to 30-90 days. This short-term supply tends to peak during market tops. For example, in December 2017 as BTC price neared $20,000 over 32% of BTC supply had moved on-chain within the previous 90 days. By August 2018 the amount of BTC supply moved within 90 days had dropped to about 15%. 

Conversely, reading from the top of the chart down shows the supply that has not moved for relatively long periods. These long-term bands tend to grow wider during bear markets and contract during bull periods when long-terms holders begin to sell. The purple band at the top represents coins that have never been moved on-chain other than the initial coinbase transaction.

The lower bands spiked following the crypto crash of March 12th, 2020. But since then the larger bands have been regaining ground. The 1-2 year band has grown from about 16.3% on March 12th to 19.1% on August 12th. 

Ethereum (ETH) HODL waves show that ETH short-term bands have been increasingly active in July and August. ETH’s 7-30 day band accounted for about 7.6% of total ETH supply on March 12th. Since then it has grown to over 9.7% in late August. Simultaneously, ETH’s 180 day-1 year band has decreased from about 11% on March 12th to less than 7.3% in late August. 

Market Data Insights

This past week was one of many impressive milestones for the FTX team. There is a lot going on in the space at the moment, so we won’t blame you if you missed it. The highlights include launching the Project Serum DEX, all-time high prices for FTT (FTX’s exchange token), over $1B in monthly volume for the OTC desk, listing a Uniswap 100 Index Future and, of course, the reported $150M deal to acquire the portfolio tracking app Blockfolio. 

Serum DEX Launch

Over the weekend the Project Serum (https://projectserum.com/) DEX went live. The decentralized exchange is unique from others in that it is built on the Solana blockchain as opposed to Ethereum, which the team touts as better in terms of processing, as well as having much lower transaction fees while allowing for cross-chain tokenization. The DEX has its own tokens, Serum (SRM) and MegaSerum (MSRM), the latter of which is 1M locked SRM tokens, which can be used for trading discounts on the DEX, staking, and on-chain governance.

FTT Pushing All Time Highs

It should not be a surprise that FTX’s exchange token, FTT, has hit new highs following the news of the Blockfolio acquisition. However, there may be more involved than just pure speculation on the synergies between the portfolio tracking application and the exchange. The exchange has offered airdrops equalling 5% of the total SRM supply to token holders who hold 500 FTT or more on the FTX exchange at a rate of 3 locked SRM per week for every 500 FTT held. At the current market value as of writing (SRM at $3.25 with a total supply of 10B tokens), the airdrop would be worth $1.625B which is roughly equivalent to ~4.06 times the total Market Capitalization of FTT ($400M). Those who are bullish on the team are likely to be putting on this trade, further driving market demand. FTT is breaching its all time highs at roughly $4.23 as of time of writing according to our CM Reference Rates.

CM Bletchley Indexes (CMBI) Insights

This week was a relatively uneventful week for most of the CMBI and Bletchley Indexes, with choppy trading and low volatility resulting in returns of < 2% for all market cap weighted indexes. The CMBI Bitcoin Index also had an uneventful week, finishing the week at $11,644.80 (down 0.3%). However, the CMBI Ethereum Index managed to significantly outperform all other indexes this week, returning 8.2% to close at $425.72. 

The CMBI Bitcoin Hash Rate Index again reached all time highs during the week, closing as high as 135,722. With the Chinese wet season well underway, the hash rate continues to reach for ATH levels despite the Bitcoin block subsidy halving back in May.

Important Note: Bletchley Index pricing is being transitioned to CM Reference Rates which will result in three major changes:

  1. Future levels will utilize CM Real-Time Reference Rates
  2. Historical levels will be recalculated to reflect CM Real-Time Reference Rates
  3. The Bletchley Universe will be increased to include more assets from September 1, 2020

For more information please read the recent announcement.

More performance information can be found here:

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • Next week’s issue of State of the Network will be published on Wednesday (September 9th) instead of Tuesday due to Labor Day. State of the Network will return to its regular publication schedule the following week.
  • 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.

Coin Metrics’ State of the Network: Issue 65 – The Business Trends of Crypto Exchanges

Weekly Feature

The Business Trends of Crypto Exchanges 

By Huyette Spring and the Coin Metrics Team

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

Overview

State of the Network has predominantly focused on the network and market data happenings of the crypto industry. In this issue, we zoom out a bit to discuss the business trends and strategies of the exchanges building atop these decentralized protocols.

From a standing start in October 2008, the cryptocurrency exchange industry has matured at an astonishing pace. But there is no guarantee that this maturation is sufficient for cryptocurrency exchanges to remain independent indefinitely. 

Below, we explore the maturation of the crypto exchanges through the years.

Satoshi to ~2017

The first challenge for crypto exchanges was how to gain traction in a basically non-existent market. Simply put, could they build a product that early adopters would actually use?

In the early days of crypto centralized exchanges began to emerge, horrifying the hardcore decentralization-focused cypherpunks. Trust is a luxury of optionality and there was almost no competition for any given job-to-be-done. These conditions allowed MtGox to simultaneously have 70% of the Bitcoin market and absolutely no controls upon which users could place their trust. It’s no surprise, then, that the inevitable MtGox hack was a significant event in the history of crypto exchange development and threatened the future of the industry.

MtGox 7-day avg. trading volume before the exchange was abruptly taken offline on February 25th, 2014 

But the hot air gushing into the balloon during the 2017 price run-up brought with it more users, employees, business models, and competition. Users of these crypto exchanges had now been given the Promethean fire of business: choice, and with it, expectations. Those expectations meant that exchanges needed to do more than just build a product which early adopters would use. They also needed to make a product that people would trust. 

~2017 to 2020

Here’s the challenge with trust: it’s expensive and it mainly accrues to the brand, not the product. Thus, exchange’s point of focus shifted from the product to the company: Can you build a going concern; i.e. an actual run rate business?

There are two distinct but interconnected trends occurring today which demonstrate exchange’s strive to capture the hearts and minds (read, trust) of the ever fickle customer: Professionalization and Strategy Optimization. 

Professionalization

The first trend is to win the minds of customers through Professionalization. Regardless of the segment, customers now expect exchanges to act like they’ve been there before

The quickest way to do this is hiring. Visionaries started the crypto industry from whole cloth but the theme now seems to be “professional businesses require professional managers”. And while a first principles re-imagining of the social contract of money has always attracted top talent, now the talent is operating professionals coming in at the top of the org chart, with “traditional world” experience. To name just a few recent examples: Coinbase has hired executives from BarclaysGoogleLyft; BlockFi has hired executives from AmEx and Credit Suisse; Gemini hired a former Goldman Sachs executive to lead their Asia expansion. 

The second approach to Professionalization is acceptance of regulation. True, this was a hand forced by regulators, especially in the U.S., but much of the industry has, in one form or another, turned this into a trust-building competitive advantage. Regulation, and accompanying attestations like SOC audits, appears to have become a marketing positive rather than a negative. Despite it’s well documented flaws, the number of BitLicense approvals is accelerating. International companies such as Binance.US and FTX.US have cleared the regulatory hurdles necessary to enter the U.S. market, typically by registering as an MSB. Luxembourg-based Bitstamp went a step further and got a full BitLicense. BitMEX has announced a User Verticiation (read KYC) program. And unlike many crypto “exchanges” which aren’t, ErisX sought and received a DCO and DCM license from the CFTC, enabling it to fulfill its business model of targeting the institutional market. 

Continue reading “The Business Trends of Crypto Exchanges”…

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Ethereum (ETH) transaction fees came back down to earth this week after reaching new all-time highs last week due to the rapid rise and fall of YAM. But despite a 28.4% drop week-over-week, ETH total daily fees still remain relatively high. Over the past week, ETH average daily transaction fees were over $3.8M, compared to about $1.4M for Bitcoin (BTC). 

Network Highlights

After months of rapid growth, Tether’s 7-day average adjusted transfer value has finally flipped Bitcoin’s. 

On August 20th, Tether’s 7-day average adjusted transfer value reached over $3.55B compared to Bitcoin’s $2.94B. This is a big milestone for stablecoins as Tether continues to take more and more of the market share of on-chain transfers. Stablecoins are increasingly being used in popular DeFi applications like Uniswap and Curve, both of which likely played a role in Tether’s recent surge. 

Source: Coin Metrics Formula Builder

Simultaneously, total Tether supply crossed another milestone reaching over 13B on August 21st. Tether’s supply has grown at a rapid rate – it was less than 10B on June 1st, 2020, and less than 5B on March 1st. The following chart shows the total supply of the Ethereum, Tron, and Omni versions of USDT.

Source: Coin Metrics Formula Builder

And Tether continues to expand to more networks. Tether recently announced that USDT would be expanding to yet another platform in addition to Ethereum, Tron, the Omni protocol, and others. On August 19th a new USDT integration went live on the OMG Network, an Ethereum-based layer 2 protocol. As a result OMG’s daily active addresses have already shot up to their highest levels since August 2018. 

Source: Coin Metrics Network Data Charts

Market Data Insights

Current market sentiment surrounding certain DeFi projects evokes memories of the ICO-fueled market of late 2017. In light of this situation, we examine where the crypto market is in its current market cycle compared to previous cycles. 

Bitcoin has experienced multiple bubble-and-crash cycles in its history and here we identify three major cycles with cycle tops and cycle bottoms. With the benefit of hindsight, we identify the beginning of our current cycle when the price of Bitcoin briefly fell to the low $3,000s in late 2018. 

We are currently over 600 days in the current cycle and are closely tracking the performance of the previous cycle which began in 2015. Although there is no guarantee that the market will follow the patterns established by previous cycles, financial history has shown us that the formation of asset bubbles appear to be linked to deeply rooted aspects of human behavior. 

The market has significantly changed over the past several years, particularly with respect to the ability for market participants to express short market views. The market has also grown to a point where further increases are more difficult than before, so there are good arguments to be made that this cycle will be different. Nonetheless, if this cycle evolves similarly to the previous cycles, there appears to be at least several hundred days remaining. 

In DeFi news, the $BASED (based.money) project reached some major milestones. The protocol is the product of an anonymous group and follows a distribution mechanism similar to Ampleforth where the supply is rebased periodically in an attempt to have 1 $BASED equal $1. 

Following the release of its Pool 1 on Uniswap it had over $38m of staked liquidity in less than 24 hours and had traded at an all time high price of $941.13. It currently trades at $152.72 as of the time of writing. The creators state it is designed as “game of chicken designed to shake out weak hands and yield the highest gains for those who understand the rules”.  The activity surrounding it so far makes it appear an interesting aspect of the DeFi ecosystem to watch over the next few weeks

CM Bletchley Indexes (CMBI) Insights

Update to the Bletchley Indexes: As of the 1st of September, Coin Metrics will take the next step to integrate the Bletchley Indexes into Coin Metrics, transitioning all infrastructure over to Coin Metrics owned systems and updating all pricing sources to Coin Metrics Reference Rates. As part of the transition, Coin Metrics will be updating the history of the Bletchley Indexes to reflect Coin Metrics historical reference rates. Further, going forward, we will also be expanding the universe of assets available for selection which will result in a significant turnover in the index during the September Rebalance.

This is an exciting step for Coin Metrics that allows the company to wholly own, manage and have transparency into the current and historical pricing data as well as overcoming anomalies that currently existed from methodologies that are not administered and calculated by Coin Metrics. 

After a few weeks of across the board growth, this week most CMBI and Bletchley Indexes experience a pull back. The CMBI Bitcoin Index fell a modest 1.7%, ending the week at $11,680.64 after twice closing the daily above $12,000 for the first time since July 2019. The CMBI Ethereum Index, which has recently been more volatile on the up and downside, closed the week at $393.49 (down 8.4%) after reaching intra-week highs of $437.78. The only Index to close the week higher was the Bletchley 40 (small caps) which grew 3.3%. 

Source: Coin Metrics CMBI

The CMBI Bitcoin Hash Rate Index reached all time highs of 136,060 terahashes during the week, but ended closing at 117,947 terahashes, remaining in the range it has been in since the start of June (100,000 TH – 140,000 TH).

More performance information can be found here:

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.

Coin Metrics’ State of the Network: Issue 64 – How YAM’s Collapse Drove Ethereum Fees to New Heights

Weekly Feature

The DeFi Fee Explosion: How YAM’s Collapse Drove Ethereum Fees to New Heights

By Nate Maddrey and the Coin Metrics Team

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

On August 12th Ethereum’s total daily transactions fees topped $6.87M, shattering the previous all-time high of $4.55M set in January 2018. The following day, Ethereum had $8.61M worth of fees, once again breaking the daily record. 

Blockchain transaction fees are a double-edged sword. High fees means there’s high demand for usage, but can also cause network congestion and price out certain users. 

When Ethereum miners mine a block they need to select which transactions to include. Typically miners will sort by highest fee and add transactions until they run out of block space. This means that transactions with relatively low fees get deprioritized and included in later blocks once there’s space. 

Ethereum fees are measured in units of “gas.” Each transaction costs a certain amount of gas depending on the amount of computation required (more complex transactions require more gas). Transaction senders specify the gas price they want to pay when initiating a transaction. If a transaction sender increases the gas price that they’re willing to pay, there’s a higher likelihood that their transaction gets prioritized. 

Rising transaction fees therefore signals that there’s increasing demand for transactions to be quickly confirmed and included in blocks. High transaction fees also leads to higher revenue for miners, as miners receive the fees as part of their reward for securing the network. 

But high transaction fees come at a cost. As average fees increase, certain types of users and applications get priced out. Use cases like games and digital collectibles that depend on large amounts of microtransactions can become prohibitively expensive. And it becomes harder for average, retail users to compete with large, whale investors who can afford to pay high transaction fees. 

