Coin Metrics’ State of the Network: Issue 81 – Bitcoin As A Hedge Against Inflation

Weekly Research Focus

Bitcoin As A Hedge Against Inflation

By Nate Maddrey and the Coin Metrics Team

For most of its existence institutions have stayed away from investing in bitcoin, typically citing it as a risky, speculative asset. Over the course of 2020, however, many institutions have started to endorse bitcoin. One of the most commonly cited reasons for this change of tune is the growing narrative that bitcoin could serve as a good hedge against inflation.

For example, in early May billionaire hedge fund manager Paul Tudor Jones announced that he had over 1% of his assets in bitcoin. He explained that he viewed it as a hedge against inflation, saying “we are witnessing the Great Monetary Inflation — an unprecedented expansion of every form of money unlike anything the developed world has ever seen.”

In their recent report “Why Corporate Treasuries May Consider Bitcoin,” Fidelity Digital Assets cites potential inflation as one of the primary reasons that companies are starting to consider holding bitcoin in their corporate treasuries. MicroStrategy, Square, and others, have recently bought bitcoin and stated that they see it as a protection against inflation. 

The rapid onset of COVID in early 2020 changed macro conditions seemingly overnight. Following the market crash of March 2020, central banks around the world began printing money and introducing quantitative easing measures coupled with aggressive fiscal stimulus at an unprecedented rate. In late March the US passed the CARES act, which provided about $2 trillion worth of stimulus money. As a result, the US M2 money stock, as seen below, grew more from about $15 trillion to about $19 trillion over the course of 2020. For context, the M2 money stock grew by less than $1 trillion from January 2008 to January 2010, following the 2007-2008 financial crisis.

Source: FRED Economic Data

Quantitative easing and growth of the M2 money stock does not necessarily directly lead to increased inflation, as newly printed money typically stays in bank reserves. But combined with mounting fiscal deficits due to lagging global economies, rampant quantitative easing has pushed federal banks to their limits and created conditions that could lead to a significant inflation rate rise. 

Source: Federal Reserve Bank of New York, Center for Microeconomic Data

Although inflation rate is still around 2%, the uncertainty around potential future inflation has increased. In other words, while the current median estimate of expected inflation is still anchored around 2%, the variance in expectations has widened. This is reflected in the below chart from the New York Federal Reserve, which shows inflation uncertainty increasing to over 3% following March 2020. 

Source: Federal Reserve Bank of New York, Center for Microeconomic Data

This increased uncertainty was also reflected in the Federal Reserve’s updated monetary policy statement released in August 2020. While the Fed has historically targeted a 2% inflation, the updated statement says it “will likely aim to achieve inflation moderately above 2 percent for some time.”

Bitcoin, in contrast, does not suffer from an uncertain monetary policy. One of Bitcoin’s core properties is its predictable supply schedule. New bitcoins are issued every time a new block is mined as a reward for the miner who successfully mined the block. This is the only way that new bitcoins can be created and is a key part of the Bitcoin protocol. 

Bitcoin’s current block reward is 6.25, which means 6.25 new bitcoins are issued every time a block is mined. On average, blocks are mined every ten minutes, which typically means about 800-1000 new bitcoins are issued every day. There’s slight variance from day to day due to the unpredictable nature of exactly how often new blocks are mined (Bitcoin’s difficulty adjusts every two weeks to keep the average block time around ten minutes), but over the long term this supply issuance is deterministic and predictable. 

Importantly, Bitcoin’s supply issuance is also transparent and auditable. Anyone can run a Bitcoin node and independently verify Bitcoin’s issuance throughout its history. The below chart shows Bitcoin’s daily issuance going back to 2012, smoothed using a 30-day rolling average. 

Source: Coin Metrics Network Data Charts

Bitcoin issuance is decreased by 50% every four years. These halvings are also a core part of the Bitcoin protocol, and are predictable well into the future. The most recent halving occurred in May 2020, which dropped Bitcoin’s average annual inflation rate to below 2%.

Source: Coin Metrics Network Data Charts

Unlike fiat currencies, there’s a hard cap on the total number of bitcoin that will ever exist. Halvings will keep occurring every four years until the supply cap of 21M bitcoin has been reached. This means we can project well into the future, and have clarity about what Bitcoin’s inflation rate will look like 1, 5, or 10 years from now.

Source: Bitcoin – A Novel Economic Institution

Bitcoin’s predictable and transparent monterey policy is ultimately what makes it a good potential hedge against inflation. While the US dollar, and many other fiat currencies, face increased uncertainty about inflation expectations over the upcoming years, Bitcoin’s inflation expectations are predefined. Due to its regular halvings and maximum supply cap, Bitcoin’s inflation rate will decrease in the future, while fiat inflation rates may increase.

To check out some of the data featured in this article and explore more of our on-chain data, check out our free Network Data Charts tool. 

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin and Ethereum network metrics were mostly flat over the past week, with a 2-3% decrease in active addresses for both assets. Bitcoin fees had the most noticeable dropoff of the week, declining by about 40%. Ethereum averaged almost twice as much in daily fees as Bitcoin: $2.3M to $1.2M.

USDC continued its growth, after supply passed 3B last week. USDC active addresses grew by 22.8% week-over-week, and averaged about 26K per day. Tether active addresses declined by about 10.5% week-over-week, but are still well above USDC at an average of 163.2K per day. 

Network Highlights

Bitcoin’s gross unrealized profit is the total amount of profit that could be made if each holder sold their coins at current market prices. To get a proxy for bitcoin’s total unrealized profit we use a metric called “gross unrealized UTXO profit.” Similarly to SOPR, gross unrealized UTXO profit estimates bitcoin’s unrealized profit on a UTXO by UTXO basis. 

Relative unrealized profit ratio is calculated by dividing the total “gross unrealized profit” of bitcoin UTXOs (in USD) by bitcoin’s market cap. Historically, it has been a relatively accurate indicator of bitcoin market cycles. Bitcoin’s relative unrealized profit ratio increased to about 62% at the end of November, and dropped back down below 60% over the last week. Bitcoin’s relative unrealized profit reached a peak of 62% during July 2019. But the current level is still well below the December 2017 peak of 79%. 

For more information about this as well as four other on-chain indicator metrics, check out our latest in-depth research report: The Bitcoin On-chain Indicators Primer.

Disclaimer: Although relative unrealized profit has been a historically informative indicator, there’s no guarantee it will continue to be accurate in the future. Please do your own research – this does not constitute investment advice.

Tether’s total supply has passed 20 billion. After initially launching on Omni, the Ethereum based version of Tether (USDT_ETH) and Tron based version of Tether (USDT_TRX) have both grown rapidly over the last year (see our report “The Rise of Stablecoins” for an exploration of why stablecoins have been exploding). Tether is still the undisputed leader of stablecoins, with over 5x the supply of any other stablecoin. But regulatory action is once again heating up with the recent introduction of the STABLE Act. Tether may once again come under fire in 2021.

Source: Coin Metrics Network Data Charts

Market Data Insights

Bitcoin prices approaching all-time highs again gives us an opportunity to examine the rolling drawdown of the major cryptoassets. Among the majors, only a handful of cryptoassets are just under or have recently exceeded their all-time high: Bitcoin, ChainLink, and Binance Coin. Most other cryptoassets launched in 2017 or before are still well below their all-time highs, with some such as XRP, Bitcoin Cash, and EOS still more than 85 percent below their all-time highs reached in late 2017 and early 2018. 

