Coin Metrics' State of the Network: Issue 72

Tuesday, October 13th, 2020

Weekly Feature

Analyzing the Fallout from the BitMEX Lawsuits

By Antoine Le Calvez, Timo, and the Coin Metrics Team

On October 1st, the CFTC and Department of Justice jointly announced charges filed against BitMEX’s owners and operators. The CFTC is alleging they were illegally operating a derivatives trading platform and the Department of Justice that they violated various parts of the Bank Secrecy Act. BitMEX’s CTO, Samuel Reed, was arrested and released on a $5M bail the same day in Massachusetts.

The red line represents when the filings were made public

In this feature, we’ll look at the impact of these filings on BitMEX and the broader cryptocurrency ecosystem from different perspectives.

Not Your Keys, Not Your Coins

BitMEX stands out amongst cryptocurrency exchanges by how it stores its bitcoin. Instead of using the common hot/cold wallets structure, all the coins are held in cold storage. Withdrawals are processed once a day, usually around 1 PM UTC, and signed by 2 of the 3 BitMEX founders. A blog post by BitMEX details how this works and plays together with their broader security efforts.

From a technical point of view, each BitMEX address is a multisignature address that requires 3-of-4 keys to spend from. Three of the four keys are owned by one founder each. The fourth key is “mined” to ensure that each BitMEX’s addresses starts with a vanity prefix (either 3BMEX or 3BiTMEX). The latter key, also called “vanity key”, always signs the withdrawal transactions; then only 2 of the 3 founders are required to approve a withdrawal (it could also be that all 3 founders approve and the vanity key doesn’t sign, but this hasn’t happened in the last months we observed).

While the identities of the founders are known, it is not trivial to associate the public keys with its real life owner. By collecting the recent BitMEX withdrawals and identifying which keys signed for which withdrawal batch, we can make an educated guess which public key belongs to which founder.

Activity map showing which key signed for which withdrawal batch. The four additional off-cycle withdrawal batches not at 1 PM UTC are highlighted in red.

Most interestingly, key A didn’t sign on Oct 1st, when Samuel Reed was in custody. It has signed twice since the publication of the filings against BitMEX, both times presumably after Samuel Reed was released on bail. We further presume that key B belongs to Ben Delo and key C to Arthur Hayes.

The fact that all three founder keys have signed following the publication of the filings is reassuring for traders with funds on BitMEX. Had Mr Reed not been released on bail, any incapacitation of any of the two remaining founders could have meant a freeze of all the funds on the platform.

Samuel Reed’s bail prevents him from contacting the co-defendants without counsel being present. However, since his release on Oct 1st, all founder keys signed withdrawals. While Bitcoin multisignature is technically a non-interactive protocol, signing BitMEX withdrawals probably requires some level of interaction between the founders involved.

What remains unknown is whether the founder keys changed ownership since the publication of the filings. The fact that the 3 original founders stepped down from their executive roles at 100x, the parent company of BitMEX, seem to indicate such a transition has happened, or will happen soon.

Impact on BitMEX’s Wallet

Right after the publication of the filings and the arrest of BitMEX’s CTO, thousands of users withdrew funds from the platform. BitMEX also broke from its traditional once-a-day withdrawal processing and did 6 batches in 2 days to reassure traders that the funds were “SAFU”.

Using our database of tagged addresses, we can dig deeper into the direct destination of these withdrawals:

Platforms with products similar to BitMEX (Binance, Okex, Deribit, and Huobi) feature prominently in the list of destinations, along with traditional exchanges like Gemini, Bitstamp, et al.

Impact on Derivatives Market

BitMEX ruled for many years as Bitcoin’s emergent derivatives market. Its perpetual inverse swap saw trillions of dollars in volume and generated hundreds of millions in trading fees. But in 2020 it’s dominant position in the market became challenged by many competitors and BitMEX’s troubles in handling the March 12th crash marked its peak.

The recent filings are another blow to BitMEX’s standing:

While BitMEX’s competitors have gained market share, it remains to be seen whether the CFTC and DoJ will stop at BitMEX or continue going down the list of unregistered exchanges.

Conclusion

As indicated by the market’s tepid reaction to the publication of the CFTC and DoJ’s filing, BitMEX’s legal troubles were predictable. Other recent events like John McAfee’s arrest show that the US legal system is starting to crack down on the cryptocurrency ecosystem.