YAM Mania 

This recent surge in fees was driven by one of the craziest decentralized finance (DeFi) events to date: the launch of the YAM token. 

On August 11th at 17:00 UTC, the team behind DeFi project yam.finance announced that they would soon be launching the YAM token. Following the model used by DeFi token YFI, YAM was to be distributed through staking pools. 

During the ICO boom of 2017 newly created tokens were sold through token sales, often driving prices up to crazy levels. Furthermore, tokens were often held and distributed by the ICO’s founding team or foundation, allowing many project founders to quickly profit. DeFi projects have pioneered a new model of token distributions: instead of a token sale, they distribute tokens as rewards for staking pools. DeFi projects will specify a list of staking pools and liquidity pools that are eligible to earn the token. The new token is then distributed proportionally to the amount of tokens staked, with higher stakes earning more tokens. 

The yam.finance team outlined eight different staking pools, each with a different cryptoasset that could be staked (including WETH, COMP, MKR, YFI, and others) to earn YAM. Following in the footsteps of yearn.finance’s YFI token, the yam.finance team chose not to reserve any tokens for themselves, distributing them entirely to the community. 

Once YAM launched there was a rush to start staking funds in one of the eight pools and start earning YAM as a reward. YAM staking pool smart contracts generated over $15K worth of transaction fees within hours of launch.

Signs of Trouble

But soon after YAM started to take off it began to unravel. The YAM token was designed to be “supply elastic,” meaning the token supply would automatically contract or expand in an attempt to keep price relatively stable. YAM’s supply elastic model was based on another DeFi token, Ampleforth (AMPL). 

The supply adjustments were to occur as a nightly rebase using a complex mechanism that would adjust supply without diluting current holders. But despite the relatively complex architecture, the YAM team did not have their smart contracts audited, as they explicitly stated in their announcement post. 

At 18:00 UTC on August 12th the yam.finance team announced that they found a bug in the rebasing contract which threatened the future of the project. To fix the issue they needed at least 35K YAM tokens delegated to a governance smart contract so they could pass a vote to temporarily pause the rebasing mechanism.

The rush to move YAM as a response to the bug was the first event that caused fees to skyrocket. This fee spike was also seen on Uniswap, the decentralized exchange that has become the center of DeFi trading. Further complicating things, a lot of YAM had been staked in Uniswap liquidity pools, which needed to be quickly unstaked and moved. This caused Uniswap fees to surge and peak at 20:00 on August 12th. 

YAMpocalypse

But YAM’s problems did not stop there. At 07:27 UTC on August 13th the yam.finance team announce that they had submitted a governance proposal to fix the bug before the upcoming rebase at 08:00. Crucially, they strongly encouraged users to exit the Uniswap YAM/yCRV liquidity pool before the rebase. But soon after, with help from security experts, the team concluded that “the rebaser bug would interact with the governance module and prevent this proposal from succeeding.” The YAM protocol was effectively dead. Transaction fees peaked at 08:00 UTC, and then started to fall.

Continue reading “The DeFi Fee Explosion”…

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Ethereum (ETH) remained hot this past week, with market capitalization growing by 5.9% week-over-week compared to a 1.5% growth for Bitcoin (BTC). ETH fees grew a shocking 174.3%, after already nearing all-time highs in previous weeks. On August 12th and 13th ETH fees shot to new all-time highs, as covered in this week’s Weekly Feature. 

Network Highlights

BTC hash rate is reaching new all-time highs as price is starting to climb. After a rocky start to 2020 that saw large drops in hash rate following the March 12th price crash and May 11th halving, BTC’s hash rate has fully recovered and eclipsed previous levels. This is a great sign for network security and signals that fundamentals are strong.  

Source: Coin Metrics Network Data Charts

Although ETH’s hash rate has not yet surpassed 2018 highs, it has been surging as of late as well. Spurred by the increase is miner revenue from rising transaction fees, ETH’s 7 day average hash rate reached 196.52 TH/s on August 16th, its highest level since November 2018. 

Source: Coin Metrics Network Data Charts

Market Data Insights

The market is looking frothy. 90.23% of the 248 assets that Coinmetrics provides reference rates on are up month over month with an average price increase of 53.71%. To highlight some of the exuberance we take a look at two assets in honor of the newest celebrity to embrace the cryptocurrency space, Dave “Davey Day Trader” Portnoy.

Orchid Protocol, OXT, made a 284% move over the weekend to a high of $1.00 from roughly $0.26 in less than 24 hours. It is not overtly clear what was the catalyst for this price movement with the most recent news from the project team being additional support for WireGuard on iOS, MacOS and Android, a VPN protocol supported by many major VPN providers. Many in the community remain skeptical about the move and the price has since come down to $0.57 as of the time this article was written.

Source: Coin Metrics Reference Rates

Chainlink (LINK) also continued to rage on, melting upward and reaching a price of over $20 on some exchanges. 

Source: Coin Metrics Reference Rates

Over the past thirty days LINK has risen nearly 140% and is now third behind only Bitcoin and ETH in terms of average 7 day volume.

Source: Coin Metrics Market Data Feed

CM Bletchley Indexes (CMBI) Insights

All CMBI and Bletchley Indexes finished this last week with positive returns, with the Bletchley 40 (small caps) again performing best whilst the CMBI Bitcoin Index fluctuated between 11,000 and 12,000. The CMBI Ethereum Index had another strong week, closing up 10.2% at 429.76. 

The Even Indexes also had a great week, all returning above 12%. The Even Indexes provide a different exposure to crypto markets, weighting each asset within an index evenly at the start of the month. During a week where Bitcoin underperformed the rest of the market, this is very visible in the returns of the B10 Even and the BTotal Even, which both significantly outperformed their market cap weighted counterpart.

Source: Coin Metrics CMBI

The CMBI Bitcoin Hash Rate Index reached new highs this last week, showing no signs of slowing down despite the advent of the halving back in May. As a result of the sustained high levels of hash rate, the CMBI Bitcoin Observed Work Index has also reached new all time highs, indicating that miners in aggregate have been conducting over 11,250 Zeta Hashes per day.

More performance information on the:

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.

Coin Metrics’ State of the Network: Issue 63 – Introducing the Coin Metrics Quarterly Supply Transparency Report

Weekly Feature

Introducing the Coin Metrics Quarterly Supply Transparency Report

by Ben Celermajer and the Coin Metrics Team

The following is an excerpt from a full announcement of our new Quarterly Supply Transparency Report (truncated due to space). You can read the full piece here.

Part of Coin Metrics’ mission is to provide the community with transparent cryptoasset market and network data that allows investors to make the most informed decisions. One of our most recent metrics, Free Float Supply, has provided Coin Metrics with the opportunity to gain visibility into the activities of strategic stakeholders in cryptoasset networks and report our findings to our community on a quarterly basis. We perceive this type of reporting to be akin to traditional equity markets which mandate that company insiders and other strategic stakeholders (e.g. those that own >5% of shares) report their holdings to governing bodies, which in turn are promptly made public.

Having only released the Free Float Metrics one month ago, our first report is being released slightly behind schedule. But moving forward the Quarterly Transparency Report will be released on a regular schedule, which we will be announcing soon.

Free Float Supply Inflation

At the highest level, analyzing and understanding the changes in Free Float Supply have allowed Coin Metrics to identify and better understand the inflation rate of cryptoassets. It is widely known that Proof of Work or Proof of Stake blockchains have a rate of inflation from the issuance of tokens to miners/stakers. But what is less understood is the inflation rate of cryptoassets like Stellar, Cardano, XRP, or Chainlink. Whilst these tokens all have fixed or deflationary total on-chain supplies, the transition of restricted assets (such as those held by stakeholders) into the supply available to the market can be perceived as inflation. 

Evidenced above, Free Float Inflation Rates across cryptoassets vary vastly. There are also several results that may seem non-intuitive at first glance, again highlighting the importance of understanding the full context of an asset before passing judgment. Some of the glaring oddities include:

  • Huobi Token’s high deflation – Whilst Huobi undergoes routine token burns, on March 1, 2020, Huobi burned 147.4m HT of a total 500m outstanding HT. This one-off burn followed a community vote to remove assets assigned to the Platform Operation and Investor Protection Fund.
  • In instances where a cryptoasset’s Free Float Supply is relatively small compared to its total On-Chain Supply, new issuances from foundation addresses can significantly impact inflation levels, as witnessed in the case of Crypto.com Coin (CRO).
  • Dogecoin deflation – In the case of blockchains that are older than 5 years, Coin Metrics Network Data tools identify addresses whose assets have not been sent in over 5 years. Assets in these addresses are classified as belonging to long term strategic holders of a network and thus considered restricted from liquid supply. In the case of DOGE over the last 12 months, assets that have fallen into this category have been larger than those issued by the mining issuance schedule, thus resulting in a net deflation of Free Float Supply.

In the early stages of crypto assets, the primary categories of stakeholders that restrict supply are foundations/companies and team members. Very few chains have aged more than 5 years, thus have no ‘provably’ long term strategic holders, and there has been little burning that has taken place other than from some revenue-generating businesses that operate tokens (e.g. exchanges like FTX or Huobi). To that extent, the majority of changes to supply disclosed in the Quarterly Supply Transparency Report are from the movement from Foundation/Company or Team owned addresses.

Foundation/Company Restricted Supply

The chart below displays the foundations/companies that have been most active over the last 12 months manage some of the largest market capitalization crypto assets, including XRP, Stellar, Crypto.com Coin and Huobi. 

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 Foundation/Company controlled addresses in Q2 2020 was $743M, down from $891M during the previous quarter ($148M less). However, on closer observation, $422M of the assets moved outside of foundation addresses in Q1 2020 were from the Huobi burn of 147M HT. If we were to exclude this from Q1 values since it was a burn, distribution of assets from foundation address increased $274M or 58%.

Continue reading here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Ethereum’s (ETH) growth slowed this past week, at least temporarily. After surging last week due to the rapid rise of decentralized finance (DeFi), ETH active addresses were about even for the week. ETH transactions grew by just 0.9% week-over-week, while transfers declined by 1.4%. 

Bitcoin (BTC) usage was also fairly flat for the week, with active addresses growing slightly and transfers dropping by 2.0%. On a positive note, BTC estimated hash rate was up 3.0% week-over-week and continues to hover near all-time highs.

Network Highlights

On paper, total supply seems like one of the most straightforward cryptoasset metrics to calculate. But in practice calculating ETH’s total supply is tricky, as many found out over the weekend

One of the advantages of cryptoassets is that they are inherently auditable. Unlike traditional assets, anyone can audit the supply and full transaction history. The entire Bitcoin blockchain can be replayed by running a node and tracking the unspent transaction outputs (UTXOs) that are included in each block. After replaying the whole chain, the remaining unspent outputs make up the asset’s ledger. Summing up their value gives the asset’s supply.

But for other blockchains, auditing supply can be more complicated. Ethereum, for example, uses an account-based model which requires auditors to track credits and debits for each account on the chain. Further complicating things, Ethereum has made some implicit ledger edits, where the ledger was changed but the change was not included in a transaction or block. Implicit ledger edits are not unique to Ethereum – other account-based blockchains, like Tezos, have had similar issues.

In State of the Network Issue 30 we analyzed Ethereum’s previous internal ledger edits as part of a deep dive into the auditability of different cryptoassets:

For example, following the DAO attack, Ethereum experienced a hard fork to return funds withdrawn from the DAO to another address not controlled by the person behind the unexpected DAO withdrawals. Those changes to the ledger are implemented in the code run by the nodes, not in a transaction nor in a block. Unfortunately for auditors, neither the block raw data nor the tracing data indicate that those changes occurred. The only way to capture those credits and debits is to find the hardcoded list of affected addresses and emulate what edits the code ran over the ledger.

Taking this and other edge cases into account, we can calculate ETH’s total supply: 112.1146M as of August 9th.

Source: Coin Metrics Network Data Charts

But verifying on-chain supply is just the first step in understanding a cryptoasset’s true supply. Cryptoasset supply can be permanently lost or burned, which should be accounted for (we detailed some examples of this in State of the Network Issue 26 – How Many Bitcoins Are Permanently Lost?). Additionally, certain cryptoassets have supply that is staked or held by an official foundation, effectively removing it from liquid supply. 

To account for this, Coin Metrics developed “free float supply,” which was introduced in State of the Network Issue 57. Free float supply takes a methodical approach to identifying supply that is highly unlikely to be available to the market in the short to mid-term. ETH’s free float supply is 108.0168M as of August 9th.

Source: Coin Metrics Network Data Charts

Interestingly, ETH’s free float supply percentage (i.e. the percent of total supply that is liquid) is higher than Bitcoin (BTC), Ripple (XRP), Litecoin (LTC), Bitcoin Cash (BCH), Tezos (XTZ), and Cardano (ADA). About 96.35% of ETH supply is freely available to the market at time of writing. 

Source: Coin Metrics Formula Builder

Ultimately, it’s important that data providers operate their own nodes to get a full picture of what is truly happening on-chain. When it comes to important metrics like on-chain supply, the old adage always rings true: don’t trust, verify.

Market Data Insights

The markets cooled off this past week after last week’s ETH fueled surge. BTC and ETH are both up 5%, while Ripple (XRP) finished the week even. 

ChainLink (LINK) continued its run, up 67% on the week with price reaching new all-time highs. LINK’s trading volume even temporarily passed BTC’s trading volume on Coinbase. ChainLink is a decentralized oracle network that’s used in decentralized finance (DeFi) apps like Synthetix. Over the weekend, over $20M worth of LINK short positions were liquidated on Aave, a DeFi platform built on Ethereum. This led to questions whether the short positions were part of an elaborate marketing campaign designed to pump LINK’s price higher. 

