Coin Metrics' State of the Network: Issue 86

Tuesday, January 19th, 2021

Get the best data-driven crypto insights and analysis every week:

Weekly Research Focus

Altseason Watch

By Nate Maddrey and the Coin Metrics Team

It’s starting to feel a lot like altseason. That magical time of year when people you went to high school with start messaging you out of the blue to ask if a coin you thought had died in 2017 is a good investment. 

“Altcoins” is a term typically used to describe cryptocurrencies other than BTC and ETH (or other than just BTC, depending on who you ask). They’re the smaller cap cryptoassets that can lead to huge gains or unexpectedly go bust. 

Many altcoins have come and gone over the years. Most notably, during the ICO boom during 2017 hundreds of new tokens were launched at ridiculously lofty valuations, many of which are now dead and gone. But amidst the many scams and busts there are also plenty of legitimate, innovative projects. Especially with the rise of DeFi, more investors are looking to diversify into smaller holdings. 

With new capital flowing into BTC and ETH, some of that money may start flowing into altcoins. While that largely held true in the retail driven 2017 rally, this current run is a little different: signs point to it being driven by institutional investors, rather than retail. Altcoin investing is largely considered a retail phenomenon. Similar to penny stocks, it’s often driven by individual investors looking for outsized gains. Institutions mostly stick to BTC and potentially ETH given their liquidity requirements and risk profiles. But as crypto prices keep going up more and more retail investors are starting to get back on board. 

Since the beginning of December 2020 BTC and ETH have outperformed most other Layer 1 (L1) blockchains. Many of the assets that were launched as competitors to either Ethereum or Bitcoin have not been able to keep up during the current rally. BCH, BSV, and LTC are all down compared to BTC since December 1st. ETC, TRX, EOS, and XTZ are all down compared to ETH. 

Source: Coin Metrics Reference Rates

However, there are a few notable exceptions. Decred (DCR) is up 126.59% since December 1st, outpacing both BTC and ETH. Decred fundamentals look relatively strong compared to most other L1 altcoins. DCR active addresses are reaching new all-time highs, while most other blockchains other than Bitcoin and Ethereum are well below 2017 levels. DCR staking is also reaching all-time high levels, which locks DCR and removes it from circulating supply. The Decred Project also recently launched a decentralized exchange, rivaling some of the innovation being built on Ethereum. 

Source: Coin Metrics Network Data Charts

Cardano (ADA) has also outperformed. Similar to DCR, ADA active addresses have spiked to all-time highs in early 2021. Cardano’s Shelley mainnet launched in 2020, which helped renew hype around the platform. However, Caradano has still not deployed functional smart contracts, which means the large price movements are still likely anchored around future expectations.

Lastly, Dogecoin (DOGE) has outperformed BTC, ETH, ADA, DCR, and pretty much every other L1 cryptoasset. DOGE is a long time favorite of altcoin investors and is regaining steam after being hyped on TikTok and by Elon Musk. While DOGE may simply be an outlier, it may also be a canary in a coal mine - an early indicator of an oncoming altcoin wave. 

Although most L1 assets are underperforming, the story changes when we look at tokens for applications built on top of Ethereum. After surging over the summer and crashing in September, decentralized finance (DeFi) tokens are back on the rise. Since December 1st 2020 Uniswap (UNI), Aave (AAVE), Synthetix (SNX), MakerDAO (MKR), SushiSwap (SUSHI), and Curve (CRV) have all outperformed ETH and BTC. 

Source: Coin Metrics Reference Rates

DeFi development has been progressing rapidly since Q4 2020. Synthetic recently announced the initial steps of an integration with the Optimistic Virtual Machine (OVM), a new solution to help with scalability and reduce Ethereum transaction fees. Yearn.finance (YFI) is working on V2 of their platform and recently released an updated version of their vaults. And the Uniswap team is hard at work on Uniswap V3, which is rumored to improve slippage and potentially address high transaction fees. Uniswap trading volume has surged in early 2021 (as seen in the below chart) to similar levels as September 2020.