With only one of the three founders arrested, BitMEX avoided a solvency problem and managed to process the numerous withdrawal requests in a timely manner. As many precedents, like MtGox or QuadrigaCX, show, it is just a question of time until the arrest or death of crypto custodians triggers another solvency problem. 

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) and Ethereum (ETH) network metrics had relatively stable weeks, apart from large swings in transaction fees. ETH fees continued to plummet following the unprecedented DeFi-driven growth over the summer. BTC fees went in the opposite direction, growing by 15.2% week-over-week and averaging about $1M per day.

Ethereum hash rate hit a new all-time high of 254.36 TH/s on October 6th. Ethereum hash rate has been growing since mid-July thanks to the rise of DeFi. The large increase in fees meant more revenue for miners, which incentivized more miners to join the network and caused hash rate to grow. 

USDC also had a big week with supply growing by about 200M to a total of over 2.8B. USDC continues to grow faster than Tether, which was relatively flat this past week. However, Tether still dominates in terms of usage, with active addresses growing an additional 9.5% week-over-week compared to a 7.8% drop for USDC. 

Network Highlights

Privacy coins are back on the rise. Monero’s (XMR) market cap just hit its highest level since September, 2018. And XMR on-chain activity is surging as well. XMR transfer count is just shy of setting new all-time highs.

The following charts are smoothed using 7-day rolling averages. 

Source: Coin Metrics Network Data Charts

Zcash (ZEC) transfers are also on the rise. Part of ZEC’s growth may be related to DeFi - similar to wrapped BTC and wrapped ETH, wrapped ZEC has been growing since June. ZEC transfers have been growing since mid-July, which coincides with the rise of DeFi. 

Source: Coin Metrics Network Data Charts

Market Data Insights

Bitcoin closed this past week with a weekly candle of up $686.77 or ~6.4%. This was well above the three year average weekly candle of 1.1% and median of 0.79%. 

The main news the market is attributing the price action to is Square’s announcement of around a $50m purchase of Bitcoin. However, this is unlikely to be the full reason as Microstrategy’s $500m purchase did not have an impact of this magnitude. This move appears to be relatively healthy, as it was still within the standard deviation of the weekly candles in the past three years.

Source: Coin Metrics Market Data Feed

Ethereum also saw a bigger than normal weekly gain of $21.48 or ~ 6.0%. This is much larger than the three year average of 1.1% and median of 1.8% but also still within the standard deviation. 

Source: Coin Metrics Market Data Feed

CM Bletchley Indexes (CMBI) Insights

A very strong week for all CMBI and Bletchley Indexes led by the large cap assets. There was a strong level of correlation in the markets this week with the large cap assets moving in lock step while some of the mid and small cap assets tended to lag. The CMBI Bitcoin Performed the best of the CMBI Indexes closing the week at $11,365.32, up 6.4%. The CMBI Ethereum also closed the week strong at $373.85, up 6.1%.

The large cap indexes, CMBI 10 and Bletchley 10, also performed strongly and mostly in line with Bitcoin, returning 6.4% and 6.9% respectively. The difference in returns can largely be attributed to the different close time of the indexes (CMBI close is at 4pm NY Time, Bletchley close is at midnight UTC). The other difference is the methodologies, where CMBI utilized free float and a stricter eligibility criteria for asset selection.

Source: Coin Metrics CMBI

The CMBI Bitcoin Hash Rate again broke all time highs this week, peaking mid week at 153 EH per second before closing the week down 3% at 137 EH per second. Despite hash rate closing down, the CMBI Bitcoin Observed Work closed the week up 1.7%, with an implied 84,028 zetahashes being conducted during the week.

More performance information on each of the CMBI products can be found in our factsheets:

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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

As always, if you have any feedback or requests, don’t hesitate to reach out at 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 71

Tuesday, October 6th, 2020

Weekly Feature

Introducing the CMBI Multi Asset Series

By Ben Celermajer and the Coin Metrics Team

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

In this week’s State of the Network we are excited to announce the release of the CMBI Multi Asset Series, the first industry indexes that weigh cryptoassets by their Free Float Market Capitalization

We are particularly excited to bring these indexes to market after almost a year of design and methodology testing, and to share the design considerations and unique data constructs utilized in the index calculations. Cryptoassets are here to last, and as such, Coin Metrics determined it imperative to design a methodology that meets the standards of traditional capital markets and takes the next step towards professionalization of this asset class.