Source: Coin Metrics Reference Rates

Ethereum Classic (ETC) was the only major cryptoasset down on the week, with a 4% loss. Over the past week ETC suffered multiple 51% attacks and a successful double spend of $5.6M, a massive security breach that poses an existential threat to the Ethereum Classic network.

Source: Coin Metrics Reference Rates

CM Bletchley Indexes (CMBI) Insights

As the CMBI Bitcoin Index and CMBI Ethereum Index took a breather from their last two weeks of strong returns, it was the alt-coins that saw the most action this past week. The Blethley 40 (small caps) experienced the greatest returns, growing 20.7% for the week. The Bletchley 20 (mid caps) and Bletchley 10 (large caps) also both outshone the single asset indexes, returning 9.0% and 7.4% respectively.

Interestingly, despite the Bletchley 10 and Bletchley Total growing the least of the market cap weighted indexes, their even counterparts both outperformed the Bletchley 20 Even fairly substantially. This is largely the result of Bitcon and Ethereum composing the majority of the market cap weighted Bletchley 10 (68% BTC, 13% ETH) and Bletchley Total (63% BTC, 12% ETH).

Update to the Bletchley Indexes: As of the 1st of September, Coin Metrics will take the next step to integrate the Bletchley Indexes into Coin Metrics, transitioning all infrastructure over to Coin Metrics owned systems and updating all pricing sources to Coin Metrics Reference Rates. As part of the transition, Coin Metrics will be updating the history of the Bletchley Indexes to reflect Coin Metrics historical reference rates. Further, going forward, we will also be expanding the universe of assets available for selection which will result in a significant turnover in the index during the September Rebalance.

This is an exciting step for Coin Metrics that allows the company to wholly own, manage and have transparency into the current and historical pricing data as well as overcoming anomalies that currently existed from methodologies that are not administered and calculated by Coin Metrics. 

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.

Coin Metrics’ State of the Network: Issue 62 – Surveying the Bitcoin Perpetual Swap Market

Weekly Feature

Derivatives’ Disparities: Surveying the Bitcoin Perpetual Swap Market

by Karim Helmy and the Coin Metrics Team

The following is an excerpt from our research on the crypto derivatives market (truncated due to space limitations). Read the full piece here

Dissecting Derivatives

The crypto market is still young and the contract structure of derivatives varies across exchanges. Derivatives lack a standard methodology by which to calculate indexes and funding payments, and documentation in this space is generally difficult to follow. While these figures are important for traders to understand, especially during periods of market volatility, there’s a severe shortage of information on the topic.

Derivatives are incredibly influential on the broader market due to their association with levered trading, and bitcoin’s recent price appreciation has led to a surge in perpetual swap volumes. As is the norm in crypto, liquidity in this market is highly fragmented—in the case of derivatives, differing contract terms and API structures make it particularly difficult to harmonize data collected from different exchanges. These differences obscure the amount of risk taken on by users, especially through index composition and funding calculation.

To help us build out our upcoming derivatives data product which will complement our existing market data feed, the Coin Metrics team aggregated information from major derivatives markets on their contract structures. In this issue, we’ll take a close look at the state of the bitcoin perpetuals market and the discrepancies between perpetual swap contracts.

Volatile Volumes

perpetual swap, also known as a perpetual, is a type of derivative that approximates the price of its underlying asset in close to real time. Perpetual swaps resemble fixed-maturity futures but don’t settle. Instead, these derivatives use a mechanism called funding to keep swap prices in line with those of the underlying asset.

Perpetuals were popularized in the crypto ecosystem by BitMEX, and are rare in traditional financial markets. Perpetual swaps account for a substantial portion of derivatives trading volume, dwarfing fixed-maturity futures volumes across the exchanges tracked by Coin Metrics. 

Although perpetuals continue to drive the markets, year-to-date, monthly volumes across the exchanges where Coin Metrics currently has access to historical data have declined significantly. Binance, in particular, has gained a significant amount of market share this year.

A look at daily volumes reveals that trading volumes across exchanges tend to move in tandem with one another. It also shows a resurgence in activity in late July, corresponding to the recent appreciation in Bitcoin’s price. This view also traces the change in market dynamics to the March 12 crash; the role of derivatives exchanges in this crash was the subject of SOTN Issue 43.

Perpetuals are highly influential on crypto markets. Trading volume in the bitcoin perpetuals markets tracked by Coin Metrics is significantly higher than in all crypto spot markets passing Coin Metrics’ Trusted Volume Framework.

Continue reading Derivatives’ Disparities: Surveying the Bitcoin Perpetual Swap Market

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) and Ethereum (ETH) market caps both surged to new 2020 highs over the weekend breaking well past pre-March levels. Usage metrics also continue to grow, adding to evidence of a rising bull market.

BTC averaged over 1 million daily active addresses over the past week for the first time since January 2018. ETH had 626K active addresses on August 2nd and is closing in on the all-time high of 735K set on January 16th, 2018.

Transaction fees also continue to rise which signals increasing demand for block space. ETH averaged almost $2M worth of daily fees over the last week, and is still outpacing BTC. But BTC is catching up, as BTC daily transaction fees grew 67.4% week-over-week compared to a 28.7% growth for ETH.  

Network Highlights

Stablecoins are back on the rise, once again led by Tether. Since the beginning of August the total Tether supply has grown by over 400M to a total of over 11.5B. Much of the growth has come from the Tron version of Tether (USDT-TRX), which has increased by about 250M since July 31st. But the majority of Tether’s supply remains on Ethereum (USDT-ETH). USDT-ETH continues to add to the rise in overall Ethereum usage. For more on what’s driving the recent rise of stablecoins check out our Rise of Stablecoins report.

Source: Coin Metrics Network Data Charts

Tether has also risen back above its price peg to its highest levels since mid-May. Tether’s price has been significantly higher than the other major stablecoins (excluding DAI) so far throughout August. 

Source: Coin Metrics Network Data Charts

Stablecoin transfer value reached over $5B on July 27th, led by USDT-ETH, USDC, and DAI. DAI, USDC, and increasingly USDT-ETH are all used extensively in decentralized finance (DeFi) applications such as Compound, Aave, and Curve Finance, which contributed to the large increase in transfer value. The following chart shows adjusted transfer value smoothed using a 7 day rolling average. 

Source: Coin Metrics Network Data Charts

Market Data Insights

ETH and BTC Move Higher

Following July’s break in the low volatility regime, BTC and ETH continue to move higher this past weekend. On the morning of August 2, 2020, ETH broke $400, reaching a high of approximately $415, a level not seen in over a year. BTC also breached a key level of $12,000. However these price levels were not sustained for long, both selling off rapidly.

Above is a view of the BTC perpetual and dated futures during the selloff this weekend, highlighting the brief decoupling the quarterly contracts near the local bottom.

After the brief selloff this weekend, both BTC and ETH resumed climbing in price, with BTC trading in the $11 – 11.5k range and ETH looking to breach $400 again in the $380 – $400 range. 

CM Bletchley Indexes (CMBI) Insights

Another fantastic week for large cap crypto assets with the CMBI Ethereum Index leading the Coin Metrics suite of indexes, closing the week at $380.51, up 23.6%. The CMBI Bitcoin Index and Bletchley 10 performed outstandingly during the week as well, returning 13.3% and 14.0% respectively. After the large caps experiencing months of low volatility and <3% weekly returns, they have been playing some impressive catch-up these last two weeks.

The Bletchley 40 (small cap index) which had been enjoying all the returns during the low volatility period of large caps experienced another down week, falling 7.1% against the USD and a staggering 18.1% against Bitcoin. This type of market activity is not unfamiliar to crypto assets, with investors and speculators often cycling profits from large cap to small cap and vice versa as market conditions change.

Source: Coin Metrics CMBI

The CMBI Bitcoin Index closed the month of July at $11,309.56, marking its second highest monthly close after the 31-December 2017 month end $14,150 value print. For more performance information check out the July CMBI Single Asset Index Factsheet.

Source: Coin Metrics CMBI

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.

Coin Metrics’ State of the Network: Issue 61 – Introducing Coin Metrics’ Trusted Volume Framework

Weekly Feature

Introducing Coin Metrics’ Trusted Volume Framework

By Jon Geenty and the Coin Metrics Team

This week we want to highlight our work to improve the quality of information in our industry by introducing a framework to better identify exchanges with spot volume reporting that you can trust.  Below are some excerpts from our research. You can find the full report here.

Overview

Fake trading volume is a persistent problem on crypto exchanges. With little regulatory oversight, it can be difficult to determine whether reported volume numbers are accurate or exaggerated. At Coin Metrics we’ve taken a data driven approach to the problem and are excited to introduce a “trusted volume” metric to help identify legitimate trading volume.

Our trusted volume metric is an aggregation of the reported volume from exchanges that we consider the most accurate and trustworthy. This is based on a combination of both quantitative and qualitative features. The analysis below is limited to spot exchanges and spot volume. This is a distinction with regards to derivative exchanges such as BitMEX and Deribit. 

Our framework for measuring the reporting quality of an exchange is broken down into three broad categories: volume correlation, web traffic analytics and qualitative features. Each of these three categories culminates in a pass/fail test. Exchanges that pass all three measures are included in our trusted volume set of metrics.

Part I: Correlation of Hourly Volume with Regulated Exchanges

During times of high volatility and large price movements, exchanges should see an increase in trading volumes in a similar magnitude to their peers. The same applies in times of low volatility and small price movement. Accordingly, authentic volume should have a higher correlation to other authentic volume. Fake volume should surface as an outlier with lower correlation. 

In this test, we took hourly volume from long-standing, regulated exchanges based in the United States and used that as our ‘trusted’ control group. These exchanges all have a relatively long established history of at least five years and legitimacy that has been somewhat bolstered by regulations within the United States. These exchanges also support fiat USD trading, which adds additional credibility. This list includes Bitstamp, Bittrex, Coinbase, Gemini, itBit and Kraken. All data in this section is from trading volume between June 1 and June 30, 2020.

Using a time series of the hourly volume from all markets on all exchanges in our test set, we aggregated the volume by base asset and calculated the correlation between the exchange and the volume for the same base asset on the trusted exchanges. We did this for all assets listed on at least two or more trusted exchanges.

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. We take the correlations (like those seen in the examples above) and look at them in their entirety to get a better sense for the overall dispersion of the exchange’s markets’ correlation to the ‘trusted’ control group.

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. However, a median measure across an exchange’s markets is not the best measure for economic activity.

In order to make this measurement better represent the exchanges’ overall volumes we created an aggregated volume weighted correlation based on the relative volumes of the exchanges’ markets. This was accomplished by taking the volumes for the month of June 2020 and calculating the percentage that each base asset made up of the exchange’s total qualified volume. Total qualified volume here is defined as volume in a base asset listed on two or more of the ‘trusted’ exchanges. We then used that percentage to create a volume weighted average of the correlations of each exchange. We believe that the reasonable cutoff for this test is a volume weighted correlation to the ‘trusted’ markets of 80% or greater.

Part II: 24 Hour Volume Over Third Party Web Traffic Metrics

Another way of analyzing fake volume is to look at volume compared to the amount of users visiting an exchange. In theory, the amount of an exchange’s volume should hold some relation to the amount of traders visiting their site. More users should lead to more volume and the inverse should hold as well. An exchange inflating volume numbers should tend to have a higher ratio of volume to traders relative to the other exchanges. 

Continue reading the full report…

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

After weeks of decentralized finance (DeFi) growth with little movement from Ether (ETH), ETH finally exploded this past week. ETH market cap grew 15.6% week-over-week leading all other major cryptoassets. ETH transaction fees also continued to surge, growing over 76.1% week-over-week. ETH had an average of over $1.5M daily fees over the last week, outpacing Bitcoin (BTC) by about $500K per day. ETH adjusted transfer value surged as well, growing by 77.9%, and averaging close to $1B per day.

BTC’s fees also showed strong growth, gaining 74.1% week-over-week. BTC is starting to rise along with ETH, buoyed by strong security. BTC’s hash rate recently hit a new-all-time high on July 24th and grew 7.4% week-over-week.

Network Highlights

On July 25th, Ethereum contract calls hit a new all-time high of 3.11M. Ethereum contract usage is surging as decentralized finance (DeFi) apps continue their hot streak. 

Source: Coin Metrics Network Data Pro

ETH is also gaining momentum on exchanges. While the amount of BTC and ETH transactions involving exchanges (i.e. sent either to or from an exchange) has been relatively equal over the last year, ETH has started to pull ahead in July. The following chart shows the number of daily transactions involving exchanges, smoothed using a 7 day rolling average. 

Source: Coin Metrics Network Data Pro

Binance net flows show a similar pattern. Net flows measures the net amount of a cryptoasset flowing in and out of exchanges (i.e. deposits minus withdrawals) as observed on-chain. Over the last year, Binance’s BTC and ETH net flows have mostly mirrored each other, although BTC’s movements have generally been more extreme. But over the last week, BTC and ETH net flows started going in opposite directions: ETH has been flowing into the exchange, while BTC has been flowing out.   

Source: Coin Metrics Network Data Pro

Market Data Insights

Volatility in financial markets is a mean reverting process. Prolonged periods of low levels of volatility encourage market participants to take on greater position sizes, engage in increased leverage, set tighter stops, and reduce the thresholds upon which they will respond to new information. This phenomenon is even stronger in crypto markets due to the amount of leverage present in futures markets and the method by which exchanges engage in liquidations as part of their risk management engine. 

Cryptoassets are showing signs of life again following a period where Bitcoin’s 30-day annualized correlation briefly dipped below 25%, a level rarely reached in its ten year history. Ethereum has shown particularly strong gains over the past week — a rational response to its improving network fundamentals. Critical metrics such as transaction fees and adjusted transfer value have steadily increased as Ethereum benefits as the platform hosting most stablecoin and DeFi activity. 