Source: Uniswap.info

Although institutions likely aren’t wading into DeFi at this stage, there may be growing interest from traditional finance investors drawn in by the technology. We also might finally be starting to see some of the capital flow from L1 assets to more promising application layer projects. With older projects falling out of favor and new money continuing to flow in, 2021 is gearing up to be a potential turning point for altcoins. Check out our free charting tool and mobile apps to keep up with the ongoing altcoin watch and explore the data from this piece. 

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

On-chain activity quieted down over the past week after a frenetic stretch. Transfers and adjusted transfer value decline week-over-week for both BTC and ETH. BTC regained some ground in ETH in terms of fees, gaining 5.2% on the week compared to a 27.3% drop for ETH. But ETH’s transaction fee drop comes after a stretch of new all-time highs. The daily average of ETH transaction fees still remains about twice as much as BTC. 

UNI’s on-chain activity is heating up with a 55.4% increase in adjusted transfer value. On January 16th UNI’s adjusted transfer value reached its highest level since September 24th, 2020.

Network Highlights

Spent Output Profit Ratio (SOPR) is a ratio of bitcoin’s price at the time UTXOs are spent to its price at the time they were created. In other words, it’s a proxy for price sold divided by price paid. SOPR can act as a way to approximate whether holders are selling at a profit or at a loss. 

Theoretically, a high SOPR signals that a relatively high amount of bitcoin is being sold for a profit. Historically, a high SOPR has signalled that bitcoin price is reaching a local maximum and that a decline is coming. Conversely, a low SOPR theoretically signals that holders are selling at a loss, which has historically indicated a good time to buy. A SOPR of 1 is also particularly important to watch as it signals the tipping point from selling in profit to selling at a loss.

On January 9th BTC’s 7-day average SOPR approached 1.05, a level that has typically signalled an incoming correction in the past. The following day BTC’s price dropped from over $41K to under $31K. SOPR has since recovered to about 1.017, a healthier range. 

For more information about SOPR and other on-chain metrics that can be used to gauge bitcoin market cycles see our “Bitcoin On-chain Indicators Primer” research report. 

Source: Coin Metrics Network Data Pro

The amount of ETH transferred by smart contracts has spiked in early 2021 and is approaching all-time highs set in mid-September 2020. September was the height of the summer’s DeFi mania, with the launch of UNI sending on-chain activity and transaction fees to new all-time highs. This is more evidence that DeFi and other decentralized applications built on top of Ethereum are gaining momentum. 

Source: Coin Metrics Network Data Charts

But despite the increase in ETH transferred by smart contracts, ETH’s median transfer value remains well below the highs of August and September. 

Source: Coin Metrics Network Data Charts

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 please let us know here.

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 85

Tuesday, January 12th, 2021

Get the best data-driven crypto insights and analysis every week:

Weekly Research Focus

Bitcoin Highs and Lows

By Nate Maddrey and the Coin Metrics Team

It was a crazy week for bitcoin and for the world. On January 6th the United States was thrown into civil unrest after Trump supporters stormed the Capitol Building. While historically bitcoin didn’t necessarily have a quick reaction to world events, that has changed over the last year. Bitcoin has increasingly shown immediate reactions to external events and Wednesday was no different.

At around 11:00 EST (16:00 GMT) Trump began to speak at his “Save America” rally in Washington DC, calling on the crowd to march on the Capitol. By 2:00 EST (19:00 GMT) reports began to surface that rioters were entering the Capitol Building. By 2:30 the Capitol breach escalated dramatically, with reports of tear gas being released within the building. Soon after, around 2:30 EST, bitcoin went into a temporary freefall. But at 3:15 it reached bottom and quickly started to rebound. 

By 4:00 EST (21:00 GMT) bitcoin’s price surged towards new highs of $36.5K. At 6:00 EST a curfew went into effect in Washington DC, and the rioters mostly dispersed. By the end of the day bitcoin’s price would reach $37K. The following day it surged again, reaching $40K for the first time and setting a new all-time high. 

Source: Coin Metrics Reference Rates

Bitcoin’s quick reaction to events on January 6th shows its continued maturation as an asset that responds to global events. It also potentially adds evidence to the narrative that bitcoin is sometimes viewed as a hedge against global unrest. But the run up to $40K also occurred on the tailwind of a strong run to start the year so it can be difficult to untangle the exact impact of January 6th’s events. 

