Great Takes: Arguments for Bitcoin’s Direction
ZUBR Commentary
The latest market intel report out of Chainalysis posits potential price weakening of Bitcoin as exchange inflows balance and that “bitcoin for sale is exceeding bitcoin being bought.” By their own ‘BTC Trade Intensity’ metric, the blockchain analytics firm finds that trading is relatively weak relative to supply.
Following on a previous report, Philip Gradwell, Chainalysis’ Chief Economist, writes that Ethereum has morphed into a different type of asset than Bitcoin. While Bitcoin has the characteristics of an investment asset, Ethereum proves to be more liquid as the cryptocurrency develops more extensive decentralized infrastructure in finance, a pivot away from the investment thesis seen during the ICO craze.
“That bitcoin has become more illiquid while Ethereum has become more liquid clearly illustrates the different roles they play in the cryptocurrency ecosystem, with bitcoin as digital gold and Ethereum as the technology for new experiments in money / distributed meme generation.”– Philip Gradwell, Chainalysis’ Chief Economist via https://markets.chainalysis.com/
CoinDesk argues differently in their article “Bitcoin Balances on Exchanges at 2-Year Low and That May Be a Bullish Sign.” Digital Assets Data CEO Mike Alfred was quoted by the publication saying “”Why would you be selling when you’re at the beginning of a wave of potential corporate treasuries and institutional investors coming in?” The argument could hold when looking at large asset management firms such as Grayscale, who have seen record inflows year-on-year from institutional investors and high net worth individuals who would rather deal with a simple over-the-counter trust than to go through the custody of the asset.
Meanwhile, data aggregated by Messari shows that Bitcoin has hit a new record of holding its daily close above the $10,000 level for 63 days in a row. (More info at CoinDesk)
On the longer-term horizon, Ark Invest alongside CoinMetrics has put forward arguments that markets are currently grossly undervaluing Bitcoin’s value. The duo’s two-part report believes that the market capitalization of the cryptocurrency could reach $3Trillion by 2025.
But there is a big ask for this to become any reality. Displacing current international payment systems would be the main driver. This would clash with Chainalysis view (see above) that Bitcoin is more of an investment asset, while Ethereum is developing the underlying toolset to achieve this. Ark, though, also argues that Bitcoin can eat away at gold’s market share for store-of-value assets. Theoretically — both arguments are correct in terms of positioning and technological potential.
But both Bitcoin and Ethereum still suffer from scaling issues that would scupper any such hope. Lightning and Eth2.0 remain in heavy development with timeframes murky at best.
Two Birds, One Bitcoin?
The cryptocurrency industry remains ingenious with strong efforts to utilize the best of all worlds. And by worlds, we do mean Bitcoin and Ethereum together. Dune Analytics shows over 116k Bitcoin wrapped on-top of Ethereum across multiple protocols with different custody setups. Ultimately, its Bitcoin engaging on another blockchain that has a more considerable development on the financial front. And nearly half the supply of Bitcoin on Ethereum sits on Decentralized Finance (DeFi) networks.
Total Locked Value on DeFi networks, according to DeFiPulse is at a whopping $11bn at the start of this week.
Omid Malekan, an industry veteran who has consulted Citi Ventures on Blockchain development, has his own take on DeFi. According to Mr.Malekan, valuations of protocols might face a reverse order as decentralized protocols get replicated. “The only lasting value any DeFi solution could have comes from the messy and more centralized stuff that you can’t just copy and paste, such as business development, VC backing, and human talent.”
There are the ins and outs of this, of course. GlassNode has taken an in-depth look to answer whether or not the most popular decentralized exchange is in fact, decentralized. The blockchain analytics firm argues for more transparency for the token driving the protocol as investors, advisors, and the team will have 40% of the total allocation. This means governance could potentially be entirely at their behest. The argument then put forth by Mr.Malekan would make this a bullish sign.
Institutional Option: Bitcoin
While activity on Ethereum might be high, it remains a far cry to Bitcoin in terms of trading demand on the global stage. Part and parcel is the fact that only Bitcoin futures exist on institutional venues such as CME and Bakkt. Both futures on CME and Bakkt are hitting new records of trading volumes (see our upcoming research by following us on Twitter or Telegram for notification)
Institutional Outlook: Who Knows…
Last week, ZUBR flagged a divergence in Bitcoin’s correlation to the S&P500, gold, and the US Dollar Index (DXY). While correlations for both are near all-time-high, there is a potential for incoming divergence. The cryptocurrency has gone from very closely correlated to the S&P500 after the global market crash of 2020 and shifted to gold in recent months. Previous cross-overs have proven to be bullish for Bitcoin.
But there could be a catch. With the US Dollar gaining strength, gold is weakening. And Goldman Sachs believes that the dollar’s upward pressure is unlikely to slow unless global economic outlook turns as the world still fights of COVID. How will Bitcoin react?
