Coin Metrics' State of the Network: Issue 78

Tuesday, November 24th, 2020

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

Weekly Feature

Dissecting a Bitcoin Bull Market

By Lucas Nuzzi 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.

A pandemic, followed by global societal shutdowns, followed by rampant social unrest, followed by increased political polarization, followed by unprecedented levels of monetary interventionism.

This has been 2020.

And in the midst of all of this uncertainty and chaos, a Bitcoin bull market brewed. 

Two competing theories have transpired to explain BTC’s rapid rise to $19,000. Some have speculated that this rally is being predominantly driven by increased regulatory scrutiny in China, which has prevented miners and market participants from selling their BTC. Others attribute it to increased institutional participation after Bitcoin received a trove of endorsements from high-profile macro investors.

In this post, we will evaluate the merit of each of these narratives through the use of network data. 

Are Miners Driving This Rally? 

It is no secret that Beijing has been cracking down on Bitcoin businesses, from miners to exchanges. Earlier this month, news broke that both Huobi and OKex, two of the largest exchanges operating in China, were facing stronger regulatory scrutiny as part of the country’s new mandate to fight money laundering and fraud. Now, local industry observers have reported that the bank accounts of many Shenzhen miners have been frozen as part of this regulatory crackdown.

Media outlets have hypothesized that the recent run up in Bitcoin’s price was a direct result of this crackdown. If miners are unable to sell their BTC, a sustained disruption in the existing supply chain would ultimately generate scarcity. Thus far, however, solid evidence of the impact of the crackdown on mining operations has been anecdotal. Thankfully, we have devised metrics to assess this impact more objectively by tracking the movements of newly issued BTC.

Over the course of 2020, we have closely analyzed the on-chain custody behavior of both mining pool operators and their individual miners. We have found that unspent miner rewards provide a good proxy for aggregate mining pool custody. Since mining pools issue payouts to all of their participants, supply that sits 1 transaction from mining pools is a good representation of the holdings of individual miners. The culmination of this research was a new family of metrics released in October that can provide a view of when these network participants are accumulating, or disseminating, the bitcoins they mine.  

On an aggregate basis, the amount of Bitcoin held by mining pool operators has increased over the course of 2020. Notably, there was a sharp spike in April ahead of the halving and a steady increase followed. Conversely, Bitcoin held by individual miners has decreased in 2020, and at a particularly increased rate in November. 

If, in fact, there was a liquidity crunch predominantly driven by miners, one would expect the amount of BTC held by both pools (purple) and individual miners (green) to increase. Since individual miners are the liquidity gateways of newly issued bitcoins, any supply chain disruption would entail an increase in their holdings, whereas the opposite seems to be taking place.

Another metric that suggests miners have been able to sell their BTC as usual is the aggregate value of bitcoins sent by them. If miners were unable to sell their BTC, the aggregate outflows from their account would likely drop. However, that does not seem to be the case. As of November 21st, 809,217 BTC has left miner accounts. At this pace, the sum of bitcoins sent by miners in November will surpass the yearly average of 1,052,589 BTC sent per month.

Coupled with the aforementioned data on BTC held by miners, the lack of a clear change in miner outflows discredits the hypothesis that miners have not been able to sell as a result of a regulatory crackdown in China. 

Another troublesome factor in attributing the rally to miners is the size of BTC markets. At a market cap of over three hundred billion dollars, it is very unlikely that a rally of this magnitude could have been caused by miners alone. After all, miners are disincentivized to hoard BTC. They are rewarded in a volatile currency, whereas their operations entail monthly expenses paid in fiat. As such, their impact on the market decreases as less BTC is issued.

Nearly 100B USD was added to BTC’s total market capitalization over the course of November. It is hard to envision a scenario where miners alone were responsible for it given that they have received just shy of 360M USD thus far in November. As such, any impact of the regulatory crackdown on liquidity would likely be limited to that, which is too small to an impact of this magnitude.

The Role of Centralized Exchanges

Now, let us look at the on-chain footprint of centralized exchanges and assess their impact on the recent rally, not only in the context of increased regulatory pressure in the East, but also in light of other factors impacting exchanges in the West.

Historically, exchanges operating in China have been the primary target for regulators. It was no different this time. On November 2nd, Huobi’s Chief Operating Officer was reportedly arrested by Chinese authorities, although Huobi has denied the reports. In the days following the reports, Huobi experienced a mass withdrawal event as users grew worrisome. That resulted in a 60k BTC being withdrawn; a loss equivalent to 1B USD in deposits. 

Interestingly, Huobi is not the only exchange to experience a decrease in deposits. Over the course of 2020, the percentage of total BTC supply held by major exchanges has decreased on an aggregate basis, even if we remove Huobi from the equation. We have noticed an aggregate reduction of BTC holdings by the major exchanges we support (Bitfinex, BitMEX, Binance, Bitstamp, Bittrex, Gemini, Kraken, and Poloniex).