Crypto as a whole surged in the later half of the week. By Saturday, Ethereum reached over $1,300, close to its all-time high. But the run did not last for long. By Sunday, January 10th price began to tumble. BTC fell from over $40K on Saturday to less than $31K on Monday. Similarly, ETH’s price broke $1,320 on Saturday but dipped down to under $1,000 by Monday morning. 

The dramatic price swing can be seen in the weekend’s futures liquidations. The following chart shows ETH perpetual contract liquidations from January 9th through 11th. The blue “buys” represent short sellers who were forced to cover their positions and the orange “sells” are margin traders who were forced into selling their long positions due to large losses. 

As ETH price ramped up between $1,200 and $1,300, a cluster of short sellers were forced out of their positions. But as price began to fall back down an even larger amount of longs were liquidated. The selloff became especially painful in the $1,100 - $1,000 range, which contributed to the further price collapse. 

Source: Coin Metrics Market Data Feed

But despite the rapid price action, fundamentals still look strong. Amidst the price volatility Bitcoin and Ethereum hash rate are both at all-time highs. This signals that network security is healthy, and that miners continue to support both networks. 

Source: Coin Metrics Network Data Charts

Active addresses for both BTC and ETH are also both near all-time highs. We define active addresses as the daily number of unique addresses that either send or receive a transaction. 

Active addresses are often used as a way to measure overall blockchain usage. However, it’s important to note that one active address does not necessarily equate to one active user. Individual users can create and operate multiple addresses, and a single address may belong to multiple users. But with that in mind, active addresses serve as a good proxy for overall usage. The increase in BTC and ETH active addresses signals that on-chain activity is increasing for both networks.

Source: Coin Metrics Network Data Charts

Lastly, the amount of addresses holding at least 1,000 BTC has increased significantly since the start of 2021. Addresses holding large amounts of BTC can be seen as a proxy for institutional adoption (although the same caveats as above apply). This large jump in addresses holding at least 1,000 BTC is potentially further evidence that institutions are here to stay.

Source: Coin Metrics Network Data Charts

It has already been a crazy start to the year for crypto, and things are bound to get crazier. But overall, bitcoin and the rest of crypto is still in a relatively strong position and is ready to keep growing throughout 2021. 

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Most network metrics were positive on the week despite the dip over the weekend. In addition to hash rate and active addresses, adjusted transfer value has reached new all-time highs for both BTC and ETH. ETH in particular had a huge surge, with adjusted transfer value growing 82.3% week-over-week.

ETH transaction fees have also climbed to new all-time highs. Total fees increased over 88% on the week, for a daily average of $12.7M. ETH daily fees are now almost three times as much as BTC’s, signaling high demand for usage on the Ethereum blockchain. 

Network Highlights

The balance of power between major crypto exchanges has shifted since early 2020. Binance now holds more BTC than any other exchange in our coverage, which includes all of the major exchanges except for Coinbase. The BTC holdings of Huobi, BitMEX, and Bitfinex have all dropped dramatically over the past year, after all three exchanges faced various investigations and legal issues. 

Source: Coin Metrics Network Data Charts

Gemini appears to be one of the big winners going into 2021. The amount of BTC held on Gemini has doubled since January 2019.

Source: Coin Metrics Network Data Charts

Stablecoins are back on the rise. Total stablecoin supply has already grown by more than 4 billion since January 1st, 2021. Much of that growth has come from Tether - specifically, Tether issued on Tron(USDT_TRX), which has grown by over 2 billion since the start of the year. 

Source: Coin Metrics Network Data Charts

But Tether isn’t the only stablecoin that has gotten off to a quick start in 2021. USDC supply has grown by over 500 million since the start of the year. Total USDC supply is quickly approaching 5 billion.

Source: Coin Metrics Network Data Charts

As a result, Tether’s share of total stablecoin supply is decreasing. Although Tether is still by far the most dominant stablecoin, it’s down to only about 75% of the total market. This is its lowest share of total supply since January 2019.