Throughout this feature, we will discuss the key and unique data components used in the determination of CMBI products, elaborate on the importance of each design consideration, and share the performance of the methodology relative to current standard practices.

The initial indexes that form part of the Coin Metrics Bletchley Index (CMBI) Multi Asset Series include:

These new indexes broaden Coin Metrics’ Index services, and join the already live CMBI Single Asset Series (CMBI Bitcoin and CMBI Ethereum) and CMBI Mining Series (CMBI Bitcoin Hash Rate and CMBI Bitcoin Observed Work).

The Need for Crypto Indexes

Well-designed and independently administered indexes are an important aspect of capital markets. They help to bring transparency and clarity to markets that investors wish to better understand and potentially invest in. This particularly rings true in the cryptoasset industry which can be confusing to new investors given its nascent form. The spot price of cryptoassets can vary globally, the on-chain characteristics of cryptoassets can be opaque, the market’s trading activity can be misrepresented, and many trading venues still operate in loosely regulated environments. 

The Coin Metrics Bletchley Indexes (CMBI), administered by Coin Metrics, have been designed to provide the cryptoasset market with a formalized, transparent and robust set of benchmarks on which to conduct research, measure performance, or create institutional quality financial products. The CMBI Principles outline the ethos and act as a guideline that informs the design of all CMBI products.

The most common path for many new retail and institutional investors looking to allocate to crypto is to first acquire Bitcoin and maybe Ethereum. As such, Coin Metrics’ first fore into indexes was to develop robust Bitcoin and Ethereum Indexes that were:

  • Designed in line with traditional capital markets best practices, such as the IOSCO Financial Benchmarking Principles.

  • Manipulation resistant to severe and outlier market conditions.

  • Transparent and rules based to enhance investor comfort.

  • Aligned with current regulatory concerns such as the potential for market close manipulative practices.

However, as investors become more familiar with cryptoassets, there is an increasing desire to broaden their exposure to multiple cryptoassets. This was most recently evidenced in Fidelity’s 2020 Institutional Digital Asset Investor Survey, which suggests as many as 2/3 institutional survey respondents indicated interest in diverse cryptoasset exposure. 

Granted this, the logical next step for Coin Metrics was to explore designing and developing a series of multi asset indexes for these investors to back-test strategies and allocate capital as and when they are ready to do so. 

Continue reading Introducing the CMBI Multi Asset Series...

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

After initial panic following the announcement of the BitMEX arrests, Bitcoin (BTC) and the other major cryptoassets have stabilized and started to recover. BTC managed to finish the week in the green (week-over-week) for most network metrics, buoyed by a strong start to the week.

Ethereum (ETH) activity continued to tumble following the deflation of end-of-summer DeFi hype. Active addresses fell another 5.1% week-over-week and dipped as low as 412.9K on September 30th. 

Network Highlights

On October 1st news broke that BitMEX executives had been charged with violating the Bank Secrecy Act, as well as willfully failing to establish and implement an adequate anti-money laundering program. BitMEX CTO Samuel Reed was arrested while the rest of the BitMEX executive team remains at large.

Crucially, BitMEX’s funds are held in multisig wallets that require a signature from multiple private keys in order to be unlocked. BitMEX’s three founders each hold a key, and two of three partners must sign each withdrawal. So the funds may have been unobtainable if multiple founders were arrested. 

The market reacted quickly. BitMEX had its largest daily BTC outflow ever, as investors rushed to remove their funds from the exchange. At least for now, there have been no issues with withdrawing funds. 

Source: Coin Metrics Network Data Charts

Zooming in, BitMEX had a net outflow of over 20K BTC on October 1st and an outflow of over 34K BTC on October 2nd. However, by October 3rd, as it became apparent that funds would not be locked on BitMEX (at least temporarily), things began to stabilize. BitMEX actually had a positive net inflow of about 472 BTC on October 4th.

Source: Coin Metrics Network Data Charts

As a result of the large outflows BitMEX’s BTC supply plummeted to its lowest levels since July 2018. In total, over $500M worth of BTC was withdrawn from the exchange between September 30th and October 3rd. But despite the drop, there is still close to $1.5B worth of BTC held on BitMEX. 