Source: Coin Metrics Reference Rates

Such divergence in outcomes are positive. While fundamental analysis in the field of cryptoasset research is still in its early phases and industry-wide views on which network metrics matter has not yet reached consensus, we have seen cryptoassets with strong fundamentals (measured by a variety of metrics such as miner fees, adjusted transaction value, active address count, and active user proxies measured using supply dispersion) recover stronger. The fact that some assets are still well below their peak indicates that the market, at this stage of the cycle, is still discerning in what projects to divert capital to. The market has also evolved over the past three years allowing for much easier short exposure across a variety of assets, especially outside of Bitcoin and Ethereum. This represents a healthy market without any glaring excesses. 

On the other hand, a market that exhibits excesses could be what we want. While bubbles can have damaging effects when they pop, they are very effective at drawing newcomers into the industry and incentivizing the build-out of critical infrastructure needed for the industry to scale. It is somewhat surprising that Bitcoin is almost at all-time highs but retail interest is still somewhat muted. Anecdotally, many colleagues who entered the market back at the height of the bubble have since exited the market or show indifference to cryptoassets now. These investors were much more likely to invest in cryptoassets outside of Bitcoin and Ethereum and experience heavy losses that may never recover. 

CM Bletchley Indexes (CMBI) Insights

All CMBI and Bletchley Indexes were down for the week, with the large caps experiencing the smallest of the drawdowns. The CMBI Bitcoin closed the week at $19,139.14, down 0.2% after spending most of the week in the low $18,000s. The CMBI Ethereum had a similar week, falling over 8% mid week before recovering to close at $587.84, down 1.3%.

The crypto asset class outside of Bitcoin and Ethereum finished the week down more as evidenced by the returns of the CMBI 10 Excluding Bitcoin (large caps), the B20 (mid caps) and the B40 (small caps). 

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 80 – The Bitcoin On-Chain Indicators Primer

Weekly Research Focus

The Bitcoin On-Chain Indicators Primer

By Nate Maddrey and the Coin Metrics Team

We’re excited to introduce our latest in-depth research report: The Bitcoin On-Chain Indicators Primer.

Bitcoin has created a new level of transparency and auditability previously unknown in financial and economic data. Since all Bitcoin transactions are recorded on a public ledger, we can analyze activity in a relatively comprehensive fashion. By creating metrics and analytics using data straight from the Bitcoin blockchain, we can gain novel insights into investors’ behavior that are not possible with traditional, non-crypto assets. There are a variety of different on-chain metrics that we can use to gauge bitcoin market cycles and signal when price is nearing local maximums and minimums. 

In a newly released fifteen page report we go over five of bitcoin’s most historically reliable on-chain indicators. Below is an example of one of the five indicators covered in the report: MVRV.

Disclaimer: This report does not constitute investment advice – although these indicators have historically been informative, it does not necessarily mean this will always be the case. Please conduct your own research and view these metrics as one piece in the larger picture. 

Market Value to Realized Value (MVRV)

Market value to realized value (MVRV) has historically been one of the most reliable on-chain indicators of bitcoin market tops and bottoms. MVRV is calculated by dividing bitcoin’s market capitalization by its realized capitalization. In our variant of the MVRV calculation, we use free float market capitalization in place of the traditional version of market capitalization which is based on total on-chain supply. To understand MVRV it’s important to first understand three key metrics: market capitalization, free float market capitalization, and realized capitalization.

Market Capitalization

Market capitalization (also often referred to as “market value” or “market cap”) is the most commonly used metric for gauging bitcoin’s total valuation and is often used to rank bitcoin against other cryptoassets. Market cap is derived from traditional finance where it is calculated by multiplying the total number of outstanding shares of a stock by its current market price – in crypto, this corresponds to multiplying an asset’s total supply and market price. 

In addition to reflecting bitcoin’s total valuation, market capitalization can be thought of as the valuation of current market participants, and often swings wildly up and down as price and investor sentiment shift.

Free Float Market Capitalization

In the 1990s, traditional markets began to realize the importance of having a “free float” determination to account for the illiquid shares of certain equities. Crypto faces a similar problem, as bitcoin can be permanently lost. Additionally, some units of bitcoin have remained dormant and effectively out of circulation over the long-term, the most famous example being Satoshi’s coins. Therefore market capitalization can grossly misrepresent a cryptoasset’s underlying liquidity and capitalization by equally weighting units of supply that are effectively out of circulation. 

Because of these deficiencies, we introduced free float supply to more accurately represent the supply of cryptoassets available to the market. Free float supply excludes units of supply that are provably lost or burned, in addition to tokens held by wallets that have been inactive for at least five years.

Free float market capitalization uses free float supply as an input instead of total supply, and is calculated by multiplying free float supply by current market price. 

Realized Capitalization

Realized capitalization was introduced in 2018 and gives a more long-term, slow moving measure of bitcoin’s total valuation. Realized capitalization is calculated by valuing each unit of bitcoin individually at the price that it was last transacted on-chain. Therefore it discounts the price of coins that were last moved during periods where price was relatively low. 

Realized capitalization can also be thought of as a gross approximation of bitcoin’s aggregate cost basis, also sometimes referred to as its total “stored value.” Theoretically, if each transaction was a trade, realized capitalization would reflect bitcoin’s total cost basis, or in other words the total value stored in bitcoin in terms of U.S. dollars. In reality many bitcoin transactions are not trades, so realized capitalization is not a direct measure of bitcoin’s total stored value. But it still gives an interesting approximation of long-term holders’ sentiment. 

Interpreting MVRV

Historically, a high ratio of market capitalization to realized capitalization has signalled that bitcoin price was near a local maximum, while a low ratio has indicated that price is near a local minimum. The few times that MVRV has dropped below one have historically been some of the best times to buy bitcoin. An increasing MVRV indicates that current sentiment is increasing fast relative to stored value, while decreasing MVRV signals the opposite. 

More Bitcoin On-Chain Indicators

In addition to MVRV, we analyzed four other on-chain indicators: the spent output profit ratio (SOPR), relative unrealized profit, the market cap to thermocap ratio, and HODL waves. Each indicator gives a different vantage point into bitcoin market cycles.

Read the entire “Bitcoin On-Chain Indicators Primer” here.

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Many Bitcoin (BTC) on-chain metrics went sideways this past week, while others continued to show some encouraging trends. Active addresses, transactions, and transfers were mostly flat week-over-week. Total daily transaction fees, on the other hand, grew by 45.6%, and averaged over $2M a day. This signals that the competition for block space is once again heating up. 

In contrast, Ethereum (ETH) fees are dropping after reaching over $5M a day at the end of November. ETH’s mean transaction fee has hovered between $2 and $2.50 over the past week, while BTC’s mean transaction fee has risen above $6. 

Network Highlights

Source: Coin Metrics Network Data Charts

Ethereum hash rate hit a new-all-time high on December 1st. ETH hash rate started a steep rise over the summer, spurred on by the rise of DeFi and subsequent rise in ETH transaction fees. However, after DeFi mania cooled off towards the end of September, there were some questions whether ETH’s hash rate would be able to continue its growth.

Furthermore, the launch of the beginning phases of Ethereum 2.0 and the eventual switch to Proof of Stake raises more questions about how Ethereum’s Proof of Work system will perform in the interim. Interestingly, ETH’s hash rate hit a new all-time high the day the ETH 2.0 beacon chain (the first step towards Proof of Stake) went live, and has remained near all-time highs in the days since.

Source: Coin Metrics Network Data Charts

Stablecoins have been back in the news this past week with the contentious introduction of the STABLE Act. Meanwhile, USDC has quietly continued its growth and just hit another milestone: USDC supply passed 3 billion for the first time on December 4th. 

Source: Coin Metrics Formula Builder

Although Tether remains the most dominant stablecoin with a total supply of close to 20 billion, USDC has been growing at a faster rate than Tether over the last few months. Used extensively in DeFi and now also used as a method for providing foreign aid, USDC is posed for continued growth in 2021. 