Source: Coin Metrics Network Data Charts

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 info@coinmetrics.io.

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 84

Tuesday, January 5th, 2021

Get the best data-driven crypto insights and analysis every week:

Weekly Research Focus

Crypto’s Biggest Storylines Going Into 2021

By Nate Maddrey and the Coin Metrics Team

The end of 2020 saw crypto climb to new highs. In this issue of State of the Network we look ahead to 2021 and preview some of crypto’s biggest storylines going into the new year. 

Bitcoin’s Institutional Rise

Over the course of 2020 institutions began to embrace bitcoin like never before. In May, a few months after a market wide crash in March, billionaire investor Paul Tudor Jones publicly endorsed bitcoin as a potential hedge against inflation. By Q4 2020 dozens of other institutions had joined in. 

In a sign of increased US institutional adoption, bitcoin’s price rises occurred mostly during US market hours during November 2020. This pattern somewhat changed towards the end of the year - the below chart shows bitcoin’s price movements during market hours in December 2020, with US hours highlighted in green. While a large price jump on December 16th occurred during US market hours the biggest movement of the month happened over Christmas and the following weekend while markets were closed. 

However, this may have been caused by large holders who took advantage of the relatively low liquidity over Christmas to push the markets in their desired direction. We saw a similar pattern during Thanksgiving when US markets were also closed. Other than the Christmas holiday, price movements have continued to occur largely during US hours. 

Source: Coin Metrics Reference Rates

In another sign of increased institutional adoption, the amount of BTC held by the Grayscale Bitcoin Trust skyrocketed to close out the year. The Grayscale Trust is currently one of the major ways for traditional institutions to get exposure to bitcoin so is often considered a good way of tracking institutional interest. Similarly, CME Bitcoin Futures open interest hit new all-time highs to close the year. CME is a regulated exchange which makes it a more attractive investment option for institutions compared to most other crypto futures offerings.  

Source: The Block

One of the big questions for 2021 is whether this institutional interest will continue to accelerate, or whether it will plateau or decline at some point over the year. Early signs appear to point to an acceleration, at least for now. On January 4th, Three Arrows Capital disclosed a $1B position in the Grayscale Bitcoin Trust. On the same day SkyBridge Capital also announced a $300M bitcoin position and the launch of a new bitcoin fund for accredited investors. 

Another big story going into the new year is the impending Coinbase IPO. As one of the largest crypto exchanges in the world Coinbase has already attracted the attention of traditional, institutional investors. If it successfully IPOs many new investors will likely be drawn to the industry, which would only increase institutional interest. Early signs suggest that 2021 could be another big year for institutional interest in bitcoin. 

Ethereum’s Next Chapter

Ethereum is already off to a hot start in 2021 with price jumping from $730 on January 1st to $990 by January 3rd. With many exciting upcoming developments over the next year ETH is also well positioned to benefit from the growing institutional interest in crypto. 

Source: Coin Metrics Network Data Charts

On December 1st the first phase of Ethereum 2.0 was successfully launched. It will be many years before Ethereum is able to fully move to Proof of Stake, but momentum around the transition is already growing. The Ethereum 2.0 staking deposit contract has over $2 billion locked at time of writing. 

Additionally, in late November, Coinbase announced that they would start supporting Ethereum 2.0 staking in early 2021. With the potential to earn passive yields through Ethereum’s new staking system institutions will be increasingly incentivized to start investing in ETH.

In more evidence of ETH’s growing maturation, CME Group announced its plan to introduce ETH futures by February, 2021. Building on the success of CME Bitcoin Futures, ETH Futures will be a trusted way for institutional investors to gain exposure to ETH derivatives.

Ethereum activity increased dramatically during 2020. The rapid rise of DeFi over the summer and surge in NFT activity towards the end of the year have pushed Ethereum to new heights, as well as new limits. 

Source: Coin Metrics Network Data Charts

As a result, ETH transaction fees soared to new heights throughout the second half of 2020. But a new protocol improvement may help address that issue, as well as help make Ethereum’s monetary policy more attractive to investors. EIP-1559 has been proposed as a way to fix Ethereum’s inefficient fee market. Additionally, it suggests burning a portion of ETH transaction fees, which would effectively decrease ETH inflation. If EIP-1559 is successfully implemented in 2021 Ethereum could be next in line to undergo a wave of institutional investment. 

