Market Cycle Analytics: Blockchain User Activity Bottom?
Many are calling the recent weeks a price bottom. Prices aside, another important metric to follow is user activity to determine blockchain adoption. Have we found the active blockchain user bottom? Or will we see more attrition?
When trying to determine the bottom of a market, the price of an asset is often the first place one turns to determine if they can start to be bullish again. Price analysis is most used first and foremost because people who have invested in crypto are often trying to calculate their ROI to see if it is a profitable investment or not. While price is important to assess for most assets (including crypto), it is not the only metric to look at when determining the bottom of a market of a new technology such as blockchain.
A second metric to look at when working with a new technology The adoption of new technologies ebbs and flows with the market (especially when financial incentives are tied to it) and it is equally important to track the bottoming out of users for a technology in the market.
Importance of User Activity
User activity is a key metric to track to evaluate the adoption of any new technology. Similar to prices, it is good to observe higher lows during each market downturn, indicating that adoption is occurring and that in each cycle there is a new cohort of “sticky” users that will continue using the technology through its most difficult growth periods. This is critical because as one would imagine for a technology like blockchains, if users drop to zero, prices will follow.
Deciding the best metrics to use as a proxy for user activity is less clear cut compared to prices, but there are several good candidates that can be pulled from on-chain. The metric we will use today is the Daily Active Addresses indicator that IntoTheBlock tracks on its analytics app. This metric tracks how many addresses have made one or more transactions in a given day, which gives us a general idea of how many people are interacting with the blockchain on a regular basis. While there are caveats to this metric and it can’t be assumed that each address translates into one person (people will often have multiple addresses), a modest assumption can be made that over longer time periods, increases in daily active addresses translates to an increase in users of a given blockchain. Additionally, while there are many users that only transact on centralized exchanges, we are trying to determine the adoption of the blockchain technology itself. Therefore, the users that are buying crypto on centralized exchanges, have not yet made the full leap into the blockchain.
Activity Across Chains
Since we are interested in the health of the blockchain ecosystem as a whole, a good measurement of user activity is to look at the active addresses on each chain’s native token. Since nearly all transactions on a chain will pay a gas fee in the native token, these transactions are a good proxy for how many users are interacting with the blockchain on any given day.
Looking at some of the most active chains (Ethereum and Bitcoin) daily active address history over the last bull run, we start to see that the top signal of active addresses was during the first leg of the bull run that reached all time highs (ATH) in May of 2021. If we mark the beginning of the COVID pandemic (around the March 2020 flash crash) as the beginning of the bull market, we can start to compare the increase of active addresses that have remained in the market.
For Ethereum and Bitcoin, there was a clear drop off in daily addresses, after the May 2021 ATH for prices. The active addresses stabilized quickly and have been at consistent levels since then. Comparing pre-March 2020 active addresses with the current levels, we see around a 36% increase in active addresses for Ethereum (~327k addresses on March 8, 2020 compared to 514k addresses on December 1, 2022). Bitcoin has seen more modest gains with about 20.6% increase in active addresses (826k on March 9, 2022 compared to 1.04M on December 1, 2022).
The increases in new active addresses since the price ATHs in November of 2021 are promising. Even with the chaos in the markets in 2022, the number of active users has remained relatively stable over the last year. This could indicate that we are at or near a market cycle bottom for active addresses and therefore at or near the bottom of user attrition.
Compared to the Previous Market Cycle
To better establish the user adoption trend, we will also look at the active addresses for Ethereum and Bitcoin from the last market cycle. Zooming out on the active address charts, it is clear that the trend is moving upwards. Ethereum has clearly seen significant gains in active addresses from the beginning of 2017 until now. However, both with Ethereum and Bitcoin, the increase in active addresses has slowed between the two cycles. This could indicate that as of now, there are a diminishing number of people that are at all interested in blockchain technology that aren’t already using it.
The diminishing growth rate in active addresses could potentially signal two possibilities. The first is that a true breakthrough use case that is scalable both technically and in popularity has yet to occur. The second is that the blockchain user experience is still not easy enough to use for the mass adoption we have all been waiting for.
Conclusion
While prices may drop further as active users in crypto try to preserve their capital by keeping the bulk of their assets sidelined, there are substantially more people using crypto now than before the last bull run. Barring a black swan event, It seems that we have found what resembles a bottom for active addresses. Furthermore, the trend seems to be that each market cycle is bringing in more users who decide not to leave once the bull market price frenzy dies down. As the meme goes, if you are in it for the tech, this is a promising outcome that could suggest mass adoption in due time. However, when looking at the increases in active addresses over a longer timescale, the growth rates are tapering off. This suggests that there is a finite group of people currently interested in the technology, and most of these people are already active users. This could mean that without a larger breakthrough into the mainstream, through a scalable use case or improved ease of use, blockchain technology might be arriving sooner than expected at its max user capacity.
One thing is clear, we are still early.