Continue reading “Dissecting a Bitcoin Bull Market” here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Many BTC on-chain metrics are on the verge of hitting new all-time highs as institutional interest in bitcoin (BTC) continues to gain momentum. BTC market cap averaged over $333B last week and topped $347B on November 21st, a new all-time high. Daily active addresses topped out at 1.20M, just below the all-time high of 1.28M. Hash rate has also bounced back and is nearing previous highs after a temporary dip thought to be caused by changing Chinese weather patterns, as covered in the Network Highlights section of State of the Network Issue 75

Ethereum (ETH) is following suit, with most on-chain metrics surging. ETH hash rate hit a new all-time high of 265.81 TH/S on November 21st, building on a surge over the summer likely fueled by DeFi's growth. ETH daily fees grew by a huge 56.4% week-over-week and have once again passed BTC, after BTC overtook ETH in late October. 

Network Highlights

Bitcoin market capitalization and realized capitalization have both hit new all-time highs. 

On October 21st, PayPal made a surprise announcement that they were introducing a way for customers to buy, sell, and hold cryptoassets including bitcoin (BTC), Ether (ETH), and Litecoin (LTC). Since then, BTC price has increased from $12.85K (end of day October 21st) to a high of over $18.70K. Although BTC price is still just shy of the December 2017 all-time high of $19.64K, market cap has reached new highs due to the gradual increase in BTC supply over the last three years.  

Source: Coin Metrics Network Data Charts

The number of unique addresses holding at least 1,000 BTC has also reached a new all-time high. There are currently 2,255 addresses holding at least 1,000 BTC, up from 2,184 on October 21st. This potentially supports the growing narrative that more institutional level investors are starting to buy and hold BTC. However an important caveat is that a single entity can control multiple addresses, so some of the growth may potentially be due to large holders spreading out their BTC.

Source: Coin Metrics Network Data Charts

Additionally, the number of addresses holding at least 1 BTC hit a new all-time high in early November. On November 4th there were 825.23K addresses holding at least 1 BTC. The number has since declined slightly to 819.93K, but still remains near all-time highs. This suggests that the number of retail size holders is also increasing in tandem with institutional size holders, although the same caveat mentioned above still applies.

Source: Coin Metrics Network Data Charts

Market Data Insights

A rising coin lifts all boats.

Over the past 30 days we have seen bitcoin continue to climb back toward all-time highs, reigniting excitement in the space and leaving crypto enthusiasts foaming at the mouth. Potential new highs, much like every other event, is “good for Bitcoin”. However it has also been good for many other assets in the space.

Source: Coin Metrics Market Data Feed

An indicator that we often look at for an estimate of altcoin sentiment is the ratio of assets reaching new 30 day highs minus those reaching new 30 day lows. We use our reference rate universe of 306 assets to perform this calculation. In the chart below, you can see that the blue line in the bottom plot has recently shifted to net new highs from net new lows. 

Source: Coin Metrics Market Data Feed

This displays new confidence in segments such as DeFi assets following the selloff this fall. Based on the historical range of this indicator, altcoins may have some additional room to run if the bullish trend continues.

CM Bletchley Indexes (CMBI) Insights

The cryptoasset market had a tremendous week all around with the large cap assets enjoying the largest intra-week gains. The CMBI Ethereum returned a staggering 27.9% during the week, closing at $568.10, its highest level since June 2018. Bitcoin also had an incredibly strong week, returning 17.3% to close at $18,597.55, its fourth highest daily close ever.

However, despite the strong performance of Bitcoin and Ethereum, it was the CMBI 10 Excluding Bitcoin that had the highest weekly return, closing up 32.0%. The additional performance on top of the CMBI Ethereum is largely attributable to XRP, which closed the week up 66%, its largest weekly return since September 2018.

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 77

Tuesday, November 17th, 2020

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

Weekly Feature

The State of DeFi Tokens

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 (DeFi) took over the crypto world during the summer. But it cooled off after September, and has taken a back seat to BTC and ETH since.

In this week’s Feature, we explore the rapid rise of DeFi tokens and the current state of DeFi’s market cap and usage. You can check out our DeFi data and recreate many of the charts featured in this piece using our free community charting tool

DeFi’s Third Act

Although it may seem like it popped up overnight, DeFi has been around for years. During 2018 early projects like MakerDAO (MKR) and 0x (ZRX) pushed the total DeFi market cap to over $5B, as Ether (ETH) price reached all-time highs. But the initial DeFi surge was dwarfed by this summer’s run, which saw the rapid entry of many new projects.

Source: Coin Metrics Network Data Charts

DeFi’s recent rise began in earnest in June with the launch of Compound protocol’s COMP governance token. COMP’s launch kickstarted the rise of decentralized lending and borrowing, which served as the initial fuel for DeFi’s surge. Compound lets users borrow cryptoassets like ETH, DAI, and USDC using crypto as collateral. It also lets users lend their cryptoassets and earn yield, which has become a cornerstone of DeFi investing. In addition to Compound, Aave protocol has grown to be one of the largest DeFi decentralized lending platforms. Aave originally launched the LEND token, which they recently transitioned to the AAVE token. 

Following COMP many other DeFi applications launched governance tokens during the summer of 2020. Yearn.finance, an application that automatically invests user’s funds into the highest yielding decentralized lending markets, launched the YFI governance token in mid-July. YFI was launched through incentivized liquidity pools which has become a popular way of launching DeFi tokens. YFI reached a market cap of over $1B by the end of August.