Looming Regulation

Despite the many positive developments going into 2021 some potential dark clouds loom. As crypto prices surged, the amount of regulatory attention on the industry increased as well. 

2020 saw the arrests of the BitMEX executive team, as well as regulatory crackdowns on several other large exchanges. In December, the STABLE Act was introduced as a way to regulate stablecoins with potentially far reaching consequences for the rest of the crypto industry. At the end of the year the SEC filed a lawsuit against Ripple Labs Inc. alleging that XRP had been sold as an unregistered security. And FinCEN announced the intention to require US citizens to disclose offshore crypto holdings, in addition to increased rules around exchange KYC reporting.

Crypto regulation is nothing new, as regulators have targeted various parts of the industry for years. But with more and more eyeballs on the industry regulation is likely to continue to pick up going into 2021. While there may be some pain in the short-term, increased regulation should hopefully be a good thing for crypto in the long run. The crypto industry is more organized and motivated than ever before to help fight back against regulation that is deemed to be harmful or too overbearing. Regulatory clarity will not only help institutions feel more at ease, but should also help drive out some of crypto’s bad actors and help the cream rise to the top.

With all of the changes on the horizon, crypto is poised for another exciting year in 2021.

Network Data Insights

Summary Metrics

BTC, ETH, and the rest of crypto closed out 2020 on a high note. BTC active addresses grew by 9.3% week-over-week to start 2021, averaging over 1.1M per day. Network security continues to look strong as well with hash rate growing by 11.7% and coming close to a new all-time high on December 30th. 

ETH transaction fees are also back on the rise, increasing by over 60% and signaling high demand for Ethereum block space. Daily transaction fees reached an average of about $6.8M per day, over twice the amount of BTC daily fees. 

Network Highlights

BTC active addresses are near all-time highs going into 2021. The below chart shows the 7-day rolling average of BTC active addresses. On January 3rd, the 7-day average reached 1.15M, just shy of the all-time high of 1.18M set in December 2017. 

Source: Coin Metrics Network Data Charts

Similarly, ETH daily transaction count is near all-time highs going into the new year. The following chart is the 7-day rolling average of ETH transaction count. It reached 1.20M on January 3rd, just below the 1.24M daily transactions recorded in January 2018.

Source: Coin Metrics Network Data Charts

Meanwhile, the number of addresses holding large amounts of XRP has dropped precipitously since the SEC’s announcement of charges against Ripple. The number of addresses holding at least 1M XRP dropped from 1,721 on December 21st, the day before the announcement, to 1,567 by January 3rd. 

Source: Coin Metrics Network Data Charts

Market Data Insights

The new year has brought exciting, and many believe overdue, price action to Ethereum. As of the time that this is being written, ETH has increased roughly 40% in price since this start of the year to $1,033 from a starting value of $741. 

Source: Coin Metrics Reference Rates

This move did not come without volatility. Over the course of seven hours between January 3 and 4th, the price increased from roughly $974 to $1,125 and then swiftly fell back down to $945. These rates are based on spot market trading. Across futures things were more volatile with prices as high as $1,186 (Huobi’s ETH-USDT Swap) and as low as $707.37 (Huobi’s ETH-USD Swap). 

These swift moves led to over $400m in liquidations on the ETH perpetual futures across exchanges. Below is an aggregation of the liquidations by price level and the total dollar value liquidated. In blues we have “buys” which indicate short sellers forced to cover their positions and in orange we have sells, or margin traders with losses large enough to force them into selling their long position. 

Source: Coin Metrics Market Data Feed

Based on this price level analysis, it appears that there was pain for short sellers between $900 and $1,000, and again beyond $1,100. On the way back down levered longs saw more and more liquidations as prices fell. Thankfully buyers stepped in around the $900 level or we likely would have seen a more exaggerated selloff as a greater and greater value of positions was liquidated. 

