Coin Metrics' State of the Network: Issue 132

Tuesday, December 7th, 2021

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Comparing Returns Across the Major ERC-20 Tokens

By Kyle Waters and Nate Maddrey

One of the primary use cases of Ethereum and other smart contract platforms is the creation of digital tokens. Tokens today represent assets like sovereign currencies (stablecoins), facilitate protocol governance, and broadly help create new incentive mechanisms. There are 389K smart contracts on Ethereum today that implement the ERC-20 standard for fungible tokens, a testament to the token boom.

While the vast majority of these ERC-20 tokens have been abandoned, there are multiple ERC-20 tokens today with multibillion-dollar market caps that trade on major centralized exchanges and have hundreds of thousands of holders while serving different use cases. Some close observers of the crypto markets will notice that many of these larger ERC-20 tokens tend to closely track the return of Ethereum’s native ether (ETH) token. But just how closely, and are there tokens that exhibit fundamentally different return profiles to ETH itself?

The chart below shows the distribution of daily returns in 2021 for ETH and a selection of major ERC-20 tokens broken out by category. The distributions for some ERC-20s, such as metaverse tokens Sandbox (SAND) and Decentraland (MANA), as well as Dogecoin-inspired Shiba Inu (SHIB), have much fatter tails compared to ETH, a sign of more regular large moves-both to the upside and downside.

Source: Coin Metrics Reference Rates

On any given day, the returns of the major ERC-20’s have tended to closely track ETH’s, but there are some tokens that have deviated more often. The chart below shows a scatter plot of each asset’s daily returns vs. ETH’s. Dots in the upper right represent days where both the token’s and ETH’s returns were high while dots closer to the bottom right of the graph show days where the token’s return was high and ETH’s return was negative (and vice versa). Each graph is fitted with a simple linear regression to gauge the strength and direction of the relationship.

Source: Coin Metrics Reference Rates

Most tokens, especially DeFi tokens, have moved in stride with ETH. But there are some weaker relationships. As narratives around the metaverse have accelerated following Facebook’s name change to Meta, the metaverse tokens SAND and MANA have been less correlated to ETH, for example.

The table below shows the correlation and beta between ETH’s return and a broader selection of ERC-20 tokens in the Coin Metrics Reference Rates Universe (excluding stablecoins). The beta is calculated by taking the covariance of daily ETH returns and the given ERC-20 returns divided by the variance of ETH returns ( Jan 1 to Dec 6):

beta = cov(erc20,eth)/var(eth) 

Source: Coin Metrics Reference Rates

While many of the top ERC-20 tokens are up this year, when priced in terms of ETH the story is very different. The chart below shows a selection of ERC-20s’ YTD price series in ETH terms. After a blockbuster 2020, many of the DeFi tokens in particular have underperformed ETH.

Source: Coin Metrics Reference Rates

Some tokens on Ethereum today seem to be garnering narratives that are less tied to ETH itself, demonstrating the continued evolution of use cases on Ethereum while also showing the potential benefits to diversification. Further analysis incorporating a crypto-specific CAPM (capital asset pricing model) might help shed light on the risk-reward profile of various tokens.

Open Interest Falls Amid Crypto’s Weekend Sell-Off

The global financial markets started December off in a tumultuous fashion last week. Volatility has appeared to pick up with the S&P 500 moving at least 1% up or down in the last six consecutive trading days, the longest such streak since October 2020. As the US equities markets closed on Friday it appeared crypto markets had fared alright, moving commensurate to broader markets. But then on early Saturday morning (EST), the crypto markets suddenly took a sharp turn downward. 

After falling from $57K to $51.7K over New York trading hours on Friday, BTC dropped precipitously from $51.7K to $47.3K (roughly -8.5%) around 1am EST Saturday, reaching as low as $46.7K. 

Source: Coin Metrics Reference Rates

BTC spot volume across Coin Metrics’ trusted exchanges totaled $26.6B on December 1st and $23.7B on December 4th, two of the highest totals since September 7th, but far from May 19th’s $47.7B.

While there wasn’t a clear catalyst behind the sudden downturn, the mechanics were familiar. Although events like this are always different given an ever-changing set of information and market conditions, liquidations of leveraged futures likely played a key role. There were roughly $2B worth of liquidations over the weekend across all crypto assets. As price pullbacks trigger further liquidations, the effect can be self-reinforcing, which can sometimes cause drastic movements in spot price. A similar event occurred during September’s rapid crypto pullback. Saturday’s drop might also have been exacerbated by the fact that it occurred on a weekend, when liquidity and order book depth tends to be lower. 

The effect of the liquidations can be seen in a drop in open interest. Open interest for BTC and ETH had hit all-time highs fairly recently. But after the drop in price over the weekend and subsequent liquidations, open interest has fallen with BTC open interest dropping to levels last seen in early October. 

Source: Coin Metrics Network Data Charts

ETH open interest also fell, but by a much smaller degree, with ETH open interest still nearing levels from just a few weeks ago. ETH price reached as low as $3.8K but has bounced back to $4.3K as of Monday afternoon. While BTC has also recovered back above $50K, ETH/BTC today stands at ~0.0867, the highest level since early 2018. 

In the short term, it seems crypto markets-like broader asset markets-are responding to uncertainty deriving from US Fed policy and mixed macroeconomic data, as well as continued unpredictability surrounding the Omicron COVID-19 variant. However, some on-chain data remains strong despite the volatility. For example, only 17.2% of BTC have moved in the last 90 days, suggesting that accumulators from earlier this year are holding through the market turmoil.

To follow the data used in this piece and explore our other on-chain metrics check out our free charting tool, formula builder, correlation tool, and mobile apps.

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

On-chain usage increased over the last week, both leading up to and during the weekend crash. BTC 7-day average active addresses topped 1 million for just the second time since June. ETH active addresses also spiked to some of the highest levels since the summer, peaking at 827.7K daily active addresses on December 5th. Fees also surged with the crash, reaching an average of $55M a day for ETH, and $896.3K for BTC, a 32.2% week-over-week increase.  

Network Highlights

Check out this week’s summary video showing developments on-chain such as daily active addresses for BTC and ETH, BTC transfer value, and stablecoin supply growth.

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

As always, if you have any feedback or requests please let us know here.

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