DeFi market cap peaked on September 18th shortly after the launch of Uniswap’s UNI governance token. Uniswap, the largest Ethereum-based decentralized exchange, has been the engine behind DeFi mania. Uniswap allows anyone to create a new token pair and immediately begin trading using decentralized liquidity pools, which helped new DeFi tokens launch and scale quickly. Uniswap trading volume increased from about $1M a day in early June to close to $1B a day in the beginning of September.

UNI was launched as an airdrop that rewarded previous Uniswap users and liquidity providers. Because of its sudden launch, UNI almost immediately catapulted DeFi market cap to a new all-time high. But soon after, the bubble began to burst. New UNI recipients started to sell their tokens en masse, causing UNI’s price to drop from a high of close to $7 to a low of less than $2. Additionally, a series of exploits and hacks led to large losses, which took more air out of the sector. 

Source: Coin Metrics Network Data Charts

But DeFi market cap has started to turn back around. After reaching a local low on November 4th, DeFi market cap has returned back to late September levels following a surge from BTC and ETH. If BTC and ETH continue to rise, DeFi could be a big benefactor. 

Usage Rebound

Similar to market cap, DeFi usage as measured by daily active addresses also peaked in September. Following the initial airdrop there were over 176K UNI active addresses on September 17th, by far the largest amount in DeFi history. But since then UNI daily active addresses have rapidly declined and leveled off at about 5K per day. 

Source: Coin Metrics Network Data Charts

Removing UNI from the above chart shows that other DeFi tokens are regaining usage. Excluding UNI, the overall number of active addresses still peaked in early September, mostly due to the rise and fall of SushiSwap (SUSHI). 

Source: Coin Metrics Network Data Charts

Continue reading “The State of DeFi Tokens” here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) and Ethereum (ETH) continued their hot streaks this week. BTC averaged over 1M daily active addresses and continues to close in on the all-time high of 1.29M set in December 2017. BTC’s realized cap topped $128B on November 12th, the highest it's ever been. ETH’s realized cap grew 3.9% week-over-week and is now over $36B, its highest level since September 2018. 

Network Highlights

After originally forking from Bitcoin in August 2017, Bitcoin Cash (BCH) is undergoing its own split. On Nov 15th, Bitcoin Cash forked into two chains: BCHA, and BCHN. At time of writing, BCHN appears to be winning, as little to no hash power is being devoted to BCHA.

Initially proposed as a “medium-of-exchange” alternative to BTC that could be used as a transactional currency, BCH has averaged less than $150M per day of adjusted transfer value for most of 2020. Comparatively, BTC is currently averaging over $4B of daily adjusted transfer value.

Source: Coin Metrics Network Data Charts

Although low transaction fees were often touted as one of the advantages of BCH, low fees likely hurt the long-term viability of the network. Transaction fees are paid to miners as an incentive for securing the network (in addition to block rewards). While low average fees are good for individual users, low total fees typically means that there’s low demand for block space, and ultimately low demand for using the network. BCH has had a total of less than $1.5M worth of transaction fees over its entire history. BTC had over $1.6M daily transaction fees last Friday.

Source: Coin Metrics Formula Builder

Similarly, BCH usage remains far behind BTC. The following chart shows the percent share of total active addresses across both BTC and BCH. BCH only has about 6% of active addresses, compared to 94% for BTC.

Source: Coin Metrics Network Data Charts

Market Data Insights

The decentralized exchange (DEX) tokens, UNI and SUSHI, made tremendous gains this past week as traders/speculators looked to place bets leading up to this Tuesday. November 17th marks the day that the initial UNI liquidity mining bonus program is originally scheduled to end.

For those unfamiliar, this program pays out Uniswap's governance token, UNI, at a rate of 83,333 per day to liquidity providers in the pairs ETH/USDT, ETH/USDC, ETH/DAI, and ETH/WBTC. There are two base case outlooks on the end of this program: 

1) UNI will go up in value with decreased supply. 

2) UNI will decrease in value because liquidity will leave Uniswap due to lowered incentives, decreasing the value of the platform.

This creates an opportunity for the similar, alternative dex SushisSwap to attempt to attract that liquidity searching for a higher yield. And as of Monday afternoon they are changing their bonus structure to do just that, boosting the incentives paid out to those pools with programs ending on Uniswap.

A governance proposal has been made for Uniswap to extend the program an additional two months while reducing the rewards by half. If voted in this proposal would not take effect until December 4, 2020, giving liquidity providers a fairly large window of time to move from the platform. The real winners from the continuation of the bonuses by both Uniswap and SushiSwap are the yield farming tokens which can continue to leverage these platforms to boost APY. 

UNI is up ~17% and SUSHI ~90% since Uniswap’s ‘community’ call last Friday

CM Bletchley Indexes (CMBI) Insights

A mixed week for CMBI and Bletchley Indexes that saw a cool down in most of the large cap market after several weeks of outperformance and a slight resurgence in mid and small caps. The exception to this was the CMBI Bitcoin, which had another strong week closing up 3% at $15,860.81. During this week, Bitcoin also experienced multi year highs, reaching levels that had not been experienced since January 2018.

