Coin Metrics' State of the Network: Issue 58

Tuesday, July 7th, 2020

Weekly Feature

When Markets Misalign: Mispricings and Reference Rates

by Karim Helmy and the Coin Metrics Team

Key Takeaways

  • Price discrepancies between exchanges can emerge for a variety of reasons, including market manipulation, exchange downtime, and trader error. These dislocations are aggravated by market inefficiencies that may prevent arbitrage.

  • While market dislocations are particularly common for small exchanges and illiquid assets, even liquid markets on major exchanges are impacted reasonably often. The presence of market dislocations makes relying on price feeds from a single exchange unreliable for portfolio valuation and contract settlement.

  • Creating reference rates that are robust to market dislocations is surprisingly complex. Coin Metrics offers Hourly and Real-Time Reference Rates for many of the assets covered by the CM Market Data Feed.

Messy Markets

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

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

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

Ineffective Inefficiency

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

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

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

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

Source: Coin Metrics Reference Rates, Coin Metrics Market Data Feed

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

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

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

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

Source: Coin Metrics Reference Rates, Coin Metrics Market Data Feed

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

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

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

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

Fat Fingers

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

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

Source: Coin Metrics Reference Rates, Coin Metrics Market Data Feed

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

Source: Coin Metrics Reference Rates, Coin Metrics Market Data Feed

Continue Reading

Continue reading “When Markets Misalign” here.

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

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

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

Network Highlights

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

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

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

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

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

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

Market Data Insights

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

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

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

CM Bletchley Indexes (CMBI) Insights

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

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

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • Coin Metrics is hiring! Please check out our Careers page to view the openings.

As always, if you have any feedback or requests, don’t hesitate to reach out at 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 57

Tuesday, June 30th, 2020

Introducing Free Float Supply

By Ben Celermajer and the Coin Metrics Team

Key Takeaways

  • Until now, a standardized approach to determining the free float supply (the supply that is available to the market) of cryptoassets has not been established. This has hindered the market from developing a clear understanding of available supply and market capitalization.

  • Coin Metrics’ free float supply takes many of the best practices from traditional capital markets and applies them to cryptoassets to identify supply that is highly unlikely to be available to the market in the short to mid-term. In doing so, free float supply provides a better approximation of a cryptoasset’s liquidity and market capitalization. 

  • Index weighting can benefit from using free float supply - free float supply reflects the liquid market more accurately and reduces potential manipulability.

  • Tracking free float supply provides insight into primary token holder behavior. This can lead to more transparent reporting of foundation and team selling, increased knowledge of total market supply and behavioral analysis of stakeholders.

  • Many cryptoasset valuation metrics use market capitalization which primarily utilize the on-chain visible supply. Deriving these metrics with a free float capitalization may improve the signal achieved.

Introduction

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

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

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

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

  • Market Capitalization

  • Indexes

  • Valuation methods

  • Foundation and Founding Team Transparency

Applying Free Float to Market Capitalization

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

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

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

  • Supply owned by foundations, companies and founding teams

  • Supply in addresses that have been inactive for over 5 years

  • Supply staked in a smart contract to partake in governance and long-term strategic outcomes of a network without any direct monetary incentive to do so

  • Supply that is vesting on-chain

  • Supply that is burned or provably lost

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

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

  • Bitcoin - where the industry standard has been 18.4M. Coin Metrics free float calculations determine that a more accurate representation of free float supply is 14.3M (22% lower), reflecting that 4.1M Bitcoin has not been transacted in over 5 years and as such can be considered to be owned by long term strategic holders that do not provide liquidity to markets (or lost).

  • Bitcoin Cash and Bitcoin SV - the industry standard has been to utilize their on-chain supply of ~18.5M native units to determine market capitalization. Through understanding how many BCH and BSV have been moved since the fork, Coin Metrics has determined that a more accurate representation of supply for BCH and BSV is 12.0M (36% lower) and 9.9M (45% lower) respectively. 

  • XRP and Stellar - both of these foundations report their own holdings to data distributors. Due to an absence of regulatory standards and the irregularity of reporting, not all addresses may be disclosed and the reported values may not be maintained. Coin Metrics has identified additional supply that can be traced to the foundations and team members, which is reflected by XRP and Stellar having a free float supply of 30.4B and 16.5B, lower than is typically reported.

Applying Free Float to Indexes

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

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

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

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

  1. Bitcoin’s free float ratio is 77.8% (free float supply of 14.3M of a total on-chain supply of 18.4M). 

  2. Rounded up to the nearest 10%, Bitcoin’s band would be 80%

  3. Applied to the total supply of Bitcoin, 18.4M, Bitcoin’s in weight in the index would be derived using a supply of 14.7M (18.4M * 80%)

Increasing Market Transparency

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

  • Owned by foundations/companies

  • Owned by founding team members

  • Governance contracts where there is no direct financial benefit

  • Provably lost 

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

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

Case Study 1: Tether (USDT)

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

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

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

Continue Reading…

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

Network Data Insights

Summary Metrics

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

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

Network Highlights

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

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

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

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

Market Data Insights

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

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

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

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

CM Bletchley Indexes (CMBI) Insights

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

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

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

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • Coin Metrics is hiring! Please check out our Careers page to view the openings.