Bitcoin, up until very recently, has shown a somewhat muted response. While it has performed well year-to-date compared to other financial assets, some have questioned why it hasn’t performed even better in response to coordinated easing from the world’s major central banks. While the below chart only shows data up until midnight UTC on Sunday (to serve as a timestamp to calculate weekly changes), Bitcoin has since broken through the psychologically-important $10,000 level on Monday. 

Source: Coin Metrics Reference Rates

Gold has reached all-time highs over the past week and today’s move in Bitcoin reinforces its safe haven properties, although Bitcoin’s lack of response over the past month was beginning to call in question this theory. Investors should continue to pay attention to real yields (nominal interest rates adjusted for inflation) because it serves as the most straightforward measure of the opportunity cost of holding cash. With the market pricing in low nominal interest rates for the foreseeable future and inflation expectations still moderate but with the potential to rise, holding non-yield producing assets such as gold and Bitcoin are increasingly attractive. Bitcoin is perhaps the purest way to express a market view that long-term realized inflation will come in higher than what is currently priced in. 

Some describe owning Bitcoin as an insurance policy against instability of our financial markets. Insurance policies are similar to options and in today’s world, Bitcoin is increasingly being used as a call option on inflation. The coronavirus and the monetary and fiscal response have increased the uncertainty in the future path of monetary policy, inflation, and growth, all of which are supportive to Bitcoin’s prices. 

Bitcoin and gold’s 30-day correlation are returning to near all-time highs. The all-time high was reached in March when all risk assets sold off due to the rapid need for liquidity driven by coronavirus fears. Previous to 2020, Bitcoin and gold’s correlation have normally oscillated around zero while reaching brief moments of high positive and negative correlation. If high positive levels of Bitcoin and gold’s correlation can be sustained, it might serve as an indication of a regime shift in Bitcoin’s response to geopolitical and macroeconomic developments. 

CM Bletchley Indexes (CMBI) Insights

After the majority of returns over the last two months came from small-cap assets, it was the large-caps that experienced the greatest gains this week. The CMBI Ethereum Index was the best performer, returning a staggering 30.8% for the week, with the CMBI Bitcoin Index also performing very well, returning 7.9%.

Of the market cap weighted indexes, it was the Bletchley 10 (large-cap) and Bletchley 20 (mid-cap) that performed the best through the week, returning 9.8% and 7.4% respectively. After months of outperformance, the Bletchley 40 (small-cap) did not experience a similar run, falling 2.3% during the week. The Bletchley Total performed in line with these indexes, returning 9.3%, largely due to the weighting of constituents significantly favoring large-cap and mid-cap assets.

Source: Coin Metrics CMBI

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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.

Coin Metrics’ State of the Network: Issue 60 – Analyzing The Early Uses of Bitcoin

Weekly Feature

Analyzing The Early Uses of Bitcoin

by Antoine Le Calvez and the Coin Metrics Team

Since its inception in 2009, Bitcoin triggered many discussions around its raison d’être. Conflicts between different points of view of what Bitcoin is and should be spanned years and tore many communities apart. Hasufly and Nic Carter cataloged the many different Bitcoin narratives in Visions of Bitcoin.

In this piece we aim for something a bit different than the usual discourse on this topic: instead of approaching Bitcoin as a political, philosophical or technical project and going top-down, we start by observing the history of what happened on-chain to gain insight into how Bitcoin’s usage has evolved over time.  

Early Exchanges

Bitcoin launched in January 2009 to little fanfare. Before July 2010, it only saw a paltry eight thousand transactions (excluding protocol-mandated mining transactions). But then, within two weeks, Bitcoin did more transactions than it did in all its previous history. 

This change is also visible when looking at a more subtle indicator: what was the precision of the amounts being sent? In that same period, the number of transactions specifying oddly precise amounts of bitcoin to be transferred increased dramatically.

A few events led to the sudden increase in Bitcoin usage in July 2010. First, Bitcoin had its Slashdot moment – the release of Bitcoin version 0.3 was picked up by the popular tech news outlet. A few days after, MtGox opened its doors to traders and users began using more decimals in their transactions to reflect the fact that they were transacting in Bitcoin, but with USD amounts. 

As Bitcoin’s price increased in mid-2011, more and more outputs began using all the available decimals. What this tells us is that Bitcoin’s first growth spurt was directly related to the emergence of MtGox, the first marketplace allowing the exchange of BTC for US dollars.

SatoshiDice

The next interesting growth spurt comes from the rise of SatoshiDice in April 2012. It allowed users to bet bitcoin on the roll of a dice, with different odds, by just sending bitcoin to a specific address (for example, send 1 BTC and get 2x back with a 48% chance). Its key innovation was to use a provably fair protocol to show that it wasn’t defrauding its users with a bad random number generator.

In a matter of days after its launch, SatoshiDice grew to represent 40% of Bitcoin’s daily activity.

SatoshiDice represents a compelling argument for Bitcoin as a cheap and trustless payment network. Playing the same game with bank wires would not only be illegal, but also painfully slow. Its popularity died off due to many reasons, some regulatory (it had to ban US players), some business related as it changed ownership several times and some technical as raising transaction fees made using it less interesting to users.

Continue reading the full article…

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

On July 17th a Cloudflare outage briefly disrupted much of the internet. Although the major crypto networks were mostly unscathed, the outage led to a slight decrease in transactions likely due to popular wallets going down. Bitcoin (BTC) transactions were down 5% week-over-week as a result. But BTC transaction fees were up 54.5% week-over-week, signifying a surge in demand for block space despite the dip in transactions. Ethereum (ETH) transactions also dipped on July 17th, but they are still up week-over-week thanks to the continued rapid growth of decentralized finance (DeFi) applications. 

Network Highlights

DeFi continues to push ETH fees higher. ETH median fees are approaching $0.40, which is the highest they’ve been since mid-2018. High fees are a mostly healthy sign – high fees typically signify high demand for block space, and create more revenue for the miners securing the network. 

Source: Coin Metrics Network Data Pro

But high fees can also make it prohibitively expensive to send transactions, especially for use cases like gaming and collectibles that depend on large amounts of low cost transactions. Over the last week the amount of unique active ETH addresses decreased, despite an increase in transactions (7 day average).

Source: Coin Metrics Network Data Pro

Another sign of DeFi’s growth, the amount of ETH transferred by smart contracts is surging towards new all-time highs. There’s been an average of over 1M ETH transferred per day for most of July (7 day average).

Source: Coin Metrics Network Data Pro

DAI supply increased by over 40M since July 17th likely due to high demand for DAI within the DeFi ecosystem. For example, DAI currently has a 6.16% supply APY on Compound, about 4.5% higher than either USDC or USDT. 

Source: Coin Metrics Network Data Pro

Market Data Insights

It was a relatively sleepy week for the markets, with one big exception: ChainLink. ChainLink continues to defy gravity and pushed through to a new all-time high price this week of $8.80. This is happening on the continued tail of a euphoric period of momentum for altcoins. 

Source: Coin Metrics Reference Rates

ChainLink has continued to increase its market share of spot volume as well, now making up roughly 9% of the rolling 7 day average.

Volatility continued to drift lower for all the major assets and the long volatility trade continued to get crushed. We reported on this trend back in June as holding below these levels for less than 20 days in a majority of cases. We are now at day 41.

CM Bletchley Indexes (CMBI) Insights

Most CMBI and Bletchley Indexes finished the week slightly down, excluding the Bletchley 40 (small-cap), which significantly outperformed the rest of the indexes, returning 7.1%.

The CMBI Bitcoin Index was down 0.4%, continuing its streak of weekly performance in the ±3% range for the 7th straight week.

The strong performance of small-cap assets relative to the rest of the market can be witnessed in the returns of the Bletchley Total Even Index. This index is composed of the 70 constituent markets included in the B10, B20 and B40, weighting each constituent equally (1.43%). The result is much greater exposure to small-cap assets (57.1%) than its market cap weighted peer, which allocated Bitcoin a 65% weighting and small-caps collectively only 1.6%.

Source: Coin Metrics CMBI

For further detail on the performance of the CMBI Bitcoin Index and CMBI Ethereum Index, please check out the  CMBI Single Asset Index Factsheet.

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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.

Coin Metrics’ State of the Network: Issue 59 – The Rise of Stablecoins

Weekly Feature

The following is an excerpt from an in-depth research report on the rise of stablecoins following the March 2020 crypto crash. Access the full report here.

The Rise of Stablecoins

By Nate Maddrey and the Coin Metrics Team

Stablecoin supply has exploded in 2020 but it’s unclear exactly why. After it took 5 years for stablecoin supply to reach 6 billion, it only took another 4 months for it to grow from 6 billion to 12 billion following the March 12th crypto crash. 

A large majority of the supply growth was due to Tether. On March 12th 2020, the price of most crypoassets dropped over 50% after global equity markets crashed due to the rise of COVID-19. Within two weeks of the crash over 800M new USDT_ETH were issued. For context, about 740M USDT_ETH were issued from January 1st through March 11th. Additionally, USDT_TRX supply would increase by over 2B by the end of June.

Following the price crash, stablecoin markets were suddenly thrown into disarray. Stablecoin prices can fluctuate during times of market volatility due to sudden changes in supply and demand. For example, when Bitcoin price suddenly plummets, the demand for stablecoins often increases as investors look to move into a safe haven asset. This increased demand can cause the price of a stablecoin to rise above $1 on select exchanges. 

The below chart shows stablecoin prices on an hourly basis (using Coin Metrics’ hourly reference rates) from March 11th through March 14th. The price of most stablecoins jumped up to between $1.03 and $1.06 from 2:00 to 6:00 UTC on March 13th. This corresponds with the timing of the BitMEX liquidation spiral, when Bitcoin price dropped to as low as $3,900. 

USDT, USDC, PAX, BUSD, and HUSD appear to have recovered relatively quickly, returning close to their $1 pegs within days after the crash. But as seen in the below chart, USDT’s price remained above $1. Notably, USDT’s price remained significantly higher than USDC, PAX, BUSD, and HUSD through mid-May (DAI and GUSD are excluded from the following chart due to their extreme divergence). 

Because of their nature as price-pegged assets, deviations in stablecoin prices create arbitrage opportunities. For example, when a stablecoin’s price is above $1, new supply can be printed at $1 each, and then sold on an exchange for a profit. Done at a large enough scale, this can lead to significant profit even if the price is only slightly over a dollar. 

Continue reading the full report…

Network Data Insights

Summary Metrics

Bitcoin (BTC) and Ethereum (ETH) continued to show positive momentum this week, with small growth in usage metrics including active addresses and transactions. 

But the smaller-cap assets noticeably outperformed this past week. Ripple (XRP), Litecoin (LTC), and Bitcoin Cash (BCH) all grew more week-over-week than BTC and ETH in most usage, valuation, and economics metrics. XRP led the way in many categories, including a 14.8% growth in active addresses and 11.8% growth in market cap.

Is this a sign of an altseason? We explore in this week’s Network Highlights and Market Data Insights sections.  

Network Highlights

In addition to Ripple, Litecoin, and Bitcoin Cash, many other mid to small cap cryptoassets saw increased activity over the last week. Often described as a “meme coin,” Dogecoin (DOGE) had a large increase in market capitalization on July 7th and 8th. This corresponds with a viral TikTok video that promoted DOGE. 

DOGE two-year revived supply also spiked on July 8th. Over 1B units of supply that had not moved on-chain for at least two years were suddenly transferred. This suggests that some longer term holders sold off amidst the frenzy. 

DOGE active addresses have been surging in July but are still below 2020 highs. Network usage is not increasing as fast as valuation, a potential signal of a price bubble.  

Cardano (ADA) has also been growing recently. In anticipation of the Shelley mainnet release, ADA’s market cap reached new 2020 highs on July 8th. Cardano’s market cap has passed LTC’s, despite having about 7x less daily active addresses. 

Market Data Insights

This week marked a roughly $13.9B, or nearly 38%, uplift in spot volume. This is a remarkable number when considering the historically low volatility range that BTC and ETH have been trading in. Low volatility generally coincides with low volume but in the past week, the speculation on a few key altcoins pushed trading volumes upward.  In this analysis, we will focus on three in particular: Doge, Cardano and ChainLink. Together they made up 20% of this week’s increase.

Let’s take a look at some exchanges that benefited the most, beginning with the more well known exchanges that support a long tail of altcoins. Binance, Bittrex, Kraken and Poloniex all benefited from these assets.  Binance, Bittrex and Kraken saw a fairly equal distribution between all three assets, similar to the overall uplift contributed by these assets to the total spot volume for all exchanges.

Poloniex saw 57% of its weekly increase in volume from Doge trading.  The exchange has one of the longest standing Doge markets and was the primary trading venue for the Doge spike in the summer of 2019. Regardless of a historically liberal listing policy, Poloniex does not currently support Cardano and missed a large opportunity this past week. Given that they have prioritized the listing of lesser known assets recently such as BitCherry and Flexacoin, it brings into question the exchange’s listing strategy.

Coinbase also saw a large portion (39.5%) of this week’s gain in volume attributed to ChainLink. Often considered to have a fairly liberal listing strategy and primarily U.S. retail trading base, this large portion of trading attributed to ChainLink may signal that we are still in the midst of an altseason and that even small traders are embracing a risk-on investing strategy.

CM Bletchley Indexes (CMBI) Insights

For the first time in 5 weeks, all of the CMBI and Bletchley Indexes experienced positive returns week on week. The CMBI Bitcoin Index Continued to demonstrate a low level of volatility, returning 1.8% for the week, marking the 6ths consecutive week of less than |±3%| performance. The CMBI Ethereum Index had a better week, returning 5.6%. But it was the multi-asset indexes that had the best performances, returning between 6.0% (Bletchley 10, Large Cap)  and 16.5% (Bletchley 20, Mid Cap) during the week. 