Source: Coin Metrics Network Data Charts

Market Data Insights

Last Thursday we saw a bit of a selloff following the arrest of Samuel Reed of BitMEX. Bitcoin fell roughly 5% in as the news broke but has retraced two-thirds of that decline in the time following.

Source: Coin Metrics Reference Rates

What has not recovered as quickly is the open interest in the XBT Perpetual contract on BitMEX. In parallel to the price drop roughly $130M in open interest on the contract was closed, falling from ~$590M to ~$460M. 

Source: Coin Metrics Market Data Feed

Other exchanges with similar contracts saw temporary declines in open interest as well, however most of them gained it back in the period following. This may be traders that intend to keep the position on and remove some risk by either moving some size to other exchanges or off of BitMEX entirely. 

CM Bletchley Indexes (CMBI) Insights

With the launch of our CMBI Indexes announced in this week’s feature we underwent our first rebalance for the CMBI Multi Asset Series. During the rebalance the CMBI10 added Polkadot and Binance and removed Cardano and Tezos.

A relatively quiet week for cryptoasset markets that saw all CMBI and Bletchley Indexes finish the week slightly down. The CMBI Ethereum was least impacted by the week's movements, closing 0.2% down at $352.36. The CMBI Bitcoin also finished the week slightly down, falling 0.4% to close at $10,678.54. All Bletchley Indexes finished the week between 0.9% and 1.4% down, with the large caps (Bletchley 10) being the least impacted by this down week.

Source: Coin Metrics CMBI

More performance information on each of the CMBI products can be found in our factsheets:

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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

As always, if you have any feedback or requests, don’t hesitate to reach out at 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 70

Tuesday, September 29th, 2020

Weekly Feature

Ethereum’s DeFi Evolution: How DeFi Is Fueling Ethereum’s Growth

By Nate Maddrey and the Coin Metrics Team

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

Decentralized finance reached new heights over the last few months as dozens of projects launched and large amounts of capital flowed in. A majority of decentralized finance (DeFi) apps have been built on Ethereum, and DeFi’s explosion has rippled across the network. DeFi has pushed Ethereum to its limits but is also accelerating the pace of innovation and experimentation. In this piece we look at how four DeFi token launches affected Ethereum and how the network is evolving as a result. 

DEX Dominance 

The rise of DeFi has brought on a wave of new tokens including some breakouts. The start of ETH’s summer bull run coincided with the launch of yearn.finance’s governance token YFI. But there have also been some big collapses, like the rapid rise and fall of the YAM token. The below chart shows ETH’s price following four of the largest DeFi token launches to date: YFI, YAM, SUSHI, and UNI. 

Source: Coin Metrics Reference Rates

Uniswap, the largest decentralized exchange (DEX) on Ethereum, has been the engine for DeFi token trading. Uniswap trading volume has increased from about $1M a day in early June to close to $1B a day in the beginning of September. Unlike centralized exchanges like Coinbase or Binance, Uniswap trading occurs entirely on-chain. This means that transactions must be sent and settled on Ethereum each time a Uniswap trade is made. On-chain trading has quickly become one of Ethereum’s biggest use cases. 

Source: Uniswap.info

With the rise of Uniswap and other DeFi dapps the amount of Ethereum smart contract calls hit  new all-time highs over the summer. Tokens moving around the ecosystem are increasingly controlled by code, creating a whole new level of efficiency and opportunities for automation. But it also introduces more complexity, as DeFi smart contracts can interact with each other and automatically route tokens through multiple platforms. 

Source: Coin Metrics Network Data Pro

Another result of DEX growth is the rise of wrapped ETH. Wrapped ETH (WETH) is basically a way to use ETH as an ERC-20 token. DeFi tokens are built on Ethereum’s ERC-20 token standard, which makes it easy to exchange one token for another. But the ERC-20 token standard was introduced after ETH was launched, which means ETH itself does not abide by these standards. To create WETH, ETH is locked up into a smart contract in exchange for WETH tokens.

WETH supply has soared to new all-time highs following the launch of YFI. 

Continue reading Ethereum’s DeFi Evolution...