As always, if you have any feedback or requests, don’t hesitate to reach out at 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 56

Tuesday, June 23rd, 2020

Digital Alchemy: Do Coinbase Listings Turn Altcoins Into Gold?

By Jon Geenty and the Coin Metrics Team

Key Takeaways

  • A Coinbase listing has historically shown, not surprisingly, to have a positive impact on listed assets’ prices immediately following the announcement.

  • The uplift from a listing is more muted than some may perceive, with the average and median uplift ranging from roughly -1% to 14% against US Dollar, Bitcoin and Ethereum benchmarks. Price trends seen with assets such as the recent OmiseGo listing are outliers. 

  • Coinbase’s ‘Exploration’ announcements tend to have less of a direct impact on mentioned asset’s prices. The price movements surrounding these events are less significant and largely related to the general market regime at time of announcement. We compare these changes in a bearish, bullish and flat market using past examples.

Does a Coinbase Listing Always Deliver Results?

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

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

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

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

Source: Coin Metrics Reference Rates

Methodology

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

The Impact of the Possibility of Listing

December 2018 - Bear Market

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

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

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

August 2019 - Flat, Choppy Market

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

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

Continue Reading

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

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

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

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

Network Highlights

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

Source: Coin Metrics Network Data Pro

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

Source: Coin Metrics Network Data Pro

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

Source: Coin Metrics Network Data Pro

Market Data Insights

The Compound Effect 

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

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

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

Source: Coin Metrics Reference Rates

Tether Supply Growth is Slowing

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

Source: Coin Metrics Network Data Pro

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

CM Bletchley Indexes (CMBI) Insights

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

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

Source: Coin Metrics CMBI

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • Coin Metrics is hiring! Please check out our Careers page to view the openings.

As always, if you have any feedback or requests, don’t hesitate to reach out at 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 55

Tuesday, June 16th, 2020

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

By Nate Maddrey and and the Coin Metrics Team

Key Takeaways

  • Bitcoin (BTC) and Ether (ETH) have recovered most of their losses after the March 12th crash, while assets like Bitcoin Cash (BCH) and Litecoin (LTC) have lagged behind.

  • Other assets that have outperformed include Cardano (ADA), Crypto.com Coin (CRO), and OmiseGO (OMG).

  • Stablecoin trading volume has exploded since March 12th, with Tether (USDT) leading the way. BTC-USDT spot market volume on Binance, Bitfinex, Bittrex, HitBTC, Huobi, and LBank shot up to new highs on March 13th, and has remained relatively elevated since.

  • Volume continued to spike in April and May on all six exchanges, although to a lesser extent than on March 13th.

  • Another trend that has emerged following March 12th is the growth of addresses holding relatively small amounts of crypto. Since March 12th, BTC and ETH have both had noticeable increases in addresses holding at least 1 billionth of total supply. 

Introduction

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

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

Price Recovery Differs Across Assets

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

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

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

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

Source: Coin Metrics Network Data Pro

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

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

Source: Coin Metrics Reference Rates

Stablecoin Trading Volume Has Surged

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

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

Source: Coin Metrics Market Data Feed

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

Source: Coin Metrics Network Data Pro

Addresses Holding Small Amounts of BTC and ETH are Growing

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

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

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

Source: Coin Metrics Network Data Pro

Conclusion

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

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

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

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

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

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

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

Network Highlights

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

Source: Coin Metrics Network Data Pro

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

Source: Coin Metrics Network Data Pro

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

Source: Coin Metrics Network Data Pro

Market Data Insights

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

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

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

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

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

CM Bletchley Indexes (CMBI) Insights

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

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

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • Coin Metrics is hiring! Please check out our Careers page to view the openings.

As always, if you have any feedback or requests, don’t hesitate to reach out at 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 54

Tuesday, June 9th, 2020

Analyzing Stablecoin Supply and Activity Distribution 

By Antoine Le Calvez and the Coin Metrics Team

The following is an excerpt of “Analyzing Stablecoin Supply Activity and Distribution.” Reading the full article on the Coin Metrics blog.

Key Takeaways

  • The supply and activity distribution of a stablecoin can help us understand how it is used. 

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

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

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

  • Some stablecoins like Paxos and Tether on Tron see a lot of retail-like transactions, probably due to the presence of MMM and other dividend schemes on these assets. Other stablecoins like HUSD and Binance USD have a large share of payments above $100k.

Introduction

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

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

Supply Distribution

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

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

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

Activity Distribution

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

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

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

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

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

Continue Reading on the Coin Metrics Blog

Continue reading the full article on the Coin Metrics blog.

Network Data Insights

Summary Metrics

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

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

Network Highlights

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

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

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

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

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

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

Market Data Insights

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

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

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

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

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

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

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

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

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

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

CM Bletchley Indexes (CMBI) Insights

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

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

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

As always, if you have any feedback or requests, don’t hesitate to reach out at 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.

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