Market Data Insights

Bitcoin (BTC) outperformed most other large and mid-cap cryptoassets over the past week. BTC finished the week up 6%, continuing to ride a wave of support from institutional investors. Ethereum (ETH) was not far behind, closing the week up by 5%. Grayscale’s Ethereum Trust has been growing rapidly recently (in addition to its Bitcoin Trust), which is often considered one of the best publicly available gauges of institutional interest.

Source: Coin Metrics Reference Rates

Many of the major mid and small cap assets did not fare as well this past week. Stellar (XLM) dropped 10% on the week, following a large price surge towards the end of November. Tezos (XTZ) and Zcash (ZEC) were also slightly down, dropping 2% and 1% respectively. 

Source: Coin Metrics Reference Rates

CM Bletchley Indexes (CMBI) Insights

All CMBI and Bletchley Indexes finished November strongly, returning over 30% for the month. The top performing index was the CMBI 10 Excluding Bitcoin which returned 61.7% for the month, highlighting the strength of the non-Bitcoin large caps during the period. The CMBI Ethereum was the next best performer returning 56.7% for the month, outperforming the CMBI Bitcoin by 15.8%.

Source: Coin Metrics CMBI

The first week of December was also strong for all indexes, which returned between 3.5% and 7.5%. The Bletchley 40 (small caps) was the best performer, rising 7.4% for the week. The CMBI Ethereum was and CMBI Bitcoin were not too far behind, returning 7.1% and 5.4% for the week respectively.

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 79 – Signs of Institutional Investors

Weekly Research Focus

Signs of Institutional Investors

by Nate Maddrey and the Coin Metrics Team

Over the past few weeks, Ari PaulLuke Martin, and other commentators have noted that bitcoin’s upward price movements since late October have mostly happened during US market hours, when the traditional equity markets were open. This potentially suggests that price rises are being driven by a new wave of institutional buyers who are active during the day and relatively inactive on nights and weekends. We examined this theory using our hourly reference rates to get a more granular look at bitcoin price action during US market hours. 

As bitcoin (BTC) price hovers around $20K, one of the major narratives around the price surge has been the arrival of institutional investors. After crypto and equity markets crashed in mid-March as COVID-19 began to spread, a new wave of institutional interest started to rise from the rubble. 

In early May billionaire hedge fund manager Paul Tudor Jones announced that he had over 1% of his assets in bitcoin. He explained that he viewed it as an inflation hedge against fiat currencies, saying that “your central bank has an avowed goal of depreciating [fiat’s] value 2% per year.”

As central banks began printing more and more in response to struggling global economies, the inflation hedge narrative began to gain momentum. In August, MicroStrategy, a publicly traded $1.2B company (at the time) announced the purchase of $250M worth of bitcoin as a “capital allocation strategy.” In a statement, they elaborated that “investing in the cryptocurrency would provide not only a reasonable hedge against inflation, but also the prospect of earning a higher return than other investments.”

In November, billionaire investors Bill Miller and Stanley Druckenmiller joined in, publicly stating that they held and recommended bitcoin. Both compared bitcoin to gold, with Miller adding that he thinks “inflation is ‘coming back’ due to the Federal Reserve ‘gunning the money supply.’” A few weeks later, a Citibank senior analyst predicted bitcoin could reach over $300K and called it “21st century gold” in a leaked note to institutional clients.

In addition to billionaires, payment providers are getting more involved with crypto. On October 8th, Square announced a $50M investment into bitcoin. And on October 21st, PayPal made an official announcement that it was introducing “a way for customers to buy, hold, and sell certain cryptocurrencies within the PayPal wallet.” Bitcoin’s price was $12.85K on October 21st, and has increased to over $19K since. 

Our analysis starts at the beginning of November, on the heels of PayPal’s announcement, as bitcoin began to ascend towards $20K. Building on Luke Martin’s chart, we used our hourly reference rates to examine bitcoin’s price movements during US market hours. The below charts highlight bitcoin’s price during the hours that the New York Stock Exchange was open, shown in green. Hours where the stock market was closed, like nights, weekends, and the Thanksgiving holiday, are left blank (i.e. not highlighted).

Results are somewhat mixed – there is occasionally price movement overnight, the most prominent example occurring on November 5th. But overall, over the last month price has moved upward more during hours that US markets were open than during hours where US markets were closed. On average, bitcoin’s hourly returns were about 0.1% during market open hours compared to about 0.04% when markets were closed.

Interestingly, while price moved sideways over the first three weekends of the month, last weekend saw significant upward movement. This followed a large drop on the night of Wednesday the 25th and over Thanksgiving, and is potentially related to a large CME bitcoin futures gap to close the month. Price took a big jump up on Monday, November 30th once markets re-opened. 

Source: Coin Metrics Reference Rates

Comparatively, price movement during November 2017, during bitcoin’s bull run leading up to its previous all-time high, was more scattered. Specifically, November 2017 saw more movement during nighttime hours when US markets were closed, and more volatility over weekends. Average hourly returns were about -0.13% while US markets were open versus about 0.11% while markets were closed.

Source: Coin Metrics Reference Rates

Comparing two months is a relatively small sample size, and does not necessarily provide a definitive answer. But we are starting to see some interesting evidence of growing institutional involvement, and will continue to investigate and dive deeper moving forward. If you’ve conducted your own research into this topic or would like to access our data to explore on your own please let us know by emailing [email protected], or reaching out to us on Twitter @coinmetrics.

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

It was a mixed week for Bitcoin (BTC) on-chain metrics. Despite prices testing all-time highs, activity fell off slightly mid-week during the US Thanksgiving holiday as BTC price dropped following Wednesday night. Active addresses are down about 2.2% week-over-week, although the daily average still remained at about 1M. 

Ethereum (ETH) had a relatively strong week, buoyed by news that the Ethereum 2.0 deposit contract received enough funds to launch the first phase of the network’s transition to Proof of Stake. The genesis block of Ethereum 2.0 is now set to launch on December 1st at 12:00 GMT. 

Network Highlights

With BTC price hovering around $20K attention is starting to shift towards analyzing where we are in the market cycle. One relatively simple way to gauge bitcoin cycles is to look at on-chain supply activity. Since every bitcoin transaction is publicly recorded, we can track how often individual units of supply are moved between addresses (i.e. sent as part of a transaction).  For example, about 873K BTC were active within the past week (about 5% of total supply), while about 14.47M BTC have been active within the last 5 years (about 78% of total supply). 

“1-year active supply percent” is the percent of total BTC supply that has been transferred on-chain within the last year. As BTC price rises, an increasing amount of dormant supply typically starts to become active as long-term holders sell or move their BTC. Conversely, when BTC price is low for extended periods of time, 1-year active supply percent tends to drop as investors hold through crypto winters. 

After reaching a low of about 36.5% in early September, BTC’s one year active supply has started to increase slightly and is currently around 38.44%.

HODL Waves expands this concept by looking at active supply bands for all of BTC’s supply. For more on HODL Waves see the Network Highlights section of State of the Network Issue 66.

Source: Coin Metrics Network Data Charts

Stablecoins are now officially being used as a tool of US foreign policy. On November 20th, Circle announced a partnership with the government of Venezuela to distribute aid to front-line medical workers as they battled coronavirus. Venezuelan currencies have notoriously suffered from hyperinflation due to rampant money printing, which makes stablecoins an attractive option for quick and reliable aid. This represents a potentially transformative use case for stablecoins and cryptocurrencies in general as global economies continue to suffer amidst the pandemic. USDC daily active addresses hit a new all-time high of 43.21K on November 24th, four days after the announcement.