The CMBI Ethereum finished the week down like many of the top 10 assets, closing at $444.11. The contrast in performance between Bitcoin and the other top 10 crypto assets can be observed in the returns of the CMBI10 and the CMBI10 Excluding Bitcoin, the former which closed the week up 1.8%, the latter down 1.6%.

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 76

Tuesday, November 10th, 2020

Weekly Feature

Bitcoin: An Unprecedented Experiment in Fair Distribution

By Lucas Nuzzi 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.

Much has been written about the fundamental differences between Bitcoin and other asset classes. In fact, juxtapositions of Bitcoin and established commodities such as gold continue to lure swarms of newcomers into this industry, institutional and retail-alike.

But are there factors that make Bitcoin fundamentally different than other cryptoassets?

As the first-ever successful implementation of a digital currency, it’s common to see Bitcoin serve as a punching bag for technologists. To many of them, Bitcoin is a first-generation technology and, as such, it is plagued by a lack of transactional throughput and feature richness. But make no mistake: Bitcoin’s uniqueness goes far beyond the scope of technology. It is an unprecedented experiment in wealth distribution. 

In bull markets, the proverbial comparisons of Bitcoin and the likes of dial-up internet, or email in the 1980s, are vast and plentiful. Too often, these are part of deliberate marketing strategies pushed by proponents of emerging cryptoassets that reportedly succeed where Bitcoin has failed. Tragically, newcomers confronted by a strictly technological comparison framework are ultimately pushed to the margins, especially as debates turn hyper-technical. 

While it is undeniable that technology plays a role in evaluating the merits of any cryptoasset, there’s certainly more to the story. What technologists and, by extension, most newcomers often overlook is the fact that cryptoassets function as digital economies. And just like real-world economies, the technology through which currency is accounted for (governments, banks, payment networks) is often far less important than how that currency was and is effectively distributed (monetary policy and wealth distribution).

On-chain data provides a new paradigm for this type of economic analysis, as it makes possible the identification of inequitable wealth distributions at the asset level. After all, blockchains at their core provide a full history of ownership structures, and that history often speaks volumes. Cronyism, amongst other unfair supply distribution models, inescapably result in incredibly centralized monetary bases. Through on-chain data, we can identify ownership structures antithetical to Bitcoin’s and quantify the degree of wealth centralization within their digital economies. 

To paint a full picture of the factors that drive fair supply distribution, we will begin this post by reviewing Bitcoin’s early history. Then, we will take a closer look at distribution through mining and the impact of industrialization. Lastly, we will showcase two novel supply dispersion metrics to evaluate the wealth distribution of dozens of assets relative to Bitcoin. 

The Genesis of Magical Internet Money

Bitcoin’s early history is an attestation to the novelty of a purely digital currency. Its earliest transactors were likely enticed by Satoshi’s post on the P2P foundation forum, where he first introduced the system. Back then, only the technically savvy were able or willing to continuously run a network node. Even fewer participants were able to properly custody their wallets, as that would require some understanding of PGP encryption as well as a ton of patience to deal with the inevitable bugs in Bitcoin’s first wallet (if you can even call it that). There wasn’t even an exchange rate for the earliest of adopters to begin to fathom valuing their Bitcoins. 

Coupled with the aforementioned technical complexity, the results of early experiments on Bitcoin were disastrous: there is an exorbitant amount of BTC that is believed to have been permanently lost during that period. Transactors, after all, treated Bitcoin as it was back then: a curious experiment of digital monopoly money

Perhaps no other time series better showcases the unserious nature of early Bitcoin than the chart below. It demonstrates how it took until nearly 2011 for Bitcoin transactors to start using decimals (green line) when sending BTC. Until then, all transactions used full units of BTC (purple line) as users experimented with sending full bitcoins to one another. 

This is evidence of the stark difference between Bitcoin and all cryptoassets that followed. Bitcoin set a precedent for the convertibility of a digital asset and fiat currencies, like the US dollar. As a result, early adopters of other cryptoassets assumed value from day one, as opposed to carelessly experimenting. Although it is obviously better for end users to have reliable custody and some idea of asset valuation from the get-go, that experimentation in Bitcoin ultimately led to an unmatched level of supply turnover.

A direct way to measure supply turnover is through supply velocity metrics. As covered in previous SOTN issues, velocity measures the amount of times an average unit of supply has been transferred. It is generally calculated by dividing supply transferred by the total monetary base. In order to provide a better representation of short-term turnover, the particular variation of velocity showcased below filters activity by supply that was active in the trailing 1yr (instead of using total supply). 

A key element of Bitcoin’s unmatched distribution are the clear periods of high supply turnover, showcased as cycles of increased velocity. Such cycles depict early adopters making way to new adopters who, when the time comes, make way to even newer adopters. In the past, Bitcoin’s ferocious price rallies have been a considerable driving force for supply turnover. 

Again, precedents are important. The lack of a successful precedent for Bitcoin made it so that Fear, Uncertainty and Doubt constantly tormented the minds of early adopters, and newer adopters provided a way out through the markets. 