Despite the low volatility of Bitcoin, it was the Bletchley 10 Even Index that was the best performer, returning 18.7%, largely due to the strong performances of Chainlink and Tezos. In an even weighted index, all constituents are weighted evenly at the time of rebalance, thus applying a higher weighting to the lower market cap assets than a market cap weighted index (which for the Bletchley 10 weights Bitcoin 71%).

For further detail on the performance of the CMBI Bitcoin Index and CMBI Ethereum Index, please check out the  CMBI Single Asset Index Factsheet.

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • 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]

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.

Coin Metrics’ State of the Network: Issue 58 – When Markets Misalign: Mispricings and Reference Rates

Weekly Feature

When Markets Misalign: Mispricings and Reference Rates

by Karim Helmy and the Coin Metrics Team

Key Takeaways

  • Price discrepancies between exchanges can emerge for a variety of reasons, including market manipulation, exchange downtime, and trader error. These dislocations are aggravated by market inefficiencies that may prevent arbitrage.
  • While market dislocations are particularly common for small exchanges and illiquid assets, even liquid markets on major exchanges are impacted reasonably often. The presence of market dislocations makes relying on price feeds from a single exchange unreliable for portfolio valuation and contract settlement.
  • Creating reference rates that are robust to market dislocations is surprisingly complex. Coin Metrics offers Hourly and Real-Time Reference Rates for many of the assets covered by the CM Market Data Feed.

Messy Markets

Liquidity in cryptocurrency markets is fragmented across a handful of major exchanges and scores of minor ones. Due to market inefficiencies, manipulation, and trader error, prices on these exchanges often diverge, with at least one venue mispricing the asset and failing to reflect the global market price. This issue is especially acute for illiquid and smaller-capitalization assets, which may have weaker settlement assurances and are more prone to manipulation.

Beyond creating arbitrage opportunities, this lack of a robust cardinal market price leads to difficulties in portfolio valuation and contract settlement. Derivatives like futures and options require a price against which to settle, necessitating the use of a reference rate that accurately reflects the conditions across markets.

To address the growing need for cardinal prices, Coin Metrics has developed Hourly and Real-Time Reference Rates for many of the assets covered by the CM Market Data Feed. These rates calculate the market price of an asset against a lookback period of one hour and one second, respectively, combining data from several marketplaces to create a price feed that is robust against market inefficiencies. Our live reference rates are available as part of our free community data.

Ineffective Inefficiency

Markets are typically modeled as efficient, reflecting in their prices all known information. In an efficient market, mispricings tend to be short-lived, since any price discrepancies are closed through arbitrage. These markets are said to obey the law of one price, which argues that identical goods should be sold for the same price across marketplaces. 

In the presence of transaction costs and operational risks, however, even rational markets may not behave efficiently. In an inefficient market, price divergences may be sustained so long as friction persists.

The most substantial sustained price dislocation in the cryptoasset market has been between spot prices on Bitfinex and on other exchanges. Due to concerns over the exchange’s solvency, Bitcoin on Bitfinex has frequently traded at a premium to the rest of the market, most prominently during late 2018 and early 2019. 

Since the spread was first observed by Coin Metrics in April of 2017, Bitfinex’s BTC/USD market has not been factored into Coin Metrics’ Hourly or Real-Time Reference Rates. A snapshot from a typical trading day in late 2018 shows a spread of about 1.3% between the Bitfinex BTC/USD market and the markets used to compute these rates.

Source: Coin Metrics Reference RatesCoin Metrics Market Data Feed

In addition to concerns over a counterparty’s cash flows, dislocations may be sustained due to concerns over the settlement assurances of the asset being traded.

The primary function of a public blockchain is to provide a settlement layer for the transfer of assets, and the proper execution of this function requires that transactions be probabilistically irreversible given a sufficient number of confirmations. This immutability can be compromised in several ways, most infamously through 51% attacks, in which an attacker with control of the majority of a network’s hashpower reorders the blockchain.

Recipients of poorly-secured assets may therefore require a large number of confirmations in order to recognize a transfer as valid. Exchange operators must be particularly cautious, due to the volume of deposits they receive and therefore stand to lose in the event of a reorganization. This has led exchanges to raise the wait time and number of confirmations required to deposit some assets. Increased wait times, in turn, increase the amount of risk taken on by traders seeking to profit from market inefficiencies in these assets, aggravating existing illiquidity and potentially leading to sustained market dislocations.

The most notable incident of this type occurred on April 29, 2020, when Coinbase’s Ethereum Classic (ETC) markets diverged significantly from those on other exchanges. The dislocation was wide and lasted several hours, in part due to the large number of confirmations required by exchanges for ETC deposits following several 51% attacks on the chain.

Source: Coin Metrics Reference RatesCoin Metrics Market Data Feed

Complicating this dislocation is the fact that Coinbase is the primary marketplace on which ETC is traded, reducing clarity on which price should be considered the market price and highlighting the need for transparently calculated reference rates.

Capital controls are another source of market friction, introducing barriers in foreign exchange markets that have echoes in cryptocurrency markets. These barriers were largely responsible for the so-called “Kimchi premium” between spot markets quoted in Korean won and those quoted in other fiat currencies.

Capital controls fall into the broader category of restrictions on fiat transfers that impact liquidity in cryptocurrency markets. Delays in fiat deposits or withdrawals caused by exchange downtime or strained relationships with banking partners are another, related source of friction.

Because supply and demand are not guaranteed to be homogeneous across exchanges, prices can diverge in an inefficient but rational market. In reality, market participants are prone to error and irrationality, introducing further sources of misalignment.

Fat Fingers

In one common type of error, known as a fat-finger error, a trader mistakenly submits an incorrectly typed trade. These errors may result in flash crashes, or rapid downward market movements that are quickly corrected.

On May 17, 2019, the Bitcoin market experienced a flash crash caused by a single large sell order that may have been placed in error. The effects of the crash were felt particularly strongly on Bitstamp, the exchange where it originated.

Source: Coin Metrics Reference RatesCoin Metrics Market Data Feed

As a result of their long computation window, Coin Metrics’ Hourly Reference Rates were unaffected. Coin Metrics’ Real-Time Reference Rates correctly tracked the market price, excluding the additional downward movement on Bitstamp. 

Source: Coin Metrics Reference RatesCoin Metrics Market Data Feed

Continue reading “When Markets Misalign” here.

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Despite a drop in market caps, it was a relatively good week for Bitcoin (BTC) and Ethereum (ETH) fundamentals. BTC security is looking healthy, with hash rate and mining revenue both increasing. Hash rate grew by 6.6% week-over-week and should soon pass pre-halving levels.

ETH transactions dropped by 3.5% week-over-week, while BTC transactions grew by 3.7%. But despite the dip in transactions, ETH active addresses increased by 8.1%, compared to a 5.8% increase for BTC. The reasons for ETH’s continued active address growth are explored in this week’s Network Highlights. 

Network Highlights

ETH had over 500K active addresses each of the last seven days. This has only happened during one other period in ETH’s history – January 2018, when ETH’s price soared to new all-time highs of over $1,400. The current active address surge, however, is not driven by an ETH price peak, as ETH’s price has remained under $250 since February. Instead, it appears to be driven by rapid growth of Ethereum-based stablecoins and decentralized finance (DeFi).

ERC-20 tokens, which are issued on the Ethereum blockchain, can be used as a proxy to measure activity on Ethereum. Although far from a full picture, the activity of popular ERC-20s can shed light on the usage trends of the overall network.   

The following chart shows active address counts for three Ethereum-issued stablecoins: Tether (USDT_ETH), USD Coin (USDC), and Paxos (PAX). All three have seen large increases in active addresses since March, with USDT_ETH leading the way by a huge margin. 

But despite the fast growth, USDT_ETH active addresses appear to have peaked in June (at least temporarily), and are decreasing entering July. PAX active addresses also peaked in early June and have been decreasing since. However, not all stablecoins are declining. USDC active addresses have grown relatively steadily since March and are now reaching new all-time highs.

Below we look at three DeFi related ERC-20 tokens: 0x (ZRX), Maker (MKR), and Kyber Network (KNC). KNC is hitting new all-time highs entering July in anticipation of its Katalyst and KyberDAO updates which will introduce new staking rewards – once the update goes live KNC holders will be able to participate in protocol governance by staking their tokens, while earning ETH rewards in return. ZRX active addresses are also growing in early July after a large spike in May. MKR addresses have declined since a peak in mid-June, but are still relatively elevated. 

In addition to a surge in active addresses, the number of addresses holding at least 0.01 ETH has shot up since April. On April 1st there were 7.12M addresses holding at least 0.01 ETH. By July 1st there were over 8.37M, a growth of about 1.25M addresses.

Market Data Insights

Over the past 3 months we have entered a period of consistent correlation between the S&P 500’s daily returns and Bitcoin’s daily returns. This is a trend worth noting due to the fact that immediately prior to the sell off in March the markets were negatively correlated. 

This is not the first time that the two markets have become positively correlated, although it has been one of the longest and most stable correlations. Below we take a look at the 30 and 90 day correlations of the two markets dating back to January 2015.  Following the sell off in March, we reached a level of  90 day correlation of above 0.4. Since then, correlation has remained above 0.3 for the longest duration to date. 

A positive correlation between these asset classes is largely due to the swift selloff and sustained recovery following the market reactions surrounding COVID-19. Many attribute this risk-off in both assets to the general sentiment that ‘in a selloff, the beta of all assets goes to 1’ also applies to Bitcoin. This period is making some individuals focusing on the Bitcoin industry nervous as Bitcoin’s prior lack of correlation with the broader equity market is often touted as one of its greatest selling points. Only time will tell if correlation returns to pre-March levels or remains elevated for a longer period.

CM Bletchley Indexes (CMBI) Insights

Another relatively flat week for most of the CMBI and Bletchley Indexes. The Bletchley 20 (mid-cap assets) experienced the strongest returns, finishing the week up almost 10%. This performance is largely due to the performance of Cardano, The B20’s highest weighted constituent, which finished the week up almost 20%.

The CMBI Bitcoin Index and CMBI Ethereum Index finished the week down slightly, returning -1.1% and -0.2%, respectively. Index volatility continues to trend down towards a historically low range, with both the CMBI Bitcoin Index and the CMBI Ethereum Index returning less than ±2.5% for each of the previous five weeks.

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • 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]

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.

Coin Metrics’ State of the Network: Issue 57 – Introducing Free Float Supply

Introducing Free Float Supply

By Ben Celermajer and the Coin Metrics Team

Key Takeaways

  • Until now, a standardized approach to determining the free float supply (the supply that is available to the market) of cryptoassets has not been established. This has hindered the market from developing a clear understanding of available supply and market capitalization.
  • Coin Metrics’ free float supply takes many of the best practices from traditional capital markets and applies them to cryptoassets to identify supply that is highly unlikely to be available to the market in the short to mid-term. In doing so, free float supply provides a better approximation of a cryptoasset’s liquidity and market capitalization. 
  • Index weighting can benefit from using free float supply – free float supply reflects the liquid market more accurately and reduces potential manipulability.
  • Tracking free float supply provides insight into primary token holder behavior. This can lead to more transparent reporting of foundation and team selling, increased knowledge of total market supply and behavioral analysis of stakeholders.
  • Many cryptoasset valuation metrics use market capitalization which primarily utilize the on-chain visible supply. Deriving these metrics with a free float capitalization may improve the signal achieved.

Introduction

In April, Coin Metrics announced a new methodology for the determination of a cryptoasset’s supply that is ‘available’ to the market, cryptoasset free float.

Without reporting standards and regulations that require foundations and companies to accurately report holdings in a timely manner, obtaining supply data that is reflective of market trading opportunities can be a challenge.

Coin Metrics’ free float supply takes many of the best practices from traditional capital markets and applies them to cryptoassets to identify supply that is unlikely to be available to the market. In doing so, free float supply provides a better approximation of a cryptoasset’s liquidity and market capitalization. For more information on the supply that is considered restricted, please refer to the CMBI Adjusted Free Float Methodology.

While initially created to help inform CMBI design, cryptoasset free float supply can be applied in many different ways to help market participants make smarter investment decisions. Some of the areas where free float can be applied to improve market understanding include:

  • Market Capitalization
  • Indexes
  • Valuation methods
  • Foundation and Founding Team Transparency

Applying Free Float to Market Capitalization

Typically, investors expect a market size measurement to reflect the total value of assets that are available in the market. For example, to determine market capitalization in equity markets, data providers and participants exclude company and executive team owned shares, as well as shares owned by other strategic investment partners that do not provide liquidity to markets. 

A standardized approach like this has not yet been consistently applied to determining the free float supply and market capitalization of cryptoassets. This has hindered the market from developing a clear understanding of available supply and market capitalization.

For determining supply and market capitalization, the CMBI Adjusted Free Float Methodology applies a standardized criteria for which units of supply to exclude from free float, including but not limited to:

  • Supply owned by foundations, companies and founding teams
  • Supply in addresses that have been inactive for over 5 years
  • Supply staked in a smart contract to partake in governance and long-term strategic outcomes of a network without any direct monetary incentive to do so
  • Supply that is vesting on-chain
  • Supply that is burned or provably lost

Applying the above methodology rigorously to the top cryptoassets identifies a more comprehensive supply that is not available to the market. Utilizing the available supply to trade (free float supply) rather than either reported supply by foundations/companies or total visible on-chain supply can significantly impact investor’s understanding of the total market size of a cryptoasset and related metrics such as dominance and liquidity.