Source: Coin Metrics Network Data Charts

In other stablecoin news, PAX supply has increased by about 100M since PayPal’s October 21st announcement that they would be supporting cryptocurrencies. PayPal is using Paxos, the company behind PAX, as their infrastructure provider.

Source: Coin Metrics Network Data Charts

Market Data Insights

Bitcoiners old and new alike rejoiced today as the orange coin reached a new all time high price which, according to our real time reference rate, clocked in at $19.864.08. It has been 1,079 days since we last crossed this milestone.

Source: Coin Metrics Reference Rates

Other large market capitalization assets have held their own against BTC. Ethereum, XRP, Litecoin and Cardano have all notched gains in BTC value over the past month. Ethereum aside, one popular theory is that traders may be chasing the legacy assets in the space that they believe incoming “retail” flow may view as “cheap” and subsequently appreciate in value.

Source: Coin Metrics Reference Rates

CM Bletchley Indexes (CMBI) Insights

Over the last week, the CMBI Bitcoin and CMBI Ethereum indexes both experienced pullbacks after several weeks of strong performance. This stall in price action provided the opportunity for investors to seek returns in the rest of the market that had lagged this recent run up. This is most evidenced in the different return profiles of the CMBI 10 and the CMBI 10 Excluding Bitcoin (CMBI10EX), which returned -0.9% and 2.4% respectively. The positive return of the CMBI10EX is particularly interesting when considering 61% of the index is Ethereum, which was down 2.1% for the week.

This week’s top performing index was the Bletchley 40 (small caps), which rose 4.5% for the week.

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 78 – Dissecting a Bitcoin Bull Market

Weekly Feature

Dissecting a Bitcoin Bull Market

By Lucas Nuzzi 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.

A pandemic, followed by global societal shutdowns, followed by rampant social unrest, followed by increased political polarization, followed by unprecedented levels of monetary interventionism.

This has been 2020.

And in the midst of all of this uncertainty and chaos, a Bitcoin bull market brewed. 

Two competing theories have transpired to explain BTC’s rapid rise to $19,000. Some have speculated that this rally is being predominantly driven by increased regulatory scrutiny in China, which has prevented miners and market participants from selling their BTC. Others attribute it to increased institutional participation after Bitcoin received a trove of endorsements from high-profile macro investors.

In this post, we will evaluate the merit of each of these narratives through the use of network data. 

Are Miners Driving This Rally? 

It is no secret that Beijing has been cracking down on Bitcoin businesses, from miners to exchanges. Earlier this month, news broke that both Huobi and OKex, two of the largest exchanges operating in China, were facing stronger regulatory scrutiny as part of the country’s new mandate to fight money laundering and fraud. Now, local industry observers have reported that the bank accounts of many Shenzhen miners have been frozen as part of this regulatory crackdown.

Media outlets have hypothesized that the recent run up in Bitcoin’s price was a direct result of this crackdown. If miners are unable to sell their BTC, a sustained disruption in the existing supply chain would ultimately generate scarcity. Thus far, however, solid evidence of the impact of the crackdown on mining operations has been anecdotal. Thankfully, we have devised metrics to assess this impact more objectively by tracking the movements of newly issued BTC.

Over the course of 2020, we have closely analyzed the on-chain custody behavior of both mining pool operators and their individual miners. We have found that unspent miner rewards provide a good proxy for aggregate mining pool custody. Since mining pools issue payouts to all of their participants, supply that sits 1 transaction from mining pools is a good representation of the holdings of individual miners. The culmination of this research was a new family of metrics released in October that can provide a view of when these network participants are accumulating, or disseminating, the bitcoins they mine.  

On an aggregate basis, the amount of Bitcoin held by mining pool operators has increased over the course of 2020. Notably, there was a sharp spike in April ahead of the halving and a steady increase followed. Conversely, Bitcoin held by individual miners has decreased in 2020, and at a particularly increased rate in November. 

If, in fact, there was a liquidity crunch predominantly driven by miners, one would expect the amount of BTC held by both pools (purple) and individual miners (green) to increase. Since individual miners are the liquidity gateways of newly issued bitcoins, any supply chain disruption would entail an increase in their holdings, whereas the opposite seems to be taking place.

Another metric that suggests miners have been able to sell their BTC as usual is the aggregate value of bitcoins sent by them. If miners were unable to sell their BTC, the aggregate outflows from their account would likely drop. However, that does not seem to be the case. As of November 21st, 809,217 BTC has left miner accounts. At this pace, the sum of bitcoins sent by miners in November will surpass the yearly average of 1,052,589 BTC sent per month.

Coupled with the aforementioned data on BTC held by miners, the lack of a clear change in miner outflows discredits the hypothesis that miners have not been able to sell as a result of a regulatory crackdown in China. 

Another troublesome factor in attributing the rally to miners is the size of BTC markets. At a market cap of over three hundred billion dollars, it is very unlikely that a rally of this magnitude could have been caused by miners alone. After all, miners are disincentivized to hoard BTC. They are rewarded in a volatile currency, whereas their operations entail monthly expenses paid in fiat. As such, their impact on the market decreases as less BTC is issued.

Nearly 100B USD was added to BTC’s total market capitalization over the course of November. It is hard to envision a scenario where miners alone were responsible for it given that they have received just shy of 360M USD thus far in November. As such, any impact of the regulatory crackdown on liquidity would likely be limited to that, which is too small to an impact of this magnitude.

The Role of Centralized Exchanges

Now, let us look at the on-chain footprint of centralized exchanges and assess their impact on the recent rally, not only in the context of increased regulatory pressure in the East, but also in light of other factors impacting exchanges in the West.

Historically, exchanges operating in China have been the primary target for regulators. It was no different this time. On November 2nd, Huobi’s Chief Operating Officer was reportedly arrested by Chinese authorities, although Huobi has denied the reports. In the days following the reports, Huobi experienced a mass withdrawal event as users grew worrisome. That resulted in a 60k BTC being withdrawn; a loss equivalent to 1B USD in deposits. 

Interestingly, Huobi is not the only exchange to experience a decrease in deposits. Over the course of 2020, the percentage of total BTC supply held by major exchanges has decreased on an aggregate basis, even if we remove Huobi from the equation. We have noticed an aggregate reduction of BTC holdings by the major exchanges we support (Bitfinex, BitMEX, Binance, Bitstamp, Bittrex, Gemini, Kraken, and Poloniex).

Continue reading “Dissecting a Bitcoin Bull Market” here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Many BTC on-chain metrics are on the verge of hitting new all-time highs as institutional interest in bitcoin (BTC) continues to gain momentum. BTC market cap averaged over $333B last week and topped $347B on November 21st, a new all-time high. Daily active addresses topped out at 1.20M, just below the all-time high of 1.28M. Hash rate has also bounced back and is nearing previous highs after a temporary dip thought to be caused by changing Chinese weather patterns, as covered in the Network Highlights section of State of the Network Issue 75

Ethereum (ETH) is following suit, with most on-chain metrics surging. ETH hash rate hit a new all-time high of 265.81 TH/S on November 21st, building on a surge over the summer likely fueled by DeFi’s growth. ETH daily fees grew by a huge 56.4% week-over-week and have once again passed BTC, after BTC overtook ETH in late October. 

Network Highlights

Bitcoin market capitalization and realized capitalization have both hit new all-time highs. 

On October 21st, PayPal made a surprise announcement that they were introducing a way for customers to buy, sell, and hold cryptoassets including bitcoin (BTC), Ether (ETH), and Litecoin (LTC). Since then, BTC price has increased from $12.85K (end of day October 21st) to a high of over $18.70K. Although BTC price is still just shy of the December 2017 all-time high of $19.64K, market cap has reached new highs due to the gradual increase in BTC supply over the last three years.  