Fair Distribution by Design

As mentioned in the introduction, a cryptoasset’s underlying technology is most definitely not the sole determinant of its intrinsic value. However, it is still an important factor to consider as it often plays an enormous role in the distribution of supply. Bitcoin solved a decades-long problem in distributed computing dubbed the “Byzantine’s General Problem”, which has to do with reaching consensus on the validity of a statement amongst untrusted parties. What is truly remarkable is that Satoshi’s solution not only addressed the issue of distributed consensus, but did so with an activity that intrinsically fosters monetary decentralization: mining.

By design, Bitcoin mining is an activity that pushes the forces of fair distribution. In order to be profitable, miners must operate on long time horizons as they have fixed operational costs. However, the BTC reward issued for this activity widely fluctuates as Bitcoin’s price carries high volatility. This nudges miners to carefully manage their treasuries and constantly sell their holdings for operational purposes   like paying for electricity, as well as strategic requirements like upgrading their hardware to remain competitive. This ultimately increases supply turnover.

Apart from the effective validation of Bitcoin transactions, this activity strengthens the network by increasing the cost to attack it. By its very nature, Bitcoin’s underlying monetary policy fosters competition as its inflation rate decreases over time with every halvening. Even though miners have consolidated and fully industrialized as time progressed, the sheer size of existing operations leaves less room for them to speculate, which pushes new supply to change hands. 

Crypto Assets and Wealth Inequality

Thus far, we have covered the fundamental factors that have affected Bitcoin’s supply distribution. Now it is time to assess the extent to which these factors differentiate Bitcoin from other assets. In economics, there is extensive literature on wealth inequality and supply dispersion metrics. Unfortunately, the cryptoasset industry has not converged on an equivalent set of metrics. We hope to change that, and have devised a new set of metrics to quantify wealth inequality across many cryptoassets.

Continue reading “Bitcoin: An Unprecedented Experiment in Fair Distribution” here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

It was a big week for Bitcoin (BTC) with market cap surging past $260B for the first time since January 2018. In addition to price, network usage was also up across the board. BTC active addresses grew by 17.9% week-over-week and averaged over 1M a day, after averaging only about 861K a day the previous week. Hash rate rebounded and grew 10.1% week-over-week after a precipitous drop likely caused by changing weather conditions in China. Daily transaction fees also continued to climb, averaging about $3M a day. Overall, the surge in usage and fundamental metrics is a positive sign that BTC is in a good position to continue its price growth. 

Ethereum (ETH) also had a big week, with release of the Ethereum 2.0 deposit contract which allows users to start locking up ETH in anticipation of Ethereum’s upcoming transition to proof-of-stake. The deposit contract will serve as a one-way bridge - once the funds are committed to the contract they cannot be subsequently unlocked and used on the main (Ethereum 1.0) chain. Therefore the supply locked into the contract is effectively taken out of circulation, at least until the launch of Ethereum 2.0. Once 524,288 ETH is locked into the contract Ethereum will launch Phase 0 of Ethereum 2.0, which will be a multi-year process aimed at exponentially increasing Ethereum’s scalability.  At time of writing, the deposit contract already holds about 49,500 ETH.

Network Highlights

On November 3rd an old Bitcoin address that had been dormant since 2013 suddenly came to life and transferred 69,369 BTC to an initially unknown destination. The transfer of almost 70K BTC was one of the largest single-day movements of dormant supply in Bitcoin’s history. The below chart shows the daily amount of BTC supply that has been revived after remaining inactive for at least five years. Since the initial transaction, it's been revealed that the address was tied to early darknet marketplace Silk Road, and that the BTC was seized by the United States Department of Justice. 

Source: Coin Metrics Network Data Charts

On November 4th the percent of BTC unspent transaction outputs (UTXOs) in profit topped 98% for the first time since December 2017. Every time a Bitcoin transaction occurs at least one UTXO is created. UTXOs represent coins that can be spent as inputs to future transactions. We consider a UTXO “in profit” if BTC’s price at the time of the UTXO creation was lower than BTC’s current price. Theoretically, this means that the UTXO’s owner can sell their BTC at a profit (assuming that their initial transaction represented a purchase price). A high percentage of UTXOs in profit potentially signals that there is relatively low sell pressure, since there’s low risk of capitulation. But conversely it could signal that some investors may soon start taking profits if the potential gains become too good to pass up. 

Source: Coin Metrics Network Data Charts

Decentralized finance (DeFi) is showing signs of life. After declining over the last few months, yearn.finance (YFI) transaction count hit a new all-time high of 11.3K on November 7th. With ETH pumping, DeFi could be in store for a resurgence, although it remains to be seen whether we will ever return to the days of peak DeFi mania. 

Source: Coin Metrics Network Data Charts

Market Data Insights

We have rapidly reached levels over the past month not seen since late 2018 and are closing in on all-time highs. Bitcoin moved ~$2,000 week-over-week with a close of $15,483. The high for the week reached over $16,000 on some exchanges. 

Source: Coin Metrics Reference Rates

But the macroeconomic backdrop shifted a bit over the weekend. With the recent results from a Pfizer vaccine for COVID-19 and the “blue wave” not coming to fruition, the magnitude of future fiscal stimulus via central bank policy appears to have decreased. On Monday the markets reacted by punishing inflation hedges when money moved from safe havens to risk-on assets, sending gold down 5% for its worst day since August. Bitcoin ended the day down roughly 1%.