Evidenced in the above, standard industry reporting of cryptoasset supply, and thus market capitalization, has traditionally been overstated. Some of the more pertinent examples of this are:

  • Bitcoin – where the industry standard has been 18.4M. Coin Metrics free float calculations determine that a more accurate representation of free float supply is 14.3M (22% lower), reflecting that 4.1M Bitcoin has not been transacted in over 5 years and as such can be considered to be owned by long term strategic holders that do not provide liquidity to markets (or lost).
  • Bitcoin Cash and Bitcoin SV – the industry standard has been to utilize their on-chain supply of ~18.5M native units to determine market capitalization. Through understanding how many BCH and BSV have been moved since the fork, Coin Metrics has determined that a more accurate representation of supply for BCH and BSV is 12.0M (36% lower) and 9.9M (45% lower) respectively. 
  • XRP and Stellar – both of these foundations report their own holdings to data distributors. Due to an absence of regulatory standards and the irregularity of reporting, not all addresses may be disclosed and the reported values may not be maintained. Coin Metrics has identified additional supply that can be traced to the foundations and team members, which is reflected by XRP and Stellar having a free float supply of 30.4B and 16.5B, lower than is typically reported.

Applying Free Float to Indexes

Most multi asset indexes are weighted by each constituent asset’s market capitalization. Thus, redefining a cryptoasset market capitalization to reflect free float will impact the construction of indexes.

The key benefits of weighting an index using the free float market capitalization as opposed to the reported market capitalization include: reflecting the liquid market more accurately, maintaining more timely supply data to weight indexes, reducing potential manipulability of index weightings, and reducing index rebalancing costs.

Cryptoassets have varying levels of auditability and transparency when it comes to foundation and team holdings. For this reason, Coin Metrics applies a free float supply banding approach when weighting CMBI Indexes. The banding methodology reflects that supply determination is currently not a perfect science. For example if Coin Metrics identify 53% of cryptoassets as the free float supply, but the ‘true’ value is 56% (or 50%), the asset will ultimately fall into the 50-60% band. Such an approach helps to overcome nuances in supply determination and varying levels of transparency, reporting and auditability.

Simply, after determining the ratio of free float to on-chain available supply, each asset’s ratio is rounded up to the closest 10%. This value is then applied for the purpose of weighting assets in the CMBI Market Cap Weighted Asset Index Series. For example:

  1. Bitcoin’s free float ratio is 77.8% (free float supply of 14.3M of a total on-chain supply of 18.4M). 
  2. Rounded up to the nearest 10%, Bitcoin’s band would be 80%
  3. Applied to the total supply of Bitcoin, 18.4M, Bitcoin’s in weight in the index would be derived using a supply of 14.7M (18.4M * 80%)

Increasing Market Transparency

As part of Coin Metrics’ new free float supply metric identification process, addresses in the following categories have been tagged by Coin Metrics and are considered to be restricted: 

  • Owned by foundations/companies
  • Owned by founding team members
  • Governance contracts where there is no direct financial benefit
  • Provably lost 

Doing so can provide timely and transparent reporting of the movements and actions of each category of stakeholder on a cryptoasset’s network. This can lead to more transparent reporting of foundation and team selling, increased knowledge of total market supply and behavioral analysis of stakeholders.

Without transparency, market participants are left uninformed on the actions of foundations and teams, making it impossible to understand the holistic market dynamics. 

Case Study 1: Tether (USDT)

Many market spectators monitor and observe the printing and burning of USDT as significant market events that can impact the price of Bitcoin and crypto markets. Speculation to the impacts of Tether activity has been so high that many academics and regulators have investigated this activity during significant market events. 

However, observing the on-chain activity of USDT can be misleading as Tether has historically printed USDT in large batches in anticipation of future demand and distributions. Thus, on-chain supply does not necessarily mean new supply in public markets. Coin Metrics’ free float supply excludes USDT held by the Tether Treasury to provide a more accurate indication of the supply that is currently in public markets.

As can be observed below, particularly through 2018 and the first half of 2019, the USDT issued does not necessarily represent the USDT in markets. Particularly interesting is the USDT activity in early 2019. Market participants observing the on-chain supply would not have noticed significant change as Bitcoin rose from $4,000 to $12,000. However, by observing free float supply, the correlation between free float USDT and Bitcoin’s price becomes clearer.

Continue Reading…

Continue reading “Introducing Free Float Supply,” including analysis of how free float supply can be used to improve valuation metrics.

Network Data Insights

Summary Metrics

Ethereum (ETH) activity surged again this past week, driven by the rise of DeFi applications like Compound as well as the continued growth of stablecoins. ETH active addresses grew another 8.4% week-over-week and have now reached their highest levels of 2020. Transactions also continue to grow at a fast rate. On average, there were over a million daily ETH transactions over the past week. ETH daily transaction fees grew another 26.4% week-over-week, bringing ETH’s average fees over the last week to $663.9K compared to $322.2K for BTC. 

Despite the large growth in usage and economic metrics, ETH market cap did not significantly outperform over the last week – it only grew by 0.8%, compared to a 0.9% dip for BTC. 

Network Highlights

About 40M units of 0x (ZRX) have entered free float supply since the middle of June. ZRX free float supply increased from 631.5M on June 13th to 671.4M on June 27th. 

As introduced in today’s Weekly Feature, free float supply provides a better approximation of a cryptoasset’s liquidity and market capitalization by measuring the amount of supply that is freely available to the market. The large increase in ZRX free float supply is because the ZRX foundation has started using treasury funds to yield farm on Compound, contributing the 40M ZRX to liquidity pools.

Basic Attention Token (BAT) free float supply has increased by about 10M since the beginning of June, as some BAT team members have also looked to benefit from Compound farming.

ZRX and BAT have both also seen an uptick in transactions in May and June. There were over 13.63K BAT transactions on June 27th, a new all-time high. The following chart is smoothed using a 7 day rolling average. 

Market Data Insights

While certain network activity may be trending up, spot market volume has continued to decline over the past month due to the dampening of volatility. In the analysis below we look at the change in aggregate volume from  Binance, Binance.us, Bitfinex, Bitflyer, Bitstamp, Bittrex, Coinbase’ FTX, Gemini, Huobi, itBit, Kraken, Kucoin, Okex, Poloniex and Upbit.

Bitcoin volume has been trending down over the past 30 days, nearly reaching levels not seen since the larger sell off in mid-march. This pattern correlates with falling ranges of volatility that we noted prior this month

0x, on the other hand, did recently reach a relative peak in terms of daily volume. During June the project’s 30 day average volume increased roughly 560% to ~$33m from ~$5m following the momentum of the DeFi craze.

Basic Attention token also saw an increase in trading volume, however it was not as extreme. The recent DeFi demand brought an uptick in trading but it did not surpass the volumes seen between March and May 2019. This prior uplift was largely due to product releases from the Brave team surrounding their Brave Rewards and Advertising platform.

CM Bletchley Indexes (CMBI) Insights

This week was very similar to the last, with most CMBI and Bletchley Indexes slightly down for the week. The Bletchley 40 was the only exception of the market cap weighted indexes, finishing up 4.2%. 

The strength in small-cap assets this week can be further observed through the positive returns of the Bletchley Total Even Index. Despite the slightly negative returns of the Bletchley 10 and Bletchley 20, when the 70 constituents of the Bletchley universe each receive a weight of 1.43%, the return for the week is positive.

The CMBI Bitcoin Index and CMBI Ethereum Index continue to range trade and experience historically low levels of volatility, finishing the week down 3.1% and 1.7% respectively.

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • 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]

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.

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Coin Metrics’ State of the Network: Issue 56 – Do Coinbase Listings Turn Altcoins Into Gold?

Digital Alchemy: Do Coinbase Listings Turn Altcoins Into Gold?

By Jon Geenty and the Coin Metrics Team

Key Takeaways

  • A Coinbase listing has historically shown, not surprisingly, to have a positive impact on listed assets’ prices immediately following the announcement.
  • The uplift from a listing is more muted than some may perceive, with the average and median uplift ranging from roughly -1% to 14% against US Dollar, Bitcoin and Ethereum benchmarks. Price trends seen with assets such as the recent OmiseGo listing are outliers. 
  • Coinbase’s ‘Exploration’ announcements tend to have less of a direct impact on mentioned asset’s prices. The price movements surrounding these events are less significant and largely related to the general market regime at time of announcement. We compare these changes in a bearish, bullish and flat market using past examples.

Does a Coinbase Listing Always Deliver Results?

With the recent rise in altcoin prices and volumes, it is as good a time as any to discuss a phenomenon that typically elicits a lot of trading activity: The Coinbase listing.

Exchanges with a significant amount of market share at times can be “king makers” for altcoins. The simple suggestion or rumor that you will be listed on a top exchange has the potential to turn a valueless crypto “bag” into a large profit. Binance, Bittrex and Poloniex are exchanges known for listing the long tail of altcoins, but what about Coinbase?  

With the industry consensus being that Coinbase is the largest ‘retail’ onramp, the impact of a Coinbase listing should hold some significance on assets that might make the cut. However there is another big factor that influences the impact of the listing: market conditions. 

In this piece, we explore three separate instances that Coinbase announced they would be exploring new assets for potential listing, and analyze how the assets performed afterwards. Additionally, we explore the market conditions at time of announcement, and how different market environments (bear vs. flat vs. bull) impact the listings. 

Source: Coin Metrics Reference Rates

Methodology

For details on the methodology used in this piece see the full-length report on the Coin Metrics blog.

The Impact of the Possibility of Listing

December 2018 – Bear Market

On December 7, 2018, Coinbase announced the ‘exploration’ of 31 assets for potential listing.  The below chart shows the median and mean performance for the mentioned group against different benchmarks. 

Prior to that announcement the assets were generally tumbling in price. It is important to put in context of the asset class, with the 25 day prior mark being mid-November 2018.  During this period, Bitcoin sold off from ~$6,350 to ~$3,200, the lowest range that we have seen since the 2017 peak. This is reflected in the following chart, which shows asset price change in USD.

This announcement date precedes this “bottom” by a few days. In the period following these assets saw rebounds in value and over the following 100 days appreciated generally 50% in price against Bitcoin. The histogram below displays how the appreciation changed over time, from a tightly distributed decline in the 10 days immediately following the post to a broader, more positive distribution over the following 100 days.

August 2019 – Flat, Choppy Market

The group of assets in the second ‘exploration’ blog post in August 2019 was a much smaller sample size than the first, with only eight assets.

The market environment had also changed significantly. In this period Bitcoin had just hit 2019 highs in July and was trading in a choppy range between $12k and $8k, trending down. 

Continue Reading

Continue reading the full article including analysis of the June 2020 blog post and impact of actual listings.

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

On June 9th and 10th ETH daily transaction fees soared past BTC daily fees due to two transactions that each inexplicably spent $2.6M on transaction fees (as covered in the Network Data section of State of the Network Issue 55). Although there is still confusion around the exact reason for the high fees, the sender has been revealed to be South Korean based peer-to-peer exchange Good Cycle. 

ETH fees appear to be down because there were no more anomalous transactions this week, and therefore this week’s fee totals pale in comparison to last week’s. But ETH fees have actually been trending upwards over the last few weeks, as explored in this week’s Network Highlights section.

Network Highlights

Over the last two weeks ETH has flipped BTC in terms of daily transaction fees. Despite the obvious outliers due to the two mysterious transactions, ETH fees have continued to top BTC’s following June 10th. The last time that ETH fees topped BTC fees for at least 14 consecutive days was July 2018.  

Source: Coin Metrics Network Data Pro

Although ETH total fees have surged, BTC median fees are still higher than ETH median fees. Over the last week, BTC median fees have fluctuated between about $1 and $1.50, while ETH median fees have remained between $0.47 and $0.65. ETH median fees have, however, grown significantly since the beginning of the year. On January 1st, 2020, ETH median fees were a little less than $0.04. 

Source: Coin Metrics Network Data Pro

ETH blocks have also been getting increasingly full over the last few weeks. Relatively full blocks shows that there’s demand to use the network. To address the increase in block fullness, on June 20th Ethereum miners voted to increase the network’s gas limit by 25%. This is reflected in the following chart, which shows both the gas limit per block and the gas used per block.

Source: Coin Metrics Network Data Pro

Market Data Insights

The Compound Effect 

While the overall market has remained little changed over the past month with volatility near record lows for this market cycle, Compound’s launch of their governance token has ignited interest in the decentralized finance space. The amount of collateral locked within the Compound platform has surpassed Maker due to their implementation of liquidity mining — paying out a certain amount of Compound tokens to borrowers and lenders on the platform. 

Compound token’s rapid price growth has been reflected in most other DeFi tokens such as Aave, Maker, Bancor, and Kyber Network. This is suggestive of behavior last seen during the ICO-driven market bubble, although Ren and 0x’s muted price performance indicates that some rationality persists. 

While financial asset bubbles in mature markets are generally undesirable, financial bubbles in rapidly emerging markets such as DeFi can be a good thing in the long-run because it can incentive the build out of additional infrastructure that normally would not be economical. 

Source: Coin Metrics Reference Rates

Tether Supply Growth is Slowing

Since the beginning of the coronavirus-related lockdowns, Tether supply growth has been extremely strong. Here we show Tether’s free float supply, a measure of supply that represents the amount of supply freely available for purchase by investors. Notably, it excludes Tether that has been issued but not yet released. This year, a fairly steady rate of growth brought total Tether free float supply from around 5 billion units to 9 billion units. In just the past few weeks, however, Tether supply growth has slowed considerably, although it is still positive. 