Source: Coin Metrics Network Data Charts

The number of unique addresses holding at least 1,000 BTC has also reached a new all-time high. There are currently 2,255 addresses holding at least 1,000 BTC, up from 2,184 on October 21st. This potentially supports the growing narrative that more institutional level investors are starting to buy and hold BTC. However an important caveat is that a single entity can control multiple addresses, so some of the growth may potentially be due to large holders spreading out their BTC.

Source: Coin Metrics Network Data Charts

Additionally, the number of addresses holding at least 1 BTC hit a new all-time high in early November. On November 4th there were 825.23K addresses holding at least 1 BTC. The number has since declined slightly to 819.93K, but still remains near all-time highs. This suggests that the number of retail size holders is also increasing in tandem with institutional size holders, although the same caveat mentioned above still applies.

Source: Coin Metrics Network Data Charts

Market Data Insights

A rising coin lifts all boats.

Over the past 30 days we have seen bitcoin continue to climb back toward all-time highs, reigniting excitement in the space and leaving crypto enthusiasts foaming at the mouth. Potential new highs, much like every other event, is “good for Bitcoin”. However it has also been good for many other assets in the space.

Source: Coin Metrics Market Data Feed

An indicator that we often look at for an estimate of altcoin sentiment is the ratio of assets reaching new 30 day highs minus those reaching new 30 day lows. We use our reference rate universe of 306 assets to perform this calculation. In the chart below, you can see that the blue line in the bottom plot has recently shifted to net new highs from net new lows. 

Source: Coin Metrics Market Data Feed

This displays new confidence in segments such as DeFi assets following the selloff this fall. Based on the historical range of this indicator, altcoins may have some additional room to run if the bullish trend continues.

CM Bletchley Indexes (CMBI) Insights

The cryptoasset market had a tremendous week all around with the large cap assets enjoying the largest intra-week gains. The CMBI Ethereum returned a staggering 27.9% during the week, closing at $568.10, its highest level since June 2018. Bitcoin also had an incredibly strong week, returning 17.3% to close at $18,597.55, its fourth highest daily close ever.

However, despite the strong performance of Bitcoin and Ethereum, it was the CMBI 10 Excluding Bitcoin that had the highest weekly return, closing up 32.0%. The additional performance on top of the CMBI Ethereum is largely attributable to XRP, which closed the week up 66%, its largest weekly return since September 2018.

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 77 – The State of DeFi Tokens

Weekly Feature

The State of DeFi Tokens

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 (DeFi) took over the crypto world during the summer. But it cooled off after September, and has taken a back seat to BTC and ETH since.

In this week’s Feature, we explore the rapid rise of DeFi tokens and the current state of DeFi’s market cap and usage. You can check out our DeFi data and recreate many of the charts featured in this piece using our free community charting tool

DeFi’s Third Act

Although it may seem like it popped up overnight, DeFi has been around for years. During 2018 early projects like MakerDAO (MKR) and 0x (ZRX) pushed the total DeFi market cap to over $5B, as Ether (ETH) price reached all-time highs. But the initial DeFi surge was dwarfed by this summer’s run, which saw the rapid entry of many new projects.

Source: Coin Metrics Network Data Charts

DeFi’s recent rise began in earnest in June with the launch of Compound protocol’s COMP governance token. COMP’s launch kickstarted the rise of decentralized lending and borrowing, which served as the initial fuel for DeFi’s surge. Compound lets users borrow cryptoassets like ETH, DAI, and USDC using crypto as collateral. It also lets users lend their cryptoassets and earn yield, which has become a cornerstone of DeFi investing. In addition to Compound, Aave protocol has grown to be one of the largest DeFi decentralized lending platforms. Aave originally launched the LEND token, which they recently transitioned to the AAVE token. 

Following COMP many other DeFi applications launched governance tokens during the summer of 2020. Yearn.finance, an application that automatically invests user’s funds into the highest yielding decentralized lending markets, launched the YFI governance token in mid-July. YFI was launched through incentivized liquidity pools which has become a popular way of launching DeFi tokens. YFI reached a market cap of over $1B by the end of August.

DeFi market cap peaked on September 18th shortly after the launch of Uniswap’s UNI governance token. Uniswap, the largest Ethereum-based decentralized exchange, has been the engine behind DeFi mania. Uniswap allows anyone to create a new token pair and immediately begin trading using decentralized liquidity pools, which helped new DeFi tokens launch and scale quickly. Uniswap trading volume increased from about $1M a day in early June to close to $1B a day in the beginning of September.

UNI was launched as an airdrop that rewarded previous Uniswap users and liquidity providers. Because of its sudden launch, UNI almost immediately catapulted DeFi market cap to a new all-time high. But soon after, the bubble began to burst. New UNI recipients started to sell their tokens en masse, causing UNI’s price to drop from a high of close to $7 to a low of less than $2. Additionally, a series of exploits and hacks led to large losses, which took more air out of the sector. 

Source: Coin Metrics Network Data Charts

But DeFi market cap has started to turn back around. After reaching a local low on November 4th, DeFi market cap has returned back to late September levels following a surge from BTC and ETH. If BTC and ETH continue to rise, DeFi could be a big benefactor. 

Usage Rebound

Similar to market cap, DeFi usage as measured by daily active addresses also peaked in September. Following the initial airdrop there were over 176K UNI active addresses on September 17th, by far the largest amount in DeFi history. But since then UNI daily active addresses have rapidly declined and leveled off at about 5K per day. 

Source: Coin Metrics Network Data Charts

Removing UNI from the above chart shows that other DeFi tokens are regaining usage. Excluding UNI, the overall number of active addresses still peaked in early September, mostly due to the rise and fall of SushiSwap (SUSHI). 

Source: Coin Metrics Network Data Charts

Continue reading “The State of DeFi Tokens” here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) and Ethereum (ETH) continued their hot streaks this week. BTC averaged over 1M daily active addresses and continues to close in on the all-time high of 1.29M set in December 2017. BTC’s realized cap topped $128B on November 12th, the highest it’s ever been. ETH’s realized cap grew 3.9% week-over-week and is now over $36B, its highest level since September 2018. 

Network Highlights

After originally forking from Bitcoin in August 2017, Bitcoin Cash (BCH) is undergoing its own split. On Nov 15th, Bitcoin Cash forked into two chains: BCHA, and BCHN. At time of writing, BCHN appears to be winning, as little to no hash power is being devoted to BCHA.

Initially proposed as a “medium-of-exchange” alternative to BTC that could be used as a transactional currency, BCH has averaged less than $150M per day of adjusted transfer value for most of 2020. Comparatively, BTC is currently averaging over $4B of daily adjusted transfer value.

Source: Coin Metrics Network Data Charts

Although low transaction fees were often touted as one of the advantages of BCH, low fees likely hurt the long-term viability of the network. Transaction fees are paid to miners as an incentive for securing the network (in addition to block rewards). While low average fees are good for individual users, low total fees typically means that there’s low demand for block space, and ultimately low demand for using the network. BCH has had a total of less than $1.5M worth of transaction fees over its entire history. BTC had over $1.6M daily transaction fees last Friday.

Source: Coin Metrics Formula Builder

Similarly, BCH usage remains far behind BTC. The following chart shows the percent share of total active addresses across both BTC and BCH. BCH only has about 6% of active addresses, compared to 94% for BTC.

Source: Coin Metrics Network Data Charts

Market Data Insights

The decentralized exchange (DEX) tokens, UNI and SUSHI, made tremendous gains this past week as traders/speculators looked to place bets leading up to this Tuesday. November 17th marks the day that the initial UNI liquidity mining bonus program is originally scheduled to end.