Source: TradingView.com

CM Bletchley Indexes (CMBI) Insights

It was an incredible week for all CMBI and Bletchley Indexes with most indexes returning above 10%. The CMBI Ethereum was the strongest performer, gaining momentum after the announcement of the Ethereum 2.0 staking contracts and closing the week at $451.79, up 14.9%. The CMBI Bitcoin also performed strongly, adding to its impressive run of 5 consecutive positive weekly returns, up 11.3% to $15,400.29.

The small cap assets showed a strong reversal after several weeks of negative returns, increasing 11% for the week. The mid caps performed well against the USD, increasing 4.5%, but underperformed the rest of the market.

Source: Coin Metrics CMBI

The CMBI Bitcoin Hash Rate reversed its consecutive down weeks after a difficulty adjustment last week. The index closed the week up 13%, spending most of the week in the 115-130 exahashes per second range.

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 75

Tuesday, November 3rd, 2020

Weekly Feature

Following Flows: A Look at Miners’ On-Chain Payments

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.

Key Takeaways

  • Using a new methodology that looks at addresses one hop out from the coinbase transaction, this report quantifies miner holdings and activity. This approach improves on previous attempts at tracking miner spending, which inadvertently measured pool operator activity rather than miner behavior.

  • Miners accumulated an additional 318,000 BTC in the year leading up to the halving, from trough to peak.

  • With supply held by miners gradually decreasing and net flows from their addresses stabilizing, miners appear to be exerting less influence on the network.

  • Miner flow and supply metrics will be made available in the upcoming version 4.8 release of Network Data Pro.

Miners and Markets

In addition to their role in securing the network, miners have a profound effect on Bitcoin’s market dynamics. Because they can receive newly issued bitcoin rather than buying it, miners are natural net sellers of the asset. This effect is further compounded by the fact that miners’ operating expenses, chiefly electricity and rent, are primarily fiat-denominated, while their revenue is earned in bitcoin.

Using previously-unavailable data on accounts that have interacted with these addresses, this feature examines miners’ activity, assessing the drivers and impacts of their spending.

While on-chain data indicates miners’ influence on the network is gradually decreasing, they remain key players in the ecosystem with access to large amounts of capital. To help our users understand these actors, Coin Metrics is making a broad slice of miner-related data available in the upcoming version 4.8 release of Network Data Pro. Using this data, this feature finds that the supply held by miners has generally decreased over time and that the flows of funds to and from miners and pools have been dampened by the network’s successive halvings.

Summarizing Supply

To calculate miner flows, we begin by aggregating all addresses that have received payment from a coinbase transaction and labeling those as 0-hop addresses. All the addresses in this set, along with those that have received payment from an address in this set, are then tagged as 1-hop addresses.

Because of how mining pool wallets are typically structured, with pools initially receiving the block reward and only later distributing it to miners, 0-hop addresses generally represent mining pools and 1-hop addresses generally represent miners. For this reason, existing systems that attempt to extrapolate miner behavior from the spending habits of 0-hop addresses are theoretically unsound and do not measure what they purport to. Instead, they measure pool operators’ activity.

Admittedly, tagging miners and pools based on distance from a coinbase transaction is an imperfect technique. This is especially true when the methodology is applied to the early network, in which solo mining and alternative pool models were more popular. Because the first mining pool, Slush Pool, mined its first block in December of 2010, measurements from before this date in particular should only be used for reference. Furthermore, miner addresses that have not received funds from a 0-hop address will not be tagged. All told, though, this heuristic represents a significant improvement over the current state of the art and should accurately capture broad trends.

Miners, especially those active in the network’s early days, control a significant amount of bitcoin. The number of coins held by both 0-hop and 1-hop addresses has generally declined throughout the network’s history. H2 2019 and H1 2020 saw a significant reversal in this trend in the run up to the halving, however, with miners accumulating an additional 383,000 BTC from trough to peak. This effect was primarily confined to 1-hop addresses, with 0-hop supply remaining roughly flat—the bulk of this accumulation would therefore have remained undetected by previous estimation techniques. 

Several jumps in the supply held by miners are visible. These spikes are typically caused by addresses with significant balances mining their first block or making their first interaction with a previously-tagged 0-hop address. The most prominent of these jumps occurred on August 16, 2012, when a whale holding over half a million BTC received part of the coinbase reward for block 194,256. New entrants were also responsible for the increase in miner-controlled supply before this year’s halving.

Due to inflation, the gradual reduction in supply held by miners and pools is even more significant when viewed in the context of total supply. This decrease is in line with a general increase in bitcoin’s supply dispersion. It's also consistent with more widespread adoption of the pool model, which implies that non-mining addresses are becoming less likely to be superfluously tagged as 1-hop addresses.

Even today, though, miners and pools control a substantial chunk of the total bitcoin supply.

Pools and Payments

The flow of funds to and from these groups is another potent on-chain signal. Because pools are typically the immediate recipients of coinbase rewards, 0-hop flows are a useful indicator of mining pool activity. With the exception of several spikes, the most notable of which is attributable to the aforementioned whale, 0-hop inflows and outflows have both trended downward in BTC terms since the early days of the network.