Source: Coin Metrics Network Data Pro

Although the assumption that Tether is fully backed by fiat currency is tenuous and not fully proven, one interpretation of Tether supply growth is that it represents new capital inflows into the space. The common narrative is that Tether is printed, sent to exchanges, and then used to purchase Bitcoin or other cryptoassets. Here we plot one-month Bitcoin price growth with one-month Tether supply growth to examine the connection. Recent data points to a tight correlation between the two time series. As Tether supply growth has slowed, Bitcoin’s price growth has also attenuated.

CM Bletchley Indexes (CMBI) Insights

CMBI and Bletchley Indexes had a relatively flat week with the exception of the Bletchley 40 (small-cap) Index which closed the week up 7.4%. The CMBI Bitcoin Index and the CMBI Ethereum Index both closed the week slightly down, falling 0.6% and 2.2% respectively. 

With the CMBI Bitcoin Index down near historically low volatility levels, the large and mid-cap markets seem to be awaiting Bitcoin to make its next move before experiencing too much action. However, small-cap assets have performed independently and strongly this month, with the Bletchley 40 up 15% already. The Bletchley 10 and Bletchley 20 have seen little action, returning -2.5% and 0.1% respectively.

Source: Coin Metrics CMBI

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • 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]

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.

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Coin Metrics’ State of the Network: Issue 55 – Assessing Crypto’s Recovery Three Months After The March 12th Crash

Assessing Crypto’s Recovery Three Months After The March 12th Crash

By Nate Maddrey and and the Coin Metrics Team

Key Takeaways

  • Bitcoin (BTC) and Ether (ETH) have recovered most of their losses after the March 12th crash, while assets like Bitcoin Cash (BCH) and Litecoin (LTC) have lagged behind.
  • Other assets that have outperformed include Cardano (ADA), Crypto.com Coin (CRO), and OmiseGO (OMG).
  • Stablecoin trading volume has exploded since March 12th, with Tether (USDT) leading the way. BTC-USDT spot market volume on Binance, Bitfinex, Bittrex, HitBTC, Huobi, and LBank shot up to new highs on March 13th, and has remained relatively elevated since.
  • Volume continued to spike in April and May on all six exchanges, although to a lesser extent than on March 13th.
  • Another trend that has emerged following March 12th is the growth of addresses holding relatively small amounts of crypto. Since March 12th, BTC and ETH have both had noticeable increases in addresses holding at least 1 billionth of total supply. 

Introduction

On March 12th crypto experienced one of its largest crashes ever with many assets falling over 50% in less than 24 hours. Now, a little more than three months later, the market has turned around and shown signs of recovery. However, not all assets have reacted equally, and the market continues to change at a fast pace as global uncertainty remains high.

In today’s Weekly Feature we look at network data (i.e. on-chain data) and market data to assess how different assets recovered, and analyze some of the ongoing changes after the crash. 

Price Recovery Differs Across Assets

Assets like Bitcoin (BTC) and Ether (ETH) have recovered most of their losses after the crash, while other assets like Bitcoin Cash (BCH) and Litecoin (LTC) have lagged behind.

The below chart shows market capitalization for nine major cryptoassets over the last year. All nine assets experienced market cap spikes in February, immediately prior to the crash. BTC’s market cap reached $188.76B on February 14th, its highest point in 2020. ETH’s 2020 market cap peaked at $31.25B, also on February 14th.

After the crash, BTC’s market cap recovered to $187.58B by June 1st 2020, just shy of its February high. Similarly, ETH’s market cap reached $27.69B on June 1st.

But other assets have not recovered as much of their pre-crash highs. BCH’s post-crash market cap peaked at $4.92B on April 8th, down from $9.01B on February 14th. LTC market cap reached $5.37B on February 14th and has not passed $3.2B since. Ripple (XRP) and Bitcoin SV (BSV) are also down compared to other assets.

Source: Coin Metrics Network Data Pro

Price recovery paints a similar picture. The below chart shows price recovery (i.e. percent regained of initial price) from February 14th, which was the high point for many cryptoassets in 2020, to June 14th. 

In addition to BTC and ETH, several mid-cap assets like Cardano (ADA) and Crypto.com Coin (CRO) have recovered relatively well. OmiseGO (OMG), which launched on Coinbase Pro on May 19th, has also outperformed.

Source: Coin Metrics Reference Rates

Stablecoin Trading Volume Has Surged

Stablecoin trading volume has exploded since March 12th, with Tether (USDT) leading the way. BTC-USDT spot market volume on Binance, Bitfinex, Bittrex, HitBTC, Huobi, and LBank shot up to new highs on March 13th, and has remained relatively elevated since. Volume continued to spike in April and May on all six exchanges, although to a lesser extent than on March 13th.

The following chart shows BTC-USDT trading volume smoothed using a 7-day rolling average.

Source: Coin Metrics Market Data Feed

This increase in volume corresponds with the huge growth in Tether supply seen since February 2020. Tether is currently issued on many different platforms, including Ethereum (USDT_ETH) and Tron (USDT_TRX). USDT_ETH supply more than doubled from February to May 2020, and USDT_TRX supply has more than tripled over the last two months. 

Source: Coin Metrics Network Data Pro

Addresses Holding Small Amounts of BTC and ETH are Growing

Another trend that has emerged following March 12th is the growth of addresses holding relatively small amounts of crypto. 

The following chart shows the number of addresses holding at least 1 billionth of total supply (.000000001%). BTC and ETH both had noticeable increases in growth following March 12th. Ripple (XRP) and Tezos (XTZ) have also shown steady growth over the last year. This suggests that the amount of individuals holding these assets is growing, and that the amount of retail investors (i.e. non-institutional) may be increasing. 

However, it’s important to note that a single entity can own many addresses at once, so an increase in addresses does not necessarily mean an increase in usage. Alternatively, the rise could be caused by a small number of entities spreading their coins across many addresses.

Source: Coin Metrics Network Data Pro

Conclusion

In three short months after the March 12th crash BTC and ETH have recovered most of their losses. Additionally, stablecoin trading volume has exploded, and the amount of addresses holding small amounts of BTC and ETH have grown. However, not all assets have recovered as well as BTC and ETH. BCH and LTC market caps remain well below 2020 highs, and many other assets are lagging as well. 

As global uncertainty is still high, it remains to be seen whether crypto will continue to trend upwards. But at least up to this point, a lot of the post-crash data has pointed towards a relatively strong recovery.

Check out our free community charting tool to access some of the data used in this piece as well as more of our on-chain network data.

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) and Ethereum (ETH) both had slightly down yet relatively stable weeks. BTC’s market capitalization dropped 1.8% week-over-week, while ETH’s dropped 1.3%. Realized capitalization (which values each coin at the last time it moved on-chain), however, increased for both.

Notably, ETH daily fees grew by over 178.5% week-over-week, a seemingly huge surge. However, this was due to two specific transactions which each inexplicably spent $2.6M on transaction fees

Bitcoin Cash (BCH) and Litecoin (LTC) continued their downward trends as highlighted in today’s Weekly Feature. LTC active addresses dropped 15.8% week-over-week. Although BCH addresses increased 11.3% week-over-week, most other BCH on-chain metrics were down, including a 46.8% drop in transactions.

Network Highlights

There were 1.05M Bitcoin daily active addresses on June 11th, the highest single day total of 2020. Bitcoin daily active addresses have not topped 1.05M since June 2019. 

Source: Coin Metrics Network Data Pro

Bitcoin active addresses also surged in May. Current levels of active addresses have only been seen twice before in Bitcoin’s history: December 2017, when Bitcoin price was approaching $20K, and July 2019, when Bitcoin’s price climbed from around $5K to over $13K. The following chart shows Bitcoin daily active addresses since May 2015, smoothed using a 7-day rolling average.

Source: Coin Metrics Network Data Pro

Ethereum daily active addresses have also surged in the past few weeks. Ethereum active addresses are now approaching levels not seen since January 2018. The following shows daily active addresses smoothed using a 7-day rolling average.

Source: Coin Metrics Network Data Pro

Market Data Insights

This past week in Bitcoin was relatively quiet, with daily volatility reaching the lowest levels in three months. This level of volatility was last seen the week of March 7th, 2020, just days prior to the roughly 50% drop in price on March 12th. Historically, Bitcoin has not been able to maintain volatility below the 50% threshold for periods of time. Is this time different or will volatility be returning soon?

Bitcoin’s rolling 30 day average volatility has only fallen below the 50% threshold 35 times during the modern Bitcoin market (if we consider the modern market for Bitcoin as starting when Bitcoin initially hit $1,000 on November 29, 2013).

Below is a histogram of the number of days that Bitcoin’s 30 Day volatility has remained below 50% for those 35 points mentioned above. 80% of those periods lasted less than 20 days, with 55% lasting less than 10 days. These percentages skew higher when looking only at data since 2017. To keep the following analysis more concise and relevant for the current trading regime we will continue to focus on just the period since 2017.

This leads us to consider what happens following these periods of low volatility. Below is a look at the 10 days preceding and 50 days following periods where the volatility has fallen below 50%. You can see the median and mean trends in red, showing that pattern of rising volatility following the tenth day.

Is this a bullish or bearish signal?  It is difficult to say with certainty using solely historical price data. However, we thought it would be interesting to repeat the analysis above looking at change in price instead of volatility. The results are mixed – sometimes price rises and sometimes it falls. The median and mean therefore both hover around 0% up to 40 days out.

CM Bletchley Indexes (CMBI) Insights

All of the CMBI and Bletchley Indexes experienced losses this week with the exception of the Bletchley 40 (market cap weighted and even weighted) which was up 1.1%. The CMBI Bitcoin Index and CMBI Ethereum Index were down 2.7% and 2% respectfully. 

Interestingly, the Bletchley 10 index, which is composed 82% of Bitcoin and Ethereum, was down 5.1% for the week, implying underperformance in the other constituent assets of the Bletchey 10 (XRP, XTZ, BCH, LINK, BSV, LTC, XLM, EOS). 

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • 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]

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.

Coin Metrics’ State of the Network: Issue 54 – Analyzing Stablecoin Supply and Activity Distribution

Analyzing Stablecoin Supply and Activity Distribution 

By Antoine Le Calvez and the Coin Metrics Team

Key Takeaways

  • The supply and activity distribution of a stablecoin can help us understand how it is used. 
  • The ERC-20 variant of Tether shines as being particularly well distributed amongst its holders. Meanwhile, 6 accounts or less own 80+% of the supply for Gemini Dollar, Binance USD, Tether (Tron), USDK, and HUSD.
  • At first, Paxos appears to have a broad active user base. However, looking at the top transactors on Paxos leads to an interesting discovery: the two most active accounts on Paxos are linked to MMM BSC, a ponzi scheme which underwent an exponential growth in activity in the past year.
  • Another interesting discovery is that the most active Tether on Tron accounts are linked to “dividend” payouts. In some days, this was responsible for 90+% of Tether on Tron transfers.
  • Some stablecoins like Paxos and Tether on Tron see a lot of retail-like transactions, probably due to the presence of MMM and other dividend schemes on these assets. Other stablecoins like HUSD and Binance USD have a large share of payments above $100k.

Introduction

One of the biggest changes in the crypto industry over the past years has been the emergence and development of stablecoins. Split across many networks (Bitcoin, Ethereum, Tron and more) and issuers (Tether, Circle/Coinbase, Binance, etc.), these assets share many similarities: they have the same price, often use the same tech (ERC-20) and serve similar users.

In this piece, we will look at stablecoins network data and try to understand how their usage varies across the networks they are based on and their issuer. More particularly, we will look at Tether (on its Omni, Ethereum and Tron versions), Paxos, USDC, TrueUSD, Gemini Dollar, HUSD, Binance USD, and USDK.

Supply Distribution

The supply distribution of a stablecoin can help us understand how it is used. If it is only used on few exchanges without much other activity, most of the supply will be concentrated in few addresses. On the contrary, if it’s used by many exchanges and users, it will be more broadly distributed.

The ERC-20 variant of Tether shines as being particularly well distributed amongst its holders. Meanwhile, 6 accounts or less own 80+% of the supply for Gemini Dollar, Binance USD, Tether (Tron), USDK, and HUSD.

USDK has a particularly strange supply distribution. As of writing, 3355 accounts hold USDK, but 3170 (94%) only own either $0.5 or $1 which they received in July 2019 from an account who in turn got its money from OKex. Given that barely any recipient spent their money, it doesn’t look like a traditional airdrop.

Activity Distribution

Another way to compare stablecoins is to look at how many accounts are responsible for the majority of the on-chain activity (e.g. 80% of all on-chain activity, as in the chart below). If a small number of accounts are responsible for most of the transactions, it shows a lack of use outside of a handful of exchanges.

Note: For USDK, we exclude the activity related to crediting the 94% of accounts holding only $0.5 or $1.

At first, Paxos appears to have a broad active user base. However, looking at the top transactors on Paxos leads to an interesting discovery: the two most active accounts on Paxos are linked to MMM BSC, a ponzi scheme which underwent an exponential growth in activity in the past year.

Nowadays, more than 40% of all PAX transfers are directly related to this scheme.

Another interesting discovery is that the most active Tether on Tron accounts are linked to “dividend” payouts. In some days, this was responsible for 90+% of Tether on Tron transfers.

Continue Reading on the Coin Metrics Blog

Continue reading the full article on the Coin Metrics blog.

Network Data Insights

Summary Metrics

Ethereum continues to surge, with an 11% increase in both market cap and active addresses week-over-week. While Bitcoin’s market cap and realized cap also grew week-over-week, Ethereum once again led the way. 

Ethereum is also closing the gap in terms of daily transaction fees. Ethereum averaged $463.6K daily transaction fees over the last week, compared to $603.7K for Bitcoin.  Ethereum transaction fees rose towards the end of the week, and surpassed Bitcoin’s daily fees on both June 5th and 6th. We explore this trend more in today’s Network Highlights section. 