For those unfamiliar, this program pays out Uniswap’s governance token, UNI, at a rate of 83,333 per day to liquidity providers in the pairs ETH/USDT, ETH/USDC, ETH/DAI, and ETH/WBTC. There are two base case outlooks on the end of this program: 

1) UNI will go up in value with decreased supply. 

2) UNI will decrease in value because liquidity will leave Uniswap due to lowered incentives, decreasing the value of the platform.

This creates an opportunity for the similar, alternative dex SushisSwap to attempt to attract that liquidity searching for a higher yield. And as of Monday afternoon they are changing their bonus structure to do just that, boosting the incentives paid out to those pools with programs ending on Uniswap.

governance proposal has been made for Uniswap to extend the program an additional two months while reducing the rewards by half. If voted in this proposal would not take effect until December 4, 2020, giving liquidity providers a fairly large window of time to move from the platform. The real winners from the continuation of the bonuses by both Uniswap and SushiSwap are the yield farming tokens which can continue to leverage these platforms to boost APY. 

UNI is up ~17% and SUSHI ~90% since Uniswap’s ‘community’ call last Friday

CM Bletchley Indexes (CMBI) Insights

A mixed week for CMBI and Bletchley Indexes that saw a cool down in most of the large cap market after several weeks of outperformance and a slight resurgence in mid and small caps. The exception to this was the CMBI Bitcoin, which had another strong week closing up 3% at $15,860.81. During this week, Bitcoin also experienced multi year highs, reaching levels that had not been experienced since January 2018.

The CMBI Ethereum finished the week down like many of the top 10 assets, closing at $444.11. The contrast in performance between Bitcoin and the other top 10 crypto assets can be observed in the returns of the CMBI10 and the CMBI10 Excluding Bitcoin, the former which closed the week up 1.8%, the latter down 1.6%.

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 76 – Bitcoin: An Unprecedented Experiment in Fair Distribution

Weekly Feature

Bitcoin: An Unprecedented Experiment in Fair Distribution

By Lucas Nuzzi 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.

Much has been written about the fundamental differences between Bitcoin and other asset classes. In fact, juxtapositions of Bitcoin and established commodities such as gold continue to lure swarms of newcomers into this industry, institutional and retail-alike.

But are there factors that make Bitcoin fundamentally different than other cryptoassets?

As the first-ever successful implementation of a digital currency, it’s common to see Bitcoin serve as a punching bag for technologists. To many of them, Bitcoin is a first-generation technology and, as such, it is plagued by a lack of transactional throughput and feature richness. But make no mistake: Bitcoin’s uniqueness goes far beyond the scope of technology. It is an unprecedented experiment in wealth distribution. 

In bull markets, the proverbial comparisons of Bitcoin and the likes of dial-up internet, or email in the 1980s, are vast and plentiful. Too often, these are part of deliberate marketing strategies pushed by proponents of emerging cryptoassets that reportedly succeed where Bitcoin has failed. Tragically, newcomers confronted by a strictly technological comparison framework are ultimately pushed to the margins, especially as debates turn hyper-technical. 

While it is undeniable that technology plays a role in evaluating the merits of any cryptoasset, there’s certainly more to the story. What technologists and, by extension, most newcomers often overlook is the fact that cryptoassets function as digital economies. And just like real-world economies, the technology through which currency is accounted for (governments, banks, payment networks) is often far less important than how that currency was and is effectively distributed (monetary policy and wealth distribution).

On-chain data provides a new paradigm for this type of economic analysis, as it makes possible the identification of inequitable wealth distributions at the asset level. After all, blockchains at their core provide a full history of ownership structures, and that history often speaks volumes. Cronyism, amongst other unfair supply distribution models, inescapably result in incredibly centralized monetary bases. Through on-chain data, we can identify ownership structures antithetical to Bitcoin’s and quantify the degree of wealth centralization within their digital economies. 

To paint a full picture of the factors that drive fair supply distribution, we will begin this post by reviewing Bitcoin’s early history. Then, we will take a closer look at distribution through mining and the impact of industrialization. Lastly, we will showcase two novel supply dispersion metrics to evaluate the wealth distribution of dozens of assets relative to Bitcoin. 

The Genesis of Magical Internet Money

Bitcoin’s early history is an attestation to the novelty of a purely digital currency. Its earliest transactors were likely enticed by Satoshi’s post on the P2P foundation forum, where he first introduced the system. Back then, only the technically savvy were able or willing to continuously run a network node. Even fewer participants were able to properly custody their wallets, as that would require some understanding of PGP encryption as well as a ton of patience to deal with the inevitable bugs in Bitcoin’s first wallet (if you can even call it that). There wasn’t even an exchange rate for the earliest of adopters to begin to fathom valuing their Bitcoins. 

Coupled with the aforementioned technical complexity, the results of early experiments on Bitcoin were disastrous: there is an exorbitant amount of BTC that is believed to have been permanently lost during that period. Transactors, after all, treated Bitcoin as it was back then: a curious experiment of digital monopoly money

Perhaps no other time series better showcases the unserious nature of early Bitcoin than the chart below. It demonstrates how it took until nearly 2011 for Bitcoin transactors to start using decimals (green line) when sending BTC. Until then, all transactions used full units of BTC (purple line) as users experimented with sending full bitcoins to one another. 

This is evidence of the stark difference between Bitcoin and all cryptoassets that followed. Bitcoin set a precedent for the convertibility of a digital asset and fiat currencies, like the US dollar. As a result, early adopters of other cryptoassets assumed value from day one, as opposed to carelessly experimenting. Although it is obviously better for end users to have reliable custody and some idea of asset valuation from the get-go, that experimentation in Bitcoin ultimately led to an unmatched level of supply turnover.

A direct way to measure supply turnover is through supply velocity metrics. As covered in previous SOTN issues, velocity measures the amount of times an average unit of supply has been transferred. It is generally calculated by dividing supply transferred by the total monetary base. In order to provide a better representation of short-term turnover, the particular variation of velocity showcased below filters activity by supply that was active in the trailing 1yr (instead of using total supply). 

A key element of Bitcoin’s unmatched distribution are the clear periods of high supply turnover, showcased as cycles of increased velocity. Such cycles depict early adopters making way to new adopters who, when the time comes, make way to even newer adopters. In the past, Bitcoin’s ferocious price rallies have been a considerable driving force for supply turnover. 

Again, precedents are important. The lack of a successful precedent for Bitcoin made it so that Fear, Uncertainty and Doubt constantly tormented the minds of early adopters, and newer adopters provided a way out through the markets. 

Fair Distribution by Design

As mentioned in the introduction, a cryptoasset’s underlying technology is most definitely not the sole determinant of its intrinsic value. However, it is still an important factor to consider as it often plays an enormous role in the distribution of supply. Bitcoin solved a decades-long problem in distributed computing dubbed the “Byzantine’s General Problem”, which has to do with reaching consensus on the validity of a statement amongst untrusted parties. What is truly remarkable is that Satoshi’s solution not only addressed the issue of distributed consensus, but did so with an activity that intrinsically fosters monetary decentralization: mining.

By design, Bitcoin mining is an activity that pushes the forces of fair distribution. In order to be profitable, miners must operate on long time horizons as they have fixed operational costs. However, the BTC reward issued for this activity widely fluctuates as Bitcoin’s price carries high volatility. This nudges miners to carefully manage their treasuries and constantly sell their holdings for operational purposes   like paying for electricity, as well as strategic requirements like upgrading their hardware to remain competitive. This ultimately increases supply turnover.