Continue reading “Following Flows: A Look at Miners’ On-Chain Payments” here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) network metrics had a mixed week. BTC transaction fees broke out this past week, growing 123.3% week-over-week and averaging close to $3M per day. BTC had almost twice the amount of total fees as Ethereum (ETH) this past week, reversing the trend of the last four months.

But other BTC metrics dropped. Most notably, hash rate dropped by 18.2% week-over-week after it almost reached new all-time highs just a few weeks earlier. Block production slowed as a result of the hash rate drop, which led to a drop in the overall amount of transactions and transfers. For more about this and the reasons behind the sudden drop see today’s Network Highlights section.

One other thing to note: USDC had over $11B of transfer value (adjusted) on October 26th,  smashing its previous all-time high of $2.11B. However the huge spike was likely due to the recent Harvest Finance exploit, which involved a series of USDC flash loans. 

Network Highlights

On October 29th and 30th BTC median transaction fee reached over $7, its highest level since January 2018. While there are many factors at play, the median fee spike is an interesting example of how weather conditions in a specific region of the world can have a ripple effect across the entire Bitcoin network.   

Source: Coin Metrics Network Data Charts

From October 24th to 28th Bitcoin’s hash rate suddenly began to fall, dropping by about 35% in total. Hash rate often fluctuates but this was a particularly large drop, especially considering that price was simultaneously rising which typically attracts more miners to the network.

Although it’s difficult to pin down the exact cause of the drop, the leading theory is that it was related to the end of the rainy season in southwestern China. During the wet season there’s excess water which is used for hydro energy, resulting in relatively cheap electricity. But when the weather dries up many miners are forced to move their operations to different locations in search of cheaper electricity. 

The sudden drop in hash rate caused the average time between new Bitcoin blocks to shoot up its highest levels in years. Less hash rate devoted to finding new blocks means that less blocks are produced. The following chart shows hash rate (left hand axis) vs mean interval between blocks in seconds (right hand axis) smoothed using a 7-day rolling average.

Source: Coin Metrics Network Data Charts

While block production slowed, incoming transactions did not. However, there was suddenly less block space to process the incoming transactions, due to the decrease in hash rate. This led to a large surge in the amount of unconfirmed transactions in the Bitcoin mempool. Despite the mempool surge, the on-chain transaction count dropped, as a much larger proportion of those transactions were stuck pending in the mempool waiting for some open block space. 

Source: Coin Metrics Network Data Charts

All together, this led to the surge in BTC transaction fees. Paying a higher fee leads to a higher chance that miners will prioritize the transaction and include it in a block. With block space at a premium, users were willing to pay higher and higher fees to try to get their transactions confirmed in a timely manner.

If the hash rate drop was truly caused by migrating Chinese miners we should see hash rate bounce back up in the upcoming weeks as operations get back up and running. It will be interesting to monitor moving forward, especially as more and more miners move to frontier markets like Iran, which are less weather-dependent.

Market Data Insights

Bitcoin (BTC) was clearly the main narrative when we look back on the month of October. BTC boomed following the narratives of inflation fears, election hedges, and the parade of companies moving some portion of their balance sheet into the asset class. BTC ended the month up ~30%, which puts it just under one standard deviation of monthly returns from the mean of 31% over the past 5 years.

Source: Coin Metrics Market Data Feed

In terms of absolute U.S. dollar moves, October was a notable close. With a gain of $3,194 from Oct. 1 to 31, there has only been 1 month in the last 5 years with a larger move. That month was December 2017, where Bitcoin moved $3,432 from $10,711 to $14,149. This gives the recent move some valuable context. 

One of the reasons that this recent move feels ‘healthier’ is the relatively low levels of realized volatility. Even though the 30 day moving average recently moved back up following last week’s price action, it still remains below the 50 mark and continues to trade in a historically low range.

CM Bletchley Indexes (CMBI) Insights

Again this week was characterized by the strength in large cap assets, in particular Bitcoin. The CMBI Bitcoin was the strongest performer of the CMBI and Bletchley Indexes, closing the week at $13,832.05, up 6.1%. The CMBI Ethereum did not fare as well this week, closing down 3.6% at $393.23. 

Bitcoin’s strong performance resulted in losses across the rest of the asset class, evidenced by the negative performance of all of the multi-asset indexes that do not have Bitcoin as a constituent. 

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 74

Tuesday, October 27th, 2020

Weekly Feature

Fundamentals Show Bitcoin Is Poised for Takeoff

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.

On October 21st Bitcoin (BTC) broke out, rising by about $1,000 on the day. Since then it has topped $13,000 and set new 2020 highs. 

For crypto veterans this is a somewhat familiar story. BTC is notoriously volatile and has had many crazy price swings throughout its history. 

But something is different this time around. Ever since the March crypto crash, BTC has been growing in ways that we have not seen in previous bull runs. On-chain fundamentals hint that it could be poised for its biggest breakout yet. 

Source: Coin Metrics Network Data Charts

Digital Gold

BTC has had a low correlation with both gold and the U.S. dollar throughout most of its history. But things changed on March 12th. As panic over COVID-19 rapidly set in, equities around the world crashed. Crypto went down with the rest of the markets, with BTC and ETH price both dropping about 50%. Since then, BTC’s correlation with gold has been near all-time highs while it’s correlation with the dollar has been at all-time lows. 