CM Bletchley Indexes (CMBI) Insights

CMBI and Bletchley Indexes had a tremendous start to the new year, all returning above 15% for the week. The CMBI Ethereum was the strongest performer, returning 38.4% to close at $951.23. The CMBI Bitcoin also had a fantastic week, closing up 26.7% at a new all-time high of $33,634.07.

Mid cap (Bletchley 20) and small cap (Bletchley 40) indexes did not perform as strongly but still had impressive weeks, closing up 16.3% and 22.2% respectively. Historically, this pattern of large caps outperforming mid and small caps during a new market bull run is not uncommon. As new dollars enter crypto asset markets, they tend to gravitate to the majors. If this happens with enough volume, like we are experiencing now, the large cap assets can realize significant gains which do not necessarily flow through to the rest of the market in the short to mid term.

Source: Coin Metrics CMBI

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 and download the Coin Metrics mobile app here.

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

Coin Metrics' State of the Network: Issue 83

Tuesday, December 29th, 2020

Get the best data-driven crypto insights and analysis every week:

State of the Network Best of 2020

In this special edition we look back at the best issues of State of the Network over the past year. We’ve organized issues into five main themes that we covered throughout 2020:

  1. Bitcoin’s Macro Picture

  2. Valuation and Fundamentals

  3. Exchanges and Trading

  4. Stablecoins and DeFi 

  5. Mining and Security

Bitcoin’s Macro Picture

Bitcoin became intertwined with traditional markets this year due to changing macro conditions and a big increase in institutional interest. We covered Bitcoin’s journey over the course of 2020, from the March crypto crash to Q4’s institutional endorsements. Last week, we released our 2020 Year In Review summarizing crypto’s year quarter by quarter: 

Source - Issue 42: Data Shows Cryptoasset Selloff was Driven by Short-term Holders

Source - Issue 79: Signs of Institutional Investors

Valuation and Fundamentals

Throughout the year, we analyzed different approaches to valuation and explored crypto fundamentals. In September we introduced Bitcoin: A Novel Economic Institution, a joint research report with ARK Invest that laid out the case for bitcoin as the most compelling monetary asset to emerge since gold. In Issue 80 we released an in-depth research report about using on-chain data to gauge bitcoin market cycles: The Bitcoin On-chain Indicators Primer. We also introduced several new metrics throughout the year, including free float supply: 

Source - Issue 80: The Bitcoin On-chain Indicators Primer

Source - Issue 57: Introducing Free Float Supply

Exchanges and Trading

Another focus was crypto’s market structure, including exchanges and trading activity. We analyzed trading volume and introduced our “Trusted Trading Volume” framework to help identify legitimate trading volume. We analyzed the derivatives market including a high level look at perpetual swaps. And we covered exchange lawsuits and mishaps like the fallout after the arrest of the BitMEX leadership team:   

Source - Issue 61: Introducing Coin Metrics' Trusted Volume Framework

Source - Issue 72: Analyzing the Fallout From the BitMEX Lawsuits

Stablecoins and DeFi

In Issue 59 we introduced an in-depth research report on the rapid Rise of Stablecoins. We continued to write about stablecoins throughout the year and analyzed their supply distribution and on-chain activity. We also covered the rise of DeFi, including a look at the state of DeFi tokens: 

Source - Issue 59: The Rise of Stablecoins

Source - Issue 77: The State of DeFi Tokens

Mining and Security

We also wrote extensively about Bitcoin mining and security. We took a macro look at miner economics and did a deep dive into the data on hash rate distribution. We also introduced several new metrics including a suite of metrics on miner flows and on-chain activity: 

Source - Issue 45: The Signal and the Nonce Redux: From S9s to S17s

Source - Issue 68: Measuring Bitcoin's Decentralization

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 82

Tuesday, December 22nd, 2020

Get the best data-driven crypto insights and analysis every week:

The State Of The Network 2020 Year In Review

By Nate Maddrey and the Coin Metrics Team

In this special year end edition of State of The Network we review crypto’s tumultuous 2020 run. To explore the data in this piece, check out our free charting tool.