Apart from the effective validation of Bitcoin transactions, this activity strengthens the network by increasing the cost to attack it. By its very nature, Bitcoin’s underlying monetary policy fosters competition as its inflation rate decreases over time with every halvening. Even though miners have consolidated and fully industrialized as time progressed, the sheer size of existing operations leaves less room for them to speculate, which pushes new supply to change hands. 

Crypto Assets and Wealth Inequality

Thus far, we have covered the fundamental factors that have affected Bitcoin’s supply distribution. Now it is time to assess the extent to which these factors differentiate Bitcoin from other assets. In economics, there is extensive literature on wealth inequality and supply dispersion metrics. Unfortunately, the cryptoasset industry has not converged on an equivalent set of metrics. We hope to change that, and have devised a new set of metrics to quantify wealth inequality across many cryptoassets.

Continue reading “Bitcoin: An Unprecedented Experiment in Fair Distribution” here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

It was a big week for Bitcoin (BTC) with market cap surging past $260B for the first time since January 2018. In addition to price, network usage was also up across the board. BTC active addresses grew by 17.9% week-over-week and averaged over 1M a day, after averaging only about 861K a day the previous week. Hash rate rebounded and grew 10.1% week-over-week after a precipitous drop likely caused by changing weather conditions in China. Daily transaction fees also continued to climb, averaging about $3M a day. Overall, the surge in usage and fundamental metrics is a positive sign that BTC is in a good position to continue its price growth. 

Ethereum (ETH) also had a big week, with release of the Ethereum 2.0 deposit contract which allows users to start locking up ETH in anticipation of Ethereum’s upcoming transition to proof-of-stake. The deposit contract will serve as a one-way bridge – once the funds are committed to the contract they cannot be subsequently unlocked and used on the main (Ethereum 1.0) chain. Therefore the supply locked into the contract is effectively taken out of circulation, at least until the launch of Ethereum 2.0. Once 524,288 ETH is locked into the contract Ethereum will launch Phase 0 of Ethereum 2.0, which will be a multi-year process aimed at exponentially increasing Ethereum’s scalability.  At time of writing, the deposit contract already holds about 49,500 ETH.

Network Highlights

On November 3rd an old Bitcoin address that had been dormant since 2013 suddenly came to life and transferred 69,369 BTC to an initially unknown destination. The transfer of almost 70K BTC was one of the largest single-day movements of dormant supply in Bitcoin’s history. The below chart shows the daily amount of BTC supply that has been revived after remaining inactive for at least five years. Since the initial transaction, it’s been revealed that the address was tied to early darknet marketplace Silk Road, and that the BTC was seized by the United States Department of Justice. 

Source: Coin Metrics Network Data Charts

On November 4th the percent of BTC unspent transaction outputs (UTXOs) in profit topped 98% for the first time since December 2017. Every time a Bitcoin transaction occurs at least one UTXO is created. UTXOs represent coins that can be spent as inputs to future transactions. We consider a UTXO “in profit” if BTC’s price at the time of the UTXO creation was lower than BTC’s current price. Theoretically, this means that the UTXO’s owner can sell their BTC at a profit (assuming that their initial transaction represented a purchase price). A high percentage of UTXOs in profit potentially signals that there is relatively low sell pressure, since there’s low risk of capitulation. But conversely it could signal that some investors may soon start taking profits if the potential gains become too good to pass up. 

Source: Coin Metrics Network Data Charts

Decentralized finance (DeFi) is showing signs of life. After declining over the last few months, yearn.finance (YFI) transaction count hit a new all-time high of 11.3K on November 7th. With ETH pumping, DeFi could be in store for a resurgence, although it remains to be seen whether we will ever return to the days of peak DeFi mania. 

Source: Coin Metrics Network Data Charts

Market Data Insights

We have rapidly reached levels over the past month not seen since late 2018 and are closing in on all-time highs. Bitcoin moved ~$2,000 week-over-week with a close of $15,483. The high for the week reached over $16,000 on some exchanges. 

Source: Coin Metrics Reference Rates

But the macroeconomic backdrop shifted a bit over the weekend. With the recent results from a Pfizer vaccine for COVID-19 and the “blue wave” not coming to fruition, the magnitude of future fiscal stimulus via central bank policy appears to have decreased. On Monday the markets reacted by punishing inflation hedges when money moved from safe havens to risk-on assets, sending gold down 5% for its worst day since August. Bitcoin ended the day down roughly 1%.

Source: TradingView.com

CM Bletchley Indexes (CMBI) Insights

It was an incredible week for all CMBI and Bletchley Indexes with most indexes returning above 10%. The CMBI Ethereum was the strongest performer, gaining momentum after the announcement of the Ethereum 2.0 staking contracts and closing the week at $451.79, up 14.9%. The CMBI Bitcoin also performed strongly, adding to its impressive run of 5 consecutive positive weekly returns, up 11.3% to $15,400.29.

The small cap assets showed a strong reversal after several weeks of negative returns, increasing 11% for the week. The mid caps performed well against the USD, increasing 4.5%, but underperformed the rest of the market.

Source: Coin Metrics CMBI

The CMBI Bitcoin Hash Rate reversed its consecutive down weeks after a difficulty adjustment last week. The index closed the week up 13%, spending most of the week in the 115-130 exahashes per second range.

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 75 – Following Flows: A Look at Miners’ On-Chain Payments

Weekly Feature

Following Flows: A Look at Miners’ On-Chain Payments

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.

Key Takeaways

  • Using a new methodology that looks at addresses one hop out from the coinbase transaction, this report quantifies miner holdings and activity. This approach improves on previous attempts at tracking miner spending, which inadvertently measured pool operator activity rather than miner behavior.
  • Miners accumulated an additional 318,000 BTC in the year leading up to the halving, from trough to peak.
  • With supply held by miners gradually decreasing and net flows from their addresses stabilizing, miners appear to be exerting less influence on the network.
  • Miner flow and supply metrics will be made available in the upcoming version 4.8 release of Network Data Pro.

Miners and Markets

In addition to their role in securing the network, miners have a profound effect on Bitcoin’s market dynamics. Because they can receive newly issued bitcoin rather than buying it, miners are natural net sellers of the asset. This effect is further compounded by the fact that miners’ operating expenses, chiefly electricity and rent, are primarily fiat-denominated, while their revenue is earned in bitcoin.

Using previously-unavailable data on accounts that have interacted with these addresses, this feature examines miners’ activity, assessing the drivers and impacts of their spending.

While on-chain data indicates miners’ influence on the network is gradually decreasing, they remain key players in the ecosystem with access to large amounts of capital. To help our users understand these actors, Coin Metrics is making a broad slice of miner-related data available in the upcoming version 4.8 release of Network Data Pro. Using this data, this feature finds that the supply held by miners has generally decreased over time and that the flows of funds to and from miners and pools have been dampened by the network’s successive halvings.

Summarizing Supply

To calculate miner flows, we begin by aggregating all addresses that have received payment from a coinbase transaction and labeling those as 0-hop addresses. All the addresses in this set, along with those that have received payment from an address in this set, are then tagged as 1-hop addresses.

Because of how mining pool wallets are typically structured, with pools initially receiving the block reward and only later distributing it to miners, 0-hop addresses generally represent mining pools and 1-hop addresses generally represent miners. For this reason, existing systems that attempt to extrapolate miner behavior from the spending habits of 0-hop addresses are theoretically unsound and do not measure what they purport to. Instead, they measure pool operators’ activity.

Admittedly, tagging miners and pools based on distance from a coinbase transaction is an imperfect technique. This is especially true when the methodology is applied to the early network, in which solo mining and alternative pool models were more popular. Because the first mining pool, Slush Pool, mined its first block in December of 2010, measurements from before this date in particular should only be used for reference. Furthermore, miner addresses that have not received funds from a 0-hop address will not be tagged. All told, though, this heuristic represents a significant improvement over the current state of the art and should accurately capture broad trends.