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Ethereum (ETH) network metrics mostly dipped this past week. ETH adjusted transfer value continued to tumble after surging to two year highs in early September. On a positive note, ETH active addresses stabilized after falling after the launch and collapse of the SUSHI token. 

Bitcoin (BTC) network metrics, on the other hand, were mostly positive on the week. BTC daily active addresses remain near all-time highs, topping 1.14M on September 25th. 

Network Highlights

Total stablecoin supply has reached $20B. While Tether still has a large fraction of supply share, other stablecoins are starting to make up ground. USDC growth has been outpacing Tether, causing Tether's dominance to dip below 80% for the first time in the modern era of stablecoins.

Source: Coin Metrics Formula Builder

Stablecoin transfer value also continues to grow compared to BTC. BTC has historically dominated transfers, but since July stablecoins have taken over as the main method of transferring value on-chain. The rise of stablecoin on-chain transfer value coincides with the rise of DeFi, as highlighted in this week’s Weekly Feature.

Source: Coin Metrics Formula Builder

While stablecoins are increasingly being used for value transfer, Bitcoin is apparently increasingly being used as a store of value. The percent of BTC supply held for at least one year recently hit 63.5%, its highest level since 2010.

Source: Coin Metrics Formula Builder

Market Data Insights

Some of the euphoria of recent months appears to be fading. Week over week, 72% of the roughly 250 assets that we calculate reference rates for have declined in price. Month over month that number increases to 93%. This is a significant shift from the sentiment that was felt in the bull market only a few weeks ago. 

To better gauge the sentiment, we look at a rolling 7 day metric using a ratio of assets making new 30 day highs less a ratio of those making new 30 day lows. This shows us at a bearish level not seen since the selloff in March of this year.

This past week’s options expiration was fairly uneventful, with Bitcoin staying within the max pain range of $10-11k and Ethereum staying between $300-400. Volatility still remains relatively muted compared with historical ranges. 

CM Bletchley Indexes (CMBI) Insights

Most of the CMBI and Bletchley Indexes finished this week down slightly, with the CMBI Ethereum Index closing the week at $353.10, down 4.9%. The CMBI Bitcoin Index had another relatively flat week, closing at $10,724.67, down 1.4%. 

Multi-asset market cap weighted indexes were also all down for the week, with the Bletchley 40 (small caps) again the worst performer during this recent negative market sentiment, closing down 2.4%. Interestingly, the Bletchley 10 Even closed the week up, despite the negative performance of the CMBI Bitcoin Index, the CMBI Ethereum Index, and the Bletchley 10. This is largely attributed to the weekly performance of Cardano (up 13%) and BSV (up 10%).

As many expected, Bitcoin’s Hash Rate retraced after Bitcoin’s 11.35% difficulty adjustment last week. However, this retrace was short lived and for the third week running, the CMBI Bitcoin Hash Rate Index reached all time highs, above 150 exahashes per second. Hash rate has been on a roll during the Chinese wet season. But the wet season is coming to an end shortly, potentially resulting in a slowdown of the recent rate of increase of hash rate. 

More performance information can be found here:

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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

As always, if you have any feedback or requests, don’t hesitate to reach out at 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 69

Tuesday, September 22nd, 2020

Weekly Feature

Bitcoin: A Novel Economic Institution

Below is an excerpt of a research report authored by ARK Invest and Coin Metrics. In Part 1 of this research, we described how we believe Bitcoin satisfies the four assurances that maximize the probability of a robust and predictable financial system. In Part 2, we explore bitcoin as an emerging asset. The following is an excerpt from Part 2 of the report.

Bitcoin’s Opportunity

With little more than a 10-year price history, bitcoin has been the best performing asset of the 21st century. Five years ago, a $10,000 investment in bitcoin would have delivered a 119% compound annual rate of return and would be worth roughly $500,000 today. In fact, during any yearly holding period since inception through September 1, 2020, bitcoin’s return has been positive, significantly so in most cases, as shown in Figure 2.

Despite its run, our analysis suggests bitcoin is early on its path to monetization, with substantial appreciation potential. In our view, Bitcoin’s $200 billion market capitalization - or network value - will scale more than an order of magnitude to the trillions during the next decade.

In the next section, we will discuss bitcoin’s largest market opportunities. Consistent with these opportunities, we estimate Bitcoin could reach a $3 trillion market cap by 2025.