Q1 - A New World

Historically, bitcoin has mostly been divorced from traditional markets. But in the beginning of the year we started to see signs that bitcoin was becoming more intertwined with the external world. 

In January, as military tensions between the US and Iran began to escalate, bitcoin’s price showed signs that it was reacting to the increasing chances of conflict. During this time period oil futures and gold futures both experienced immediate positive reactions to events that marked an escalation of tensions and negative reactions to the de-escalation. In a small preview of what was to come, bitcoin reacted similarly.

Then, On March 12th, the world abruptly changed. Amidst growing concerns over the COVID-19 pandemic bitcoin suffered one of its largest one-day price drops in history. The rest of crypto followed, with most major assets down over 30% on the week.

Source: Coin Metrics Reference Rates

The crash was exacerbated by a BitMEX liquidation spiral that temporarily sent bitcoin below $4,500. From March 12th 9AM to March 13th 6AM UTC, long positions worth 1.1B contracts (one contract represents a $1 position) were liquidated. As liquidations mounted and liquidity waned BitMEX’s auto-deleveraging engine kicked in, causing bitcoin price to plummet to below $4,500. Price kept dropping until BitMEX suffered a reported DDOS attack that made it nearly impossible to trade on the exchange. In hindsight, March 13th marked the floor for BTC's price in 2020. 

Unlike most of the past major crypto crashes, this crash was directly tied to changing global conditions. Markets around the world crashed along with crypto as investors pulled money out in a rapid rush to safety. As a result, the correlation between bitcoin and the S&P 500 shot up to historic highs. The world had changed. Soon, the world’s perception of bitcoin would change as well.  

Source: Coin Metrics Correlation Charts

Q2  - The Great Inflation

In the aftermath of the March crash central banks around the world quickly sprung into action.

Early Q2 saw a rash of new responses to the growing COVID crisis. The US’s primary response, the CARES Act, devoted $2 trillion to COVID response, including stimulus checks which were paid directly to US households. As a result, the US M2 money stock grew from about $15 trillion to about $19 trillion over the course of 2020.

Source: FRED Economic Data

Quantitative easing and growth of the M2 money stock does not necessarily directly lead to increased inflation since newly printed money typically stays in bank reserves. But even though the inflation rate remained around 2%, uncertainty about future inflation levels increased dramatically in March and April. Additionally, real interest rates plummeted, making non-cash flow producing assets like gold and bitcoin more attractive.

For most of its existence institutions have stayed away from investing in bitcoin, typically citing it as a risky, speculative asset. But in Q2 there began to be signs that the tides were turning. 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.” By the end of the year, many more institutional investors would follow suit. 

Q2 also saw the start of a big rise in stablecoin supply and activity. Between March 12th and December 12th total stablecoin supply increased by close to 20 billion. For context, before March 2020 it had taken over three years for total supply to grow to about 6 billion. 

Many factors contributed to the staggering stablecoins growth. Initially, following the March 12th crash, there was a rush to safety - as crypto prices dropped, investors moved their funds into stable assets. Moving into stablecoins allowed investors to effectively keep money parked on the sideline without having to completely cash out into fiat currency and incurring fees. Stablecoins are also used extensively in trading against bitcoin and many other cryptos. Additionally, stablecoins (especially Tether) are reportedly used to move money across borders, especially in places with relatively strict restrictions. All of these use cases gained steam following the March crash. 

Source: Coin Metrics Network Data Charts

In May Bitcoin underwent its third halving. The timing could not have been better. After fiat currencies started undergoing the “great inflation” Bitcoin’s supply issuance started decreasing, towards less annual inflation. But the halving was not some response decided on by the Bitcoin community, or a central bank. The wheels were set into motion many years earlier and built into Bitcoin’s core.

Source: Coin Metrics Network Data Charts

Q3 - DeFi Mania

Fresh off of stimulus check money and with the weather turning warmer, crypto’s attention began to shift to a new front: decentralized finance (DeFi). 

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 launch of many new tokens.