Miners, especially those active in the network’s early days, control a significant amount of bitcoin. The number of coins held by both 0-hop and 1-hop addresses has generally declined throughout the network’s history. H2 2019 and H1 2020 saw a significant reversal in this trend in the run up to the halving, however, with miners accumulating an additional 383,000 BTC from trough to peak. This effect was primarily confined to 1-hop addresses, with 0-hop supply remaining roughly flat—the bulk of this accumulation would therefore have remained undetected by previous estimation techniques. 

Several jumps in the supply held by miners are visible. These spikes are typically caused by addresses with significant balances mining their first block or making their first interaction with a previously-tagged 0-hop address. The most prominent of these jumps occurred on August 16, 2012, when a whale holding over half a million BTC received part of the coinbase reward for block 194,256. New entrants were also responsible for the increase in miner-controlled supply before this year’s halving.

Due to inflation, the gradual reduction in supply held by miners and pools is even more significant when viewed in the context of total supply. This decrease is in line with a general increase in bitcoin’s supply dispersion. It’s also consistent with more widespread adoption of the pool model, which implies that non-mining addresses are becoming less likely to be superfluously tagged as 1-hop addresses.

Even today, though, miners and pools control a substantial chunk of the total bitcoin supply.

Pools and Payments

The flow of funds to and from these groups is another potent on-chain signal. Because pools are typically the immediate recipients of coinbase rewards, 0-hop flows are a useful indicator of mining pool activity. With the exception of several spikes, the most notable of which is attributable to the aforementioned whale, 0-hop inflows and outflows have both trended downward in BTC terms since the early days of the network.

Continue reading “Following Flows: A Look at Miners’ On-Chain Payments” here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) network metrics had a mixed week. BTC transaction fees broke out this past week, growing 123.3% week-over-week and averaging close to $3M per day. BTC had almost twice the amount of total fees as Ethereum (ETH) this past week, reversing the trend of the last four months.

But other BTC metrics dropped. Most notably, hash rate dropped by 18.2% week-over-week after it almost reached new all-time highs just a few weeks earlier. Block production slowed as a result of the hash rate drop, which led to a drop in the overall amount of transactions and transfers. For more about this and the reasons behind the sudden drop see today’s Network Highlights section.

One other thing to note: USDC had over $11B of transfer value (adjusted) on October 26th,  smashing its previous all-time high of $2.11B. However the huge spike was likely due to the recent Harvest Finance exploit, which involved a series of USDC flash loans. 

Network Highlights

On October 29th and 30th BTC median transaction fee reached over $7, its highest level since January 2018. While there are many factors at play, the median fee spike is an interesting example of how weather conditions in a specific region of the world can have a ripple effect across the entire Bitcoin network.   

Source: Coin Metrics Network Data Charts

From October 24th to 28th Bitcoin’s hash rate suddenly began to fall, dropping by about 35% in total. Hash rate often fluctuates but this was a particularly large drop, especially considering that price was simultaneously rising which typically attracts more miners to the network.

Although it’s difficult to pin down the exact cause of the drop, the leading theory is that it was related to the end of the rainy season in southwestern China. During the wet season there’s excess water which is used for hydro energy, resulting in relatively cheap electricity. But when the weather dries up many miners are forced to move their operations to different locations in search of cheaper electricity. 

The sudden drop in hash rate caused the average time between new Bitcoin blocks to shoot up its highest levels in years. Less hash rate devoted to finding new blocks means that less blocks are produced. The following chart shows hash rate (left hand axis) vs mean interval between blocks in seconds (right hand axis) smoothed using a 7-day rolling average.

Source: Coin Metrics Network Data Charts

While block production slowed, incoming transactions did not. However, there was suddenly less block space to process the incoming transactions, due to the decrease in hash rate. This led to a large surge in the amount of unconfirmed transactions in the Bitcoin mempool. Despite the mempool surge, the on-chain transaction count dropped, as a much larger proportion of those transactions were stuck pending in the mempool waiting for some open block space. 

Source: Coin Metrics Network Data Charts

All together, this led to the surge in BTC transaction fees. Paying a higher fee leads to a higher chance that miners will prioritize the transaction and include it in a block. With block space at a premium, users were willing to pay higher and higher fees to try to get their transactions confirmed in a timely manner.

If the hash rate drop was truly caused by migrating Chinese miners we should see hash rate bounce back up in the upcoming weeks as operations get back up and running. It will be interesting to monitor moving forward, especially as more and more miners move to frontier markets like Iran, which are less weather-dependent.

Market Data Insights

Bitcoin (BTC) was clearly the main narrative when we look back on the month of October. BTC boomed following the narratives of inflation fears, election hedges, and the parade of companies moving some portion of their balance sheet into the asset class. BTC ended the month up ~30%, which puts it just under one standard deviation of monthly returns from the mean of 31% over the past 5 years.

Source: Coin Metrics Market Data Feed

In terms of absolute U.S. dollar moves, October was a notable close. With a gain of $3,194 from Oct. 1 to 31, there has only been 1 month in the last 5 years with a larger move. That month was December 2017, where Bitcoin moved $3,432 from $10,711 to $14,149. This gives the recent move some valuable context. 

One of the reasons that this recent move feels ‘healthier’ is the relatively low levels of realized volatility. Even though the 30 day moving average recently moved back up following last week’s price action, it still remains below the 50 mark and continues to trade in a historically low range.

CM Bletchley Indexes (CMBI) Insights

Again this week was characterized by the strength in large cap assets, in particular Bitcoin. The CMBI Bitcoin was the strongest performer of the CMBI and Bletchley Indexes, closing the week at $13,832.05, up 6.1%. The CMBI Ethereum did not fare as well this week, closing down 3.6% at $393.23. 

Bitcoin’s strong performance resulted in losses across the rest of the asset class, evidenced by the negative performance of all of the multi-asset indexes that do not have Bitcoin as a constituent. 

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 74 – Fundamentals Show Bitcoin Is Poised for Takeoff

Weekly Feature

Fundamentals Show Bitcoin Is Poised for Takeoff

By Nate Maddrey and the Coin Metrics Team

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

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

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

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

Source: Coin Metrics Network Data Charts

Digital Gold

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

Source: Coin Metrics Correlation Charts

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

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

Source: Coin Metrics Network Data Charts

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

Source: Coin Metrics Network Data Charts

Increasing Holders

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

Source: Coin Metrics Network Data Charts

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

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

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

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

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

Network Highlights

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

Source: Coin Metrics Network Data Charts

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

Source: Coin Metrics Network Data Charts

Market Data Insights

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

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

Source: Coin Metrics Market Data Feed

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

Source: Coin Metrics Market Data Feed

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

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

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

CM Bletchley Indexes (CMBI) Insights

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

Source: Coin Metrics CMBI

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

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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

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

Subscribe and Past Issues

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

If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.

Check out the Coin Metrics Blog for more in depth research and analysis.

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

Weekly Feature

Q3 Refresh of Trusted Spot Volume Framework

By Jon Geenty and the Coin Metrics Team

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

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

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

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

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

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

Removing Western Bias

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

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

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

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

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

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

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

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

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

Network Highlights

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

Source: Coin Metrics Network Data Charts

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

Source: Coin Metrics Network Data Charts

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

Source: Coin Metrics Formula Builder

Market Data Insights

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

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

CM Bletchley Indexes (CMBI) Insights

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

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

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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

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

Subscribe and Past Issues

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

If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.

Check out the Coin Metrics Blog for more in depth research and analysis.

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.