Coin Metrics' State of the Network: Issue 89
Tuesday, February 9th, 2021
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Weekly Research Focus
Tesla announced a $1.5B purchase of bitcoin on Monday, less than two weeks after Elon Musk added #bitcoin to his Twitter bio. The large buy adds Tesla to the growing list of public companies buying and holding bitcoin (BTC) in their treasuries. BTC price jumped up to over $44,000 following Tesla’s announcement, a new all-time high.
Source: Coin Metrics Mobile App, BTC Reference Rate for February 8th, 2021
Large institutions have increasingly been purchasing BTC since Q4 2020 and it appears that trend will only accelerate from here. Tesla’s high-profile endorsement will likely cause many other companies to start considering purchasing BTC.
The announcement also comes on the heels of MicroStrategy’s Bitcoin Summit conference which focused on the benefits of holding bitcoin as a treasury asset and catered to a largely institutional audience. During the conference, Ross Stevens revealed that his bitcoin-focused firm NYDIG currently has over $6B in AUM from institutional investors and is confident they will have over $25B by the end of the year.
There’s also evidence for a growing amount of institution-sized investors on the Bitcoin blockchain. The following chart shows the percent of total supply held by addresses holding specific ranges of BTC. Starting from the bottom of the chart up, the yellow band represents the percent of supply held in aggregate by addresses holding 0-1 BTC, the blue band shows supply held by addresses holding 1-10 BTC, and so on.
The amount of supply held by BTC addresses holding institution-sized amounts (between 1K and 10K BTC) has increased significantly since late 2020. This group of large addresses now holds about 30% of total BTC supply. Simultaneously, addresses holding between 10 and 1K BTC have been losing supply. On the other hand, addresses holding between 0 and 10 BTC have been gaining supply share since mid-2020, indicating that retail-sized investors are accumulating along with institutions.
Ether (ETH) also reached new all-time highs on Monday following Tesla’s announcement. Monday’s surge followed a rally at the end of last week that saw ETH break through $1,700 for the first time. Although Tesla did not announce any ETH allocation, evidence suggests that institutions are finally starting to buy and hold ETH. In their recently published 2020 Year In Review report Coinbase revealed that “ a growing number [of institutional clients] also took positions in Ethereum” over the course of the year.
Addresses holding large amounts of ETH are starting to show similar growth to addresses holding large amounts of BTC. The following chart shows the number of addresses holding at least 1K BTC compared to the number of addresses holding at least 10K ETH (shown on the right-hand side).
Monday, February 8th also marked the launch of ETH futures on the Chicago Mercantile Exchange (CME), the world’s largest financial derivatives exchange. CME futures give institutional investors a way to get exposure to ETH derivatives, both long and short. CME’s launch may potentially accelerate ETH inflows into Grayscale’s Ethereum Trust (ETHE) - investors can buy into the Grayscale Trust while simultaneously shorting ETH, remaining market neutral and pocketing the ETHE premium. Grayscale’s Ethereum trust does not currently have a method for withdrawing ETH so it effectively serves as a large token sink for ETH.
But as ETH prices have grown, so have fees. ETH transaction fees are hitting new all-time highs even compared to the DeFi-driven highs set during August and September. The average ETH transaction fee reached $25.80 on February 5th, its highest level ever. The median transaction fee topped $14.32.
High transaction fees are increasingly becoming a problem for those trying to use the Ethereum network. Use cases like trading on decentralized exchanges, locking funds into DeFi apps, and transferring NFTs are becoming prohibitively expensive for users who do not want to pay excessive fees.
Over the summer the number of daily active addresses dropped off as fees spiked. Smaller players were likely priced out as fees began to rise. But so far in 2021 Ethereum usage has remained high despite the high fees. Since January ETH active addresses have stayed relatively high, averaging between about 550K and 600K a day.
But there are also signs that the network is becoming too expensive for smaller holders. ETH’s median transfer value has risen to an average of about $312, higher than September 2020’s peak of $268. While still well below the all-time highs of January 2018, this is the highest median transfer value in years.
High fees are a double-edged sword. They show that there’s huge demand for block space but also threaten to grind the network to a halt as users become priced out.
Ethereum has a large lead over the other smart contract platforms but high gas prices will be a large stress test for the network. High fees put pressure on Ethereum application developers to quickly figure out ways to help increase scalability and decrease fees. Uniswap, Synthetix, and others are already hard at work on integrating Layer 2 solutions like Optimistic Rollups to help ease congestion.
Ultimately, this could be an important inflection point for Ethereum. If fees remain high there’s a risk that some developers and users start leaving for other blockchains. But if Ethereum app developers are able to deliver better scalability Ethereum’s lead could accelerate, putting it further out of reach of competitors.
Network Data Insights
BTC and ETH on-chain metrics were in the green across the board this past week. BTC market cap grew by 12.9% week-over-week, while ETH market cap grew by 19.6%. BTC and ETH realized cap also grew by 3.3% and 12.8% respectively, as both continue to set new all-time highs. The increase in price and fees have been beneficial for miners. Bitcoin mining revenue increased 20.3% week-over-week, for a daily average of $40.4M. Ethereum mining revenue increased by 54.7%, for an average of $45.7M per day.
ETH’s on-chain transfer value has topped BTC’s. ETH’s adjusted transfer value reached over $19B on February 4th, its highest level ever. The following chart shows the 7-day average ETH transfer value, adjusted to remove self-sends and other noisy behavior.
The new all-time high is due to a huge surge in the amount transferred by Ethereum smart contracts. Automated transfers are used heavily in DeFi and other decentralized applications.
The surge in transfer value on February 4th may have been slightly exaggerated due to a complex exploit used to drain funds from yearn.finance. But despite the anomaly, transfer value remained high in the days before and after the 4th.
As prices surge, on-chain activity has been growing throughout crypto. But BTC and ETH still remain dominant compared to the rest of the largest assets by market cap. BTC and ETH each have more daily active addresses than XRP, XLM, LINK, LTC, ADA, BNB, and DOGE combined.
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/
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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.
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