Bitcoin As A Global Settlement Network

We believe Bitcoin could become a settlement system for banks and businesses. Unlike traditional settlement systems, the Bitcoin network is global, it cannot censor transactions, and its money cannot be inflated by institutions like central banks. Instead of facilitating a large volume of low- value transactions at point of sale, Bitcoin could evolve to handle large transactions between and among financial intermediaries. Today, most dollar-based international payments must settle through the Federal Reserve’s Real Time Gross Settlement (RTGS), or Fedwire.

Supporting both senders and receivers, the Bitcoin network obviates the need for counterparties to mediate and settle transactions and is capable of settling high value transactions irrevocably every few hours. It can facilitate 2,000 global settling transactions roughly every ten minutes from anywhere at any time. As noted in Economics of Bitcoin as a Settlement Network, the Bitcoin network could settle one transaction daily with every other bank in a global network of 850 banks. In the United States alone, deposits totaling $14.7 trillion generate $1.3 quadrillion in settlement volumes between and among banks each year. If it were to capture 10% of those settlement volumes at a similar deposit velocity, we believe the Bitcoin network would scale more than 7-fold from roughly $200 billion to $1.5 trillion in value, as shown below.

Bitcoin As Digital Gold

As part of the transition toward a digital economy, bitcoin could challenge gold as a global store of value. Economic history suggests that an asset accrues value as the demand for it increases relative to the supply. Demand is a function of an asset’s ability to serve the three roles of money: store of value, medium of exchange, and unit of account.

For thousands of years, the world has recognized gold as the most sustainable form of money. Through a process of natural selection, goods competed with each other for dominance until gold evolved as the global monetary standard. While gold has maintained its status as a store of value, its limitations to serve as a medium of exchange and unit of account began to surface in the 20th century.

Supporters often refer to bitcoin as digital gold because it improves upon many of physical gold’s characteristics. Not only is bitcoin scarce and durable, but it also is divisible, verifiable, portable, and transferable, all of which protect from the threat of centralization. According to our research, if it were to take 10% share of the physical gold market, bitcoin’s network value could increase nearly $1 trillion, as shown below, 5 times its $200 billion base today.

This is an excerpt of “Bitcoin: A Novel Economic Institution,” a research report authored by ARK Invest and Coin Metrics.Continue reading the full report here: Part 1 and Part 2.

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Network metrics were slightly up this past week before Monday's decline. Ethereum (ETH) transaction fees are back on the rise following the surprise launch of Uniswap’s UNI token. ETH active addresses also rebounded thanks to UNI, after dropping to a 4-month low on September 11th. Bitcoin (BTC) daily active addresses also remained strong, averaging 978K over the past week. 

Network Highlights

ETH daily transaction count hit a new all-time high of 1.41M on September 17th, following the launch of Uniswap’s UNI token the previous day. 

Source: Coin Metrics Network Data Charts

The amount of transactions sent to Ethereum smart contracts also hit a new all-time high of 915.56K on September 17th as users sent transactions to Uniswap contracts to claim and trade UNI tokens. Transactions sent to contracts have surged since July, as decentralized finance (DeFi) has taken over Ethereum activity. This signals that Ethereum is being used more and more as a smart contracts platform as DeFi continues to evolve. 

The following chart shows the daily amount of transactions sent to contracts vs non-contract addresses, smoothed using a 7-day rolling average.  

Source: Coin Metrics Network Data Formula Builder

Similarly, the amount of ETH transferred by smart contracts (non-adjusted) shot up to a new all-time high of $3.07B on September 17th. The following chart is smoothed using a 7-day rolling average. 

Source: Coin Metrics Network Data Charts

As a result, the overall amount of ETH transferred has climbed to its highest levels since January 2018. ETH’s adjusted transfer value 7-day average passed BTC’s on September 6th. ETH has increased its lead following UNI’s launch.

Source: Coin Metrics Network Data Charts

Market Data Insights

Volatility has returned to ETH following the recent selloff and last week's UNI debut. This is significant because it follows a period of sustained levels of low volatility not seen since mid-2019. This increase in volatility precedes some significant events, namely the launch of the first phase of ETH 2.0 and, more urgently, the September 25th options expiration. 