Source: Coin Metrics Correlation Charts

BTC has often been referred to as digital gold, and evidence is increasingly supporting that claim. In the past few months public companies such as MicroStrategy and Square have announced that they are buying and holding BTC as a treasury reserve asset. Additionally, on-chain data shows that since March 12th BTC holding (aka HODLing) has increased while price has risen, signaling that BTC is increasingly being used as a store of value, similar to gold. 

One signal of on-chain holding is the percent of supply held for at least one year (or in other words, the percent of supply that has not been moved on-chain as part of a transaction). As of October 25th about 62.5% of the total BTC supply had been held for at least 1 year, which is close to all-time highs. Historically, the percent of supply unmoved for at least 1 year has peaked during periods where price has been at local lows, as seen in the below chart. 

Source: Coin Metrics Network Data Charts

BTC’s velocity is also at its lowest levels since 2011. Velocity measures the amount of times an average unit of supply has been transferred in the last year. High velocity means relatively high turnover.  A decreasing velocity suggests BTC is trending towards being used as a store of value as opposed to a medium of exchange. 

Source: Coin Metrics Network Data Charts

Increasing Holders

There also appear to be more holders than ever. The number of addresses holding at least $100 worth of BTC hit a new all-time high of 9.74M on October 22nd. A single person or entity can control multiple addresses, so this only shows an approximation of usage. But the trend suggests that the amount of BTC holders is increasing, which is a positive signal for BTC’s long-term adoption.

Source: Coin Metrics Network Data Charts

BTC supply is increasingly being moved off of centralized exchanges, and presumably held by individuals. While there are many factors involved in exchange supply, this could signal that more and more BTC investors want to hold and custody their own BTC. As the old saying goes: not your keys, not your Bitcoin.

Continue reading “Fundamentals Show Bitcoin Is Poised for Takeoff” here

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Bitcoin (BTC) on-chain metrics were overwhelmingly in the green this past week, driven by price reaching 2020 highs. BTC active addresses increased by 5.8% week-over-week and transaction fees exploded, increasing by 82.5%. Additionally, transfer sizes are growing. Adjusted transfer value grew by 46.7% while transfer count only grew by 0.7%. 

Hash rate was the one outlier. After recently hitting new all-time highs, BTC hash rate dropped by 7.9% on the week. However the recent price and translation fees surge should incentivize more miners to join the network, driving hash rate back up in the near future. 

Network Highlights

On October 22nd BTC’s average transaction fee shot up to $6.35, eclipsing ETH’s average fee of $1.69. ETH average transaction fee was higher than BTC’s for most of September, after ETH transaction fees exploded over the summer due to the rapid rise of DeFi. But the momentum has shifted back towards BTC. 

Source: Coin Metrics Network Data Charts

Although DeFi mania has subsided, Ethereum ERC-20 tokens are still on a hot streak. ERC-20 token transactions have continued to surge in October after a strong September. The following chart shows ERC-20 token transaction count smoothed using a 7-day rolling average. 

Source: Coin Metrics Network Data Charts

Market Data Insights

There have been some shifts in market structure since OKEx suspended digital currency withdrawals 11 days ago. Traders who have funds locked in the exchange have been continuing to trade. However, there are some signs of stress that can be seen in a number of key markets. 

The distribution above is truncated to +/- 0.02% to highlight the slight shift.

Source: Coin Metrics Market Data Feed

One sign that traders are looking to reduce risk in their OKEx accounts is the recent premium given to USDT in the BTC market relative to its peers. This can be observed in the BTC-USDT market when comparing the volume weighted average of BTC’s Price in the 10 days before and after the suspension of withdrawals. The median discount given to BTC increased from -0.00089% to -0.00187%, an increase of ~110%.

Source: Coin Metrics Market Data Feed

The quarterly futures contract for BTC expiring in December also showed some temporary stress. Following the announcement, open interest declined by roughly 20%. However, when BTC saw positive price action later in the week, the spread between the futures contract and spot increased causing additional interest to be opened by traders looking to take advantage of the difference. 

Data above as of UTC close on 2020-10-25

This is notable as even though spot BTC is trading at a discount, it appears that the quarterly contract is trading at a premium to other exchanges. This is likely due to reluctance traders may have about bringing additional capital on the exchange to sell the futures contracts down. However, to traders confident in the ability to withdraw funds in the future, this may appear as a great opportunity.

CM Bletchley Indexes (CMBI) Insights

The market was once again led by the large cap assets this week, in particular Bitcoin which continued to capture headlines as more institutional investors and public companies build direct or indirect exposure to the asset. The CMBI Bitcoin Index was the best performer of the week, closing up 13.9% at $13,039.03, its best week since May. The CMBI Ethereum performed strongly as well, closing at $408.00, up 8.56% for the week. The small cap assets again performed the weakest during the week with the B40 being the only index that finished the week down.

Source: Coin Metrics CMBI

The CMBI Bitcoin Hash Rate spent most of the week up, before falling over the past 24 hours to finish the week down under 120 exahashes per second. Despite the increased difficulty last weekend which may have indicated a slowdown in hash rate throughout the week, marginal miners seemed to have found some renewed profitability with the increase in Bitcoin’s price. 

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.

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