Coin Metrics' State of the Network: Issue 139
Tuesday, January 25th, 2022
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Crypto Follows Global Markets Lower to Start 2022
At the beginning of 2021, bitcoin (BTC), ether (ETH), and the broader crypto market were riding high buoyed by institutional adoption and accommodative macroeconomic trends. However, one year later and in a different macro environment, January 2022 has started off in the opposite direction for most crypto assets.
Given the timing in January, it might be tempting to compare this recent bout of volatility to previous cycles in crypto assets’ history such as 2018. Yet, over the last year the macro environment has changed significantly and crypto assets are increasingly tied to price movements of other assets, such as stocks.
Stocks have fallen along with crypto assets as global markets adjust to the Federal Reserve’s more aggressive stance. As of market close Monday, the NASDAQ Composite Index stood at around 13,855, falling close to 12.5% in 2022 so far. Mechanically, higher interest rates tend to dampen demand for riskier assets that have an uncertain future payout that must be discounted back to the present like high-growth tech stocks.
Looking at returns for the S&P 500 Index and BTC over the last 6 months, the two have been tracking very closely with a correlation coefficient nearing an all-time high at 0.35. The change in the macro environment has had a negative impact on virtually all major markets, and assets perceived as high-risk such as tech stocks and crypto have been particularly hard hit. This differs from the 2018 crypto crash, which did not coincide with a major crash of tech stocks or other equities.
Subtly, markets tend to react not to interest rate increases themselves but to expectations about the future course of policy. As the Fed has shifted its language and announced quicker-than-expected plans for raising rates, markets are incorporating this new information. At best, this might mean the worst has already been priced in, all else being equal.
Interest rates on US Treasuries have shifted higher, reflecting the Federal Reserve’s intentions to raise interest rates and fight off inflation. One of the best ways to visualize changes in interest rates is looking at the yield curve. The yield curve shows the available interest rate for bonds at different maturities. The chart below shows the yield curve for US Treasuries on two different dates: January 4th, 2021 and January 21st 2022. Interest rates, especially in the shorter term, have moved up compared with last year as markets have reacted to the Fed’s announcements surrounding likely rate hikes in the near future.
Most of the shift upward has come in the last few months, as the Fed started adjusting its stance to the public.
But while the macro picture darkens, some on-chain indicators are reaching points that historically have signaled market-cycle lows. One historically helpful on-chain indicator is market value (free float market capitalization) to realized value (realized capitalization) which is commonly referred to by its acronym of MVRV. To read more about on-chain indicators and how to better interpret MVRV, check out our on-chain indicators primer here.
A MVRV of over 3 has generally marked local highs while a value under 1 has tended to coincide with low points in past market cycles. BTC’s MVRV now stands at a relatively low 1.16.
However it’s important to note that an indicator’s past success does not guarantee its future reliability. Additionally, there have been several occasions where MVRV has dropped well below 1.0, including March 2020.
In another potentially positive sign, much of Bitcoin’s supply has remained untouched in recent months, likely indicative of long-term holders’ conviction through downward price movements.
BTC age distribution bands, also known as “HODL waves,” help to show this by grouping BTC’s supply by the time since it last moved on-chain. HODL waves give a macro view of how BTC’s supply has shifted over the years. Just about 60% of BTC supply has been dormant over the last year, having last moved over one year ago (light green band of 1-2 years up to coins that have never moved in purple).
But outside of indicators, there are other signs on-chain that crypto adoption is still humming along, undeterred to short-term price deviations.
The number of addresses holding relatively small amounts of BTC and ETH continues to push higher. The count of addresses holding between 0.01 and 1 ETH (charted on the right-hand side below) recently crossed a milestone of 20M, as activity related to NFTs continues to surge on the network. This is more than 2X the 9.8M such accounts on January 1st, 2021. Similarly, Bitcoin addresses holding between 0.001 and 0.1 BTC have increased from ~13.5M to ~16M since the beginning of 2021.
Finally, it is important to note that builders are pouring into the crypto ecosystem, with recent data collected from GitHub pointing to thousands of new entrants to crypto research and development in recent months.
With projects moving forward on exciting developments in areas such as layer-2 (L2) solutions, 2022 is still poised to be a breakout year for crypto adoption and growth regardless of short-term price action.
Network Data Insights
On-chain usage fluctuated over the past week as the crypto markets continued to tumble. ETH transactions declined by 4.4% week-over-week. But adjusted transfer value grew by 33.6%, likely due to an increase in trading volume. BTC transfer value also had a significant bump up, growing by 26.4%. Stablecoin activity increased across the board as more investors moved to safety - USDC active addresses increased by 23.6% week-over-week compared to a 8.8% increase for Tether (USDT).
Check out our network highlights below:
Coin Metrics Updates
This week’s updates from the Coin Metrics team:
Check out our market-data focused newsletter State of the Market, featuring weekly updates on market conditions.
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