Source: Coin Metrics Market Data Feed

The options for ETH expiring on Friday make up almost $450m in open interest. This will be the largest expiration date for Ethereum for the options exchange Deribit, currently the largest venue (by open interest) offering these contracts. This event will likely add additional volatility to price action throughout the week, as traders look to hedge exposure on these positions, work out of them, or possibly take action in the spot market in anticipation.

CM Bletchley Indexes (CMBI) Insights

CMBI and Bletchley Indexes had a mixed week, with the large cap assets performing best. In particular the CMBI Bitcoin Index had a strong showing and closed the week up 5.6%, at $10,879.71. The CMBI Ethereum Index also finished the week up 2.4%, at $371.44. The performance of these two indexes carried through to the positive performance of the Bletchley 10, which finished the week up 2.5%, despite many of the other assets experiencing losses for the week.

The mid and small cap indexes experienced the worst of the market sentiment this week, with the Bletchley 20 and Bletchley 40 closing down 5.7% and 7.8% respectively. This performance comes after several weeks of these indexes outperforming the large cap cryptoassets. 

Source: Coin Metrics CMBI

During the week the CMBI Bitcoin Hash Rate Index yet again experienced all time high levels, peaking at 151,760 petahashes on Friday. The sustained high levels of hash rate can be evidenced through the CMBI Bitcoin Observed Work Index, whose weekly levels indicate that 85,506 zettahashes were conducted by miners during the week (up 14.3% from 2 weeks ago). These record levels of hash rate resulted in Bitcoin’s difficulty increasing 11.35% on Sunday.

More performance information can be found here:

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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

As always, if you have any feedback or requests, don’t hesitate to reach out at 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 68

Tuesday, September 15th, 2020

Weekly Feature

Measuring Bitcoin’s Decentralization

By Karim Helmy and the Coin Metrics Team

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

Over the last eleven years, Bitcoin has managed to function relatively seamlessly in the face of a large number of threats, largely due to its lack of a single controlling entity. This trait, known as decentralization, encompasses a large number of loosely-coupled characteristics. Some of these traits are difficult to describe and measure, but others lend themselves well to direct analysis. 

One directly observable feature is the dispersion of funds across addresses. The distribution of wealth is a critical factor in any economy, roughly coinciding to the distribution of economic influence. For cryptoassets, which often grant large token allocations to the founding team, it’s also a severely underexplored one.

Another characteristic, the distribution of hashpower, is arguably even more important. Bitcoin relies on decentralization at this level in order to meet its goals of sustaining a secure, censorship-resistant payments and savings system. 

Bitcoin is also highly exposed to the market share distribution of exchanges, which exercise an outsized influence on the network’s economy. The distribution of volume on fiat-quoted spot pairs is particularly important, since these represent on- and off-ramps to and from the world at large.

In this week’s feature, we’ll quantify Bitcoin’s decentralization along these three verticals and track how it’s progressed over time. 

Dispersion

The presence of whales, or users with large quantities of funds held in the asset, is a concern for the viability of many cryptocurrencies. A particularly unequal distribution of funds could grant a small set of users significant influence over the direction of an asset’s markets and protocol development and call into question the asset’s viability as a store of value or medium of exchange.

Since Bitcoin balances are easily auditable, dispersion can be assessed with on-chain data. Because funds held by custodians in omnibus accounts cannot be attributed to their owner and address reuse is generally discouraged, these estimates are imperfect. However, the degree of transparency afforded is still unprecedented when compared to the legacy financial system.

Bitcoin still has whales, but since the network’s inception, its supply has become more evenly distributed, with smaller accounts comprising an increasing proportion of the aggregate supply.

Source: Coin Metrics Network Data Pro

In addition to controlling an increasing proportion of supply, addresses with smaller balances continue to represent the majority of accounts. In the face of a fluctuating dollar-denominated price, most addresses still control less than $100 worth of Bitcoin.

Mining

In addition to on-chain dispersion and activity, Bitcoin’s effective decentralization depends on the distribution of computational power, or hashpower, among miners.

Bitcoin relies on miners to secure the network and add new blocks to the blockchain. These miners compete to find the next block by computing a large number of energy-intensive hashes, and often aggregate into loose coalitions known as mining pools.

The amount of hashpower securing the Bitcoin network has generally grown exponentially throughout the network’s history.