DeFi’s recent rise began in earnest in June with the launch of Compound protocol’s COMP governance token. Out of 10M total COMP tokens about 4M were set aside to be distributed as a reward for serving as a borrower or lender on the Compound protocol. This meant that lenders could earn interest on their locked crypto plus an additional reward of COMP tokens on top of their regular yield. Within a week after the COMP distribution began, the total value locked in Compound grew from under $100M to over $600M. In hindsight, COMP’s distribution model marked the beginning of “yield farming” and the endless pursuit of higher and higher yields. Soon after, many new DeFi tokens began to launch, mimicking COMP’s distribution model and pushing ETH’s price to its highest levels in years. 

Source: DeFi Pulse

Uniswap, the Ethereum-based decentralized exchange, was the engine behind DeFi mania. Uniswap represents a new breed of automated marker maker (AMM) - decentralized exchanges that do not have order books or traditional buy and sell orders. Uniswap trading occurs entirely on-chain, as opposed to centralized exchanges where it occurs off-chain. It also allows anyone to create a new token pair and immediately begin trading, which helped new DeFi tokens launch and scale quickly. 

Total trading volume on Uniswap increased from about $1M a day in early June to close to $1B a day in the beginning of September. The big increase in on-chain trading brought on by Uniswap helped push Ethereum transaction fees to new all-time highs in August. Bitcoin’s mean transaction fee soon followed and briefly shot past ETH’s mean fee. 

Source: Coin Metrics Network Data Charts

In September, Uniswap announced a surprise launch of their governance token: UNI. UNI was distributed 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. Yam Finance launched in August and gained over $500M locked in about 24 hours, only to collapse a few days later. In September SushiSwap had a rapid rise as a potential Uniswap competitor until its anonymous founder abruptly sold funds from the project’s dev pool, sending SUSHI’s price into a tailspin. 

After bottoming out in October DeFi has started to rebound and is back at similar levels to September. Overall, DeFi continues to grow and mutate as experimentation continues. With new money flowing into BTC and ETH, new DeFi tokens and applications may be soon to follow. 

Source: Coin Metrics Network Data Charts

Q4 - The Return of Bitcoin

By Q4 the flood gates began to open. After a tumultuous beginning of the year, institutional investors had finally arrived. 

On October 8th, Square announced a $50M investment into bitcoin, stating “we believe that bitcoin has the potential to be a more ubiquitous currency in the future.” Square joined MicroStrategy and others in allocating part of their corporate treasury to bitcoin. 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.”

Soon after, Bitcoin’s price began to rise. It would keep on rising for most of Q4. As institutions continued to join, the narratives around bitcoin started to shift. In a quickly changing world, bitcoin is increasingly being endorsed as a hedge against inflation and form of digital gold. 

Note: Q4 returns calculated from October 1st-December 20th

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.

November brought more signs of a growing institutional investor base. Throughout the month, bitcoin price moved upward more during hours that US markets were open than during hours where US markets were closed. This was not the case during bitcoin’s 2017 bull run, which was more retail driven.

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).

Interestingly, while price moved sideways over the first three weekends of the month, the last weekend of November 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. 

Adding to crypto’s growing momentum, Ethereum hit a big milestone on December 1st. After years in the making the first phase of Ethereum 2.0 was successfully launched. Over the upcoming years Ethereum will continue its transition to Ethereum 2.0, which will introduce Proof-of-Stake and allow investors to earn yield by staking their ETH to secure the network.  With over $1B already locked in the Ethereum 2.0 deposit contract, Ethereum may start attracting more institutional attention going into 2021.

On December 10th, in another sign of institutional adoption, insurance company MassMutual announced a $100 million purchase of bitcoin. Less than a week later, on December 16th, bitcoin surged past $20,000, three years to the day after it reached its 2017 peak of $19,640.

Over the course of 2020 bitcoin added over $300B to its market cap. The amount of daily active addresses doubled, and the number of addresses holding at least 0.01 BTC grew by over 700k. While adoption grew, bitcoin veterans continued to hold strong. Bitcoin’s velocity dropped by close to 10% on the year, and the amount of supply active within the last 2 years decreased by about 11%. 

In many respects, bitcoin is in its strongest position yet closing out 2020. As momentum continues to build, bitcoin is on the verge of reaching unprecedented heights in 2021.  

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