Coin Metrics' State of the Network: Issue 63

Tuesday, August 11th, 2020

Weekly Feature

Introducing the Coin Metrics Quarterly Supply Transparency Report

by Ben Celermajer and the Coin Metrics Team

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

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

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

Free Float Supply Inflation

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

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

  • Huobi Token’s high deflation - Whilst Huobi undergoes routine token burns, on March 1, 2020, Huobi burned 147.4m HT of a total 500m outstanding HT. This one-off burn followed a community vote to remove assets assigned to the Platform Operation and Investor Protection Fund.

  • In instances where a cryptoasset’s Free Float Supply is relatively small compared to its total On-Chain Supply, new issuances from foundation addresses can significantly impact inflation levels, as witnessed in the case of Crypto.com Coin (CRO).

  • Dogecoin deflation - In the case of blockchains that are older than 5 years, Coin Metrics Network Data tools identify addresses whose assets have not been sent in over 5 years. Assets in these addresses are classified as belonging to long term strategic holders of a network and thus considered restricted from liquid supply. In the case of DOGE over the last 12 months, assets that have fallen into this category have been larger than those issued by the mining issuance schedule, thus resulting in a net deflation of Free Float Supply.

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

Foundation/Company Restricted Supply

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

Note 1: In March 2020, Huobi Foundation burned $422M worth of HT

Note 2: In November 2019, Stellar Foundation burned $4.14B worth of XLM

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

Continue reading here...

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

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

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

Network Highlights

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

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

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

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

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

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

Source: Coin Metrics Network Data Charts

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

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

Source: Coin Metrics Network Data Charts

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

Source: Coin Metrics Formula Builder

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

Market Data Insights

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

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

Source: Coin Metrics Reference Rates

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

Source: Coin Metrics Reference Rates

CM Bletchley Indexes (CMBI) Insights

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

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

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

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

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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

As always, if you have any feedback or requests, don’t hesitate to reach out at 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 62

Tuesday, August 4th, 2020

Weekly Feature

Derivatives’ Disparities: Surveying the Bitcoin Perpetual Swap Market

by Karim Helmy and the Coin Metrics Team

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

Dissecting Derivatives

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

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

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

Volatile Volumes

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

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

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

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

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

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

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

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

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

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

Network Highlights

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

Source: Coin Metrics Network Data Charts

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

Source: Coin Metrics Network Data Charts

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

Source: Coin Metrics Network Data Charts

Market Data Insights

ETH and BTC Move Higher

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

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

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

CM Bletchley Indexes (CMBI) Insights

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

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

Source: Coin Metrics CMBI

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

Source: Coin Metrics CMBI

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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

As always, if you have any feedback or requests, don’t hesitate to reach out at 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 61

Tuesday, July 28th, 2020

Weekly Feature

Introducing Coin Metrics’ Trusted Volume Framework

By Jon Geenty and the Coin Metrics Team

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

Overview

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

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

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

Part I: Correlation of Hourly Volume with Regulated Exchanges

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

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

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

Above is a look at the correlations between the volume from exchanges and the volume from our ‘trusted’ control group for a few of the more well known assets, sorted by the correlation in the Bitcoin markets. We take the correlations (like those seen in the examples above) and look at them in their entirety to get a better sense for the overall dispersion of the exchange’s markets’ correlation to the ‘trusted’ control group.

Above is a series of distributions with each row representing the dispersion of the correlation between an exchange's markets and the trusted markets.  The further right the distribution, the more closely correlated it is with the trusted market’s volume. The further to the left, the less correlated. These markets are sorted by the median correlation of all of the exchange’s qualifying markets. However, a median measure across an exchange’s markets is not the best measure for economic activity.

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

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

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

Continue reading the full report...

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

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

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

Network Highlights

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

Source: Coin Metrics Network Data Pro

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

Source: Coin Metrics Network Data Pro

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

Source: Coin Metrics Network Data Pro

Market Data Insights

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

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

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

Source: Coin Metrics Reference Rates

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

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

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

CM Bletchley Indexes (CMBI) Insights

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

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

Source: Coin Metrics CMBI

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

As always, if you have any feedback or requests, don’t hesitate to reach out at 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 60

Tuesday, July 21st, 2020

Weekly Feature

Analyzing The Early Uses of Bitcoin

by Antoine Le Calvez and the Coin Metrics Team

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

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

Early Exchanges

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

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

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

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

SatoshiDice

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

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

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

Continue reading the full article…

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

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

Network Highlights

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

Source: Coin Metrics Network Data Pro

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

Source: Coin Metrics Network Data Pro

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

Source: Coin Metrics Network Data Pro

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

Source: Coin Metrics Network Data Pro

Market Data Insights

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

Source: Coin Metrics Reference Rates

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

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

CM Bletchley Indexes (CMBI) Insights

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

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

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

Source: Coin Metrics CMBI

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

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

As always, if you have any feedback or requests, don’t hesitate to reach out at 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 59

Tuesday, July 14th, 2020

Weekly Feature

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

The Rise of Stablecoins

By Nate Maddrey and the Coin Metrics Team

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

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

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

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

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

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

Continue reading the full report...

Network Data Insights

Summary Metrics

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

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

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

Network Highlights

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

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

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

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

Market Data Insights

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

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

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

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

CM Bletchley Indexes (CMBI) Insights

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

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

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

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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

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