Source: Coin Metrics Network Data Pro

In addition to the amount of raw hashpower securing the network, the distribution of hashpower is also important. A malicious actor who controls more than half of the network’s hashpower could 51%-attack the network and perform a double-spend, and an attacker with considerably less resources could censor transactions through feather forks.

An attacker would need to double-spend a large amount of money in order to make a 51%-attack profitable. In majority-hashpower ASIC-mined coins like Bitcoin, which require significant capital expenditure by miners, it would be difficult for a rational miner to perform a 51% attack, though these attacks are made somewhat more feasible by the presence of hashpower marketplaces.

Today, Bitcoin’s mining industry is competitive. The plot below, which is subject to a degree of survivorship bias, shows mining to be a thriving, distributed ecosystem.

Continue reading Measuring Bitcoin’s Decentralization...

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Network metrics were mostly down this past week as Bitcoin (BTC) and Ethereum (ETH) market caps tumbled over the first half of the week. ETH had bigger downturns in most categories as DeFi enthusiasm temporarily waned following the latest food related controversy. ETH active addresses dropped to about 356K on September 11th, which is the lowest daily total since May.  

Network Highlights

USDC supply has nearly doubled since the beginning of August. It took almost two years for USDC supply to go from zero to 1 billion. It only took about two months to go from 1 billion to 2 billion. 

Source: Coin Metrics Network Data Charts

Tether supply exploded after the March 12th market crash. But since July, USDC supply has been growing at a faster rate. Fueled by the rapid rise of decentralized finance (DeFi), USDC is increasingly being used in liquidity pools on Uniswap and Curve Finance. Uniswap clone SushiSwap has also added to USDC’s rise, as USDC is one of the main underlying tokens that is staked to earn SUSHI. USDC’s lead has grown in September, as USDC supply issuance continues to accelerate. The following chart shows growth since March 1st. 

Source: Coin Metrics Formula Builder

Tether still has a large lead in terms of total supply. As of September 13th, the total supply of Tether is approaching 15 billion, compared to about 3 billion for all other stablecoins combined. But USDC’s sudden surge might finally start to threaten Tether’s market dominance. Tether’s share of the total stablecoin supply peaked at about 87% on August 10th. Since then, it has dropped down to about 83%, its lowest level since April. 

Source: Coin Metrics Formula Builder

USDC’s median transfer value has also started to rise in August and September. DAI’s median transfer value has risen as well compared to Paxos (PAX) and Ethereum-issued Tether (USDT_ETH). This is also likely a result of DeFi, as USDC and DAI are increasingly used for staking. 

Source: Coin Metrics Network Data Charts

Market Data Insights

As the summer of DeFi rages on price action around Bitcoin has been relatively subdued. Realized volatility remains around 50%. This is interesting because in the past when Bitcoin broke out of this range into more volatile trading this measure reached levels over 100%. However, this past breakout did not reach nearly as elevated levels with the rolling 30 day average not surpassing the 60% mark. This is potentially due to a reduction in leveraged Bitcoin positions relative to the market size or a growing efficiency in the price action of the markets.

Source: Coin Metrics Market Data Feed

Another sign of growing efficiencies in the market is the reduction of offset seen between the market value of Tether and the U.S. Dollar. This chart below shows a rolling 30 day average price of Tether since 2018. You can observe that in 2018 and 2019 there were periods with large differences between the two and that this offset has been reduced over time.

Source: Coin Metrics Market Data Feed

CM Bletchley Indexes (CMBI) Insights

This week, CMBI Indexes recovered a fraction of last week’s market wash, all closing the week in the green. After last week’s big move, most indexes experienced a reduction in volatility this week, trading within a relatively tight range. The CMBI Bitcoin Index only finished slightly up, closing at $10,302.48 (up 0.4%), whilst the CMBI Ethereum Index performed slightly better closing at $362.63 (up 2.4%).

As has been a trend through most of Q3, the small cap (Bletchley 40) and mid cap (Bletchley 20) indexes were the best performers of the week. 

Source: Coin Metrics CMBI

The CMBI Bitcoin Hash Rate Index continues to reach new weekly highs, closing the week at 142,275 Petahashes per second, up 13%. This led to miners doing an observed 81,057 Zettahashes over the last week, 10.5% more than expected based on the previous week’s performance.

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

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

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

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