Network Highlights

On June 5th Ethereum had more total daily transaction fees than Bitcoin. While Ethereum also topped Bitcoin in terms of daily fees on March 12th (due to network congestion after the price crash), Bitcoin has had more daily fees than Ethereum for most of its history. 

After the recent halving, Bitcoin fees spiked to highs not seen since July, 2019. This rise in fees was mostly due to an increase in competition for block space, as explained in the Network Highlights section of State of the Network Issue 51.

But now Bitcoin fees appear to be dropping back to pre-halving levels. Bitcoin hash rate is recovering quickly following the halving, which means more blocks are being produced which leads to less block space congestion.

The following chart shows Bitcoin estimated hash rate, smoothed using a 7 day rolling average.

Simultaneously, Ethereum fees are spiking. This is at least in part due to the continued rise of Tether issued on Ethereum (USDT_ETH). USDT_ETH transfers surged to a new all-time high of 232.3K on June 6th.

In addition to hash rate, Bitcoin’s realized cap has recovered relatively quickly after the March 12th crash. Bitcoin’s realized cap reached $105.98B on June 6th and is approaching all-time highs. Bitcoin realized cap reached an all-time high of $106.26B in February 2020, before falling down to about $100B after March 12th.

Market Data Insights

To those following the digital asset space, few phrases can evoke as many feelings as “alt season.” Reading it here may stir up emotions of nostalgia, euphoria, greed and, of course, pain surrounding ‘the one that got away’.  

To those unfamiliar, alt season is the portion of the crypto currency investing cycle where the altcoins (smaller cap digital assets which are neither Bitcoin or Ethereum) are in favor. There is no strict definition, but you know it once it arrives. Common informal indicators include tokens with < $50m market caps going on multiple day runs of double-digit returns.  If you find yourself looking up tickers you read about in a forum, trying to predict the next Coinbase listing, or frustrated with how long it will take to transfer funds to an exchange listing your asset of choice, it might just be alt season.

In order to fully appreciate what happened in May, let’s put it in context with the trends in April.  April 2020 was a very positive month for the Bitcoin investment narrative. We had Paul Tudor Jones telling the world that Bitcoin was a sensible trade to hedge inflation risk. CARES Act stimulus checks went out which Coinbase data suggested led to a greater amount of deposits on their platform. Personal savings rates increased to 33% from 12.7% in March, leaving Americans with a larger cushion of cash to be allocated to crypto. Enough speculation though, let’s look at the data.

Notable in the April changes are the increases in Spot Volume Market share of Coinbase, Kraken and Bittrex. These exchanges are the typical fiat on-ramps for retail investors. 

In May, retail investors were feeling good. Bitcoin dip buyers aside, online stock brokers such as Robinhood, Fidelity, TD Ameritrade and E*Trade all reported record amounts of retail trader activity. This demographic of investors (read: speculators) who bought the dip on almost any heavily traded stocks benefited from a strong rally with the S&P 500 index gained 14% during the month of April.

A routinely studied trend in behavioral finance is that overconfident investors tend to move up the risk spectrum and take on more risk (one such study linked here). With this in mind, it is not surprising that we see the trend of trading volumes shifting from the fiat onramp exchanges to those servicing the long tail of riskier alt coins. 

Similar to what we looked at for April, the above chart shows the change in spot market share for selected exchanges in May. Notably Coinbase and Kraken, the fiat exchanges with increases in April saw declining market share in May. However, exchanges such as Binance and Okex saw large increases. These exchanges with increasing market share support trading for a longer tail of assets, i.e. altcoins.

To verify this shift in volume to said assets we take a look at the change in spot trading market share by base asset.

The visual above shows an asset’s share of spot volume at the beginning and end of May, measured using a rolling 7 day average up to and including the relevant date. Notice that there is a break in the chart’s x-axis between 3.5% and 10%. This allows us to better understand the share of volume represented while still including BTC and ETH for context.

We can see that during the month of May, the volumes for BTC and ETH both decreased, roughly by 5% and 2% respectively.  This share of volume shifted to assets such as ETC, OKb, Theta, OMG and MATIC.  Trading volume has moved into these riskier assets sending a strong signal that alt season has arrived.

CM Bletchley Indexes (CMBI) Insights

All CMBI and Bletchley Indexes had another strong week, with the multi-asset indexes performing the best. 

Both the CMBI Bitcoin Index and the CMBI Ethereum Index finished the week slightly up at 1.4% and 1.5% respectively. The Bletchley 20 (mid-cap assets) experienced the strongest returns, up 7.3% for the week, with the Bletchley 40 (small-cap assets) not far behind, returning 6.8%. 

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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.

Coin Metrics’ State of the Network: Issue 53 – Measuring Bitcoin’s Trading Volume

Measuring Bitcoin’s Trading Volume

by Kevin Lu and the Coin Metrics Team

Current market conditions have led to a resurgence of institutional interest in Bitcoin. In the face of an unparalleled monetary and fiscal policy response from central banks and governments around the world, more institutions are recognizing that such policies significantly increase the probability of policy error, either by inciting financial imbalances in certain sectors of the economy or by stoking higher levels of inflation. 

Here we examine, from the perspective of an institution considering entering the market, the distribution and size of Bitcoin’s volume across its various markets. The following is a preview of an upcoming research piece with ARK Invest which will feature a more comprehensive analysis of an institutional approach to Bitcoin.

The Many Facets of Bitcoin’s Volume 

Calculating Bitcoin’s market capitalization is relatively straightforward. Coin Metrics estimates Bitcoin’s free float market capitalization to be $136 billion, giving it a size similar to that of the largest publicly traded companies in the United States. An assessment of volume, however, is more complicated and different calculation methodologies can yield significantly different results. 

Bitcoin’s market structure is unique in that it most closely mirrors that of foreign exchange markets. It is similar in that it is globally distributed, operates 24 hours a day, and its markets utilize a base asset and quote asset convention. The exception is that a significant portion of trading volume occurs on centralized exchanges that match trades from any market participant rather than through an interbank market. 

Source: Coin Metrics Market Data Feed

Bitcoin’s daily trading volume can be evaluated at different levels of aggregation. For a buy-side institution interested in deploying fresh capital into the space, the trading volume of Bitcoin spot markets quoted in U.S. dollars of $0.5 billion per day from major exchanges is perhaps the most relevant. With this level of trading volume, a buy-side institution wishing to not exceed one percent of total trading volume could expect to deploy $5 million in capital per day. 

While the Bitcoin trading ecosystem consists of hundreds of centralized exchanges, a handful of decentralized exchanges, and several OTC desks, the majority of trading occurs on a set of major centralized exchanges. In this analysis, our volume figures are derived from a set of major exchanges consisting of Binance, Binance.US, Bitfinex, bitFlyer, Bithumb, BitMEX, Bitstamp, Bittrex, Bybit, CEX.IO, Coinbase, FTX, Gate.io, Gemini, Huobi, itBit, Kraken, Liquid, OKEX, Poloniex, and Upbit. 

Source: Coin Metrics Market Data Feed

Distribution of U.S. dollar quoted spot market volume follows a power law where roughly 90 percent of the volume is concentrated in the top four exchanges in our sample: Coinbase, Bitstamp, Bitfinex, and Kraken. The fragmented nature of trading volume and liquidity in this space indicates that institutions should expect to go through a process of onboarding with multiple exchanges to access the full spectrum of trading activity. 

Source: Coin Metrics Market Data Feed

Expanding the set of markets to include any fiat markets increases daily trading volume to $1.2 billion with the U.S. dollar consisting of roughly half of the total. Aside from the U.S. dollar, the major fiat quote currencies are the Japanese yen, the euro, the Korean won and the British pound. This set of major exchanges chosen in our analysis excludes some smaller regional exchanges, but their volume is too low to be realistically considered by institutions. 

Source: Coin Metrics Market Data Feed

Stablecoins have evolved to be systemically important to Bitcoin’s ecosystem and continue to gain trading volume market share. Including markets quoted in stablecoins significantly increases the daily trading volume to $3.5 billion, primarily due to Tether — a stablecoin which operates in a regulatory gray zone. Thus, buy-side and sell-side institutions must make a critical decision whether the advantages of participating in stablecoin markets in the form of increased liquidity and trading activity outweigh the risks. More regulatory compliant stablecoins such as USD Coin, Paxos Standard, or TrueUSD have insignificant volumes compared to Tether. 

Source: Coin Metrics Market Data Feed

The largest increase is observed when derivatives markets are added to the mix. Similar to other asset classes, derivatives markets in Bitcoin are several times larger compared to spot markets. If reported volumes are to be believed, gaining exposure through derivatives markets may be the most efficient path. However, crypto derivative markets are still developing, and market participants must contend with a confused mixture of differing contract specifications. Contracts that accept margin in and settle profit and loss in Bitcoin, stablecoins, and fiat all exist. 

Bitcoin’s Volume is Still Small But Growing

Assessing the many facets of Bitcoin’s trading volume can be aided with a frame of reference. Here we compare the spot volume of Bitcoin with the spot volume from other asset classes. 

Source: Coin Metrics Market Data Feed

With daily trading volume of only $4.1 billion, Bitcoin’s spot markets are still minuscule in comparison to U.S. equity markets, U.S. bond markets, and global foreign exchange markets. The interpretation is that Bitcoin, in its current state, is most comparable in size to a large capitalization stock rather than a distinct asset class. A large institutional investor such as an endowment, pension fund, or sovereign wealth fund might reasonably conclude that Bitcoin is only suitable for a portion of the already small allocation to alternative assets rather than carving out a separate allocation towards it. 

If historical growth rates can be maintained, however, Bitcoin’s current daily volume from spot markets of $4.3 billion would need fewer than 4 years of growth to exceed daily volume of all U.S. equities. Fewer than 5 years of growth are needed to exceed daily volume of all U.S. bonds. 

Source: Coin Metrics Market Data Feed

Conclusion

The fragmentation of trading volume in the Bitcoin ecosystem prevents a straightforward assessment of its market size. Institutions considering entering the space should first survey the landscape and make a determination of which exchanges, markets, and assets they feel comfortable transacting in. Critical decisions such as whether they would be willing to transact in stablecoins such as Tether or use derivatives such as perpetual futures contracts can have a material impact on evaluation of trading volume and liquidity. Regardless of these decisions, all facets of Bitcoin’s trading volume have experienced exponential growth and, if sustained, will grow to levels similar to major asset classes. 

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Ethereum (ETH) surged over the weekend and finished the week in the green for most metrics.  ETH daily transaction fees grew 11.0% week-over-week, with an average of $441.8K worth of fees per day. In contrast, Bitcoin (BTC) fees fell 48.6% week-over-week, after showing strong growth over most of May. BTC fees reached $1.82M on May 21st, which is the highest daily total since June 2019.

Network Highlights

When a transaction is broadcast into the Bitcoin network, before it can be included in a block it is temporarily held in a waiting area called the mempool (short for “memory pool”). Miners usually select the highest feerate transactions from the mempool to include in their mined block. 

After the halving, the Bitcoin mempool started filling up with transactions. This was a result of the hash rate drop and subsequent rise of the average interval between Bitcoin blocks following the halving, as reported in the Network Highlights section of SOTN Issue 51. A longer interval between blocks means fewer blocks being mined per day, which in turn results in fewer transactions confirming, causing the mempool to fill up. 

Over the last weeks, the Bitcoin mempool grew and peaked at about 80k unconfirmed transactions.

With the increased transaction count, two methods that Bitcoin Core software utilizes to self-regulate the mempool size could be observed. Firstly, transactions paying a low feerate of just above 1 sat/vByte were evicted from the mempool to make room for higher feerate transactions. The transactions kept in a Bitcoin Core node’s mempool are capped to only use a fixed part of the system’s memory.

In total 7,126 transactions were evicted between May 20th, 09:50 UTC, and May 22nd, 14:30 UTC. The evictions all happened during European and US business hours, the time with the highest network activity.

Secondly, transactions residing in the mempool for over two weeks expired. By default, Bitcoin Core nodes remove transactions from their mempool if no miner found transaction fees to be attractive enough to include them in a block over the last 336 hours (two weeks).

In total 1,627 transactions expired between May 25th, and May 30th. Only 35% of these resided in the mempool for two weeks. The remaining 65% likely spent unconfirmed parent transactions and became invalid as their parents expired.

Market Data Insights

Bitcoin Correlation With Gold Remains High 

The overall market environment continues to be favorable for Bitcoin. On the margin, the policy response to the coronavirus, the protest-related civil unrest in the United States, and the potential for a re-escalation of the trade war between the United States and China should be supportive for store-of-value assets such as Bitcoin. The correlation between gold has consistently maintained relatively high levels for several months now, a phenomenon that has not been historically observed. 

Source: Coin Metrics Reference Rates

Signs of Altcoin Season Regime Shift 

Some interesting signs are emerging that may mark the beginning of an altcoin season regime shift. Ethereum, the primary platform that the majority of altcoins are based on, has begun to outperform other major assets. Cardano is up over 40% this week after announcing a release date for its next major upgrade, named Shelley. And OmiseGo surged over 100% after Coinbase announced that it would begin listing the asset on its platform. Such market movements in response to mainnet launches, new product upgrades, and exchange listings are reminiscent of late 2017. 

Source: Coin Metrics Reference Rates

CM Bletchley Indexes (CMBI) Insights

In the last week of May, most CMBI and Bletchley Indexes recovered the previous week’s losses, with the CMBI Ethereum Index being the outstanding performer. Having only fallen 1% last week, the CMBI Ethereum Index was again the strongest performer, returning 14.7% this week.

All of the Bletchley Indexes experienced returns between 9% and 11%, demonstrating the uniform strength of the market across all large, mid and small cap assets.

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • 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]

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.