FUTURE OF DIGITAL ASSETS

Bitcoin, Ethereum & Tether are leading the Crypto charge

Cryptocurrency prices have been on the rise for the past few weeks. The march higher has been led by Bitcoin (BTC), the premier digital coin. Any significant price movement in BTC usually shapes the whole crypto market as it accounts for about 60% of the market cap of all the digital assets. It has actually been 12 weeks since the bitcoin price has been above $10k — longer than the 11 week period above $10k — from late Jun. to late Sep. 2019, and one week away from the 13 weeks, where the price was above $10k during the late 2017 bull market.

This year, Bitcoin has assumed a higher correlation with the U.S stocks ever since the pandemic lockdown ensued, earlier in March. Although this means that the digital asset has started to behave more like a mainstream financial asset, for the proponents of it being a store of value and hedge against risk were left stranded. However, the most recent decline in stocks was not accompanied by a similar move in Bitcoin — pointing to signs of decoupling of the months-long relationship.

The lilac line in the chart below marks periods when the S&P 500 is down but Bitcoin is up and it just spiked (Figure 1). Still too early to say whether the stocks will continue to fall as BTC rises, but the move highlights the fact that the digital asset can certainly act as a hedge against risk, similar to what gold does when Equities fall. At the time of publishing, BTC is trading just shy of $12,000.

Figure 1

2020 has seen cryptos develop specific use cases. The top 3 cryptos — namely Bitcoin, Ethereum & Tether have certainly shown that, helping move the digital assets out of the purely speculative category to asset-specific use cases. This would mean less correlation among each other in the future, with investors having digital assets in their portfolios having to actively manage them.

  • Bitcoin (BTC) — pioneer crypto acting as a digital store of value for hedging against risk & offering price volatility for active traders.
  • Tether (USDT) — a premier stable coin that also stores the value sans the price volatility since it is pegged to the US dollar.
  • Ethereum (ETH) — the first smart contract platform which has lately been used primarily in DeFi (decentralized finance), rather than being held as a passive investment.

BTC & ETH Inflows to Exchanges

Figure 2 — Chainalysis Market Intel

According to the Chainlysis Market Intel, investors are not sending large amounts of bitcoin and Ethereum to exchanges. For Bitcoin, 7-day average inflows are 19% lower than the 90-day average, while for Ethereum they are 36% lower. The fall is greater for Ethereum as it is diverting from centralized exchanges to DeFi. In simpler words, Bitcoin is being stored more than it is traded and a larger number of Ethereum is being locked up in DeFi assets.

The following three charts highlight the changes in liquidity since mid-March for Bitcoin, Tether & Ethereum respectively. They show the change in illiquid or liquid assets held in wallets by the average age of the wallet. This combination of liquidity and wallet age provides better insights into the behavior driving these changes. These moves are even more meaningful considering the change in dynamics that have occurred since the onset of the pandemic.

Bitcoin

Figure 3

Almost half of the 1.1 million Bitcoin (or 2.7% of the supply) has become illiquid since mid-March — held in wallets that are 1 to 6 months old. Liquid bitcoin is also the greatest in the same time frame wallets. More importantly, it signifies that there has been a large number of new entrants in the market. The highest number of illiquid bitcoin continues to reside in wallets aged over 24 months (Figure 3).

Of the new 1.1 million illiquid bitcoin, 726,000 was previously in liquid wallets of 1 to 6 months old. This significant drain of liquidity from the digital market has caused the price to stay at elevated levels — above the psychological level of $10k.

Tether

Figure 4

Tether has followed the same path as Bitcoin since mid-March in an even more magnified way. 3.6 billion Tether (or 31% of supply) has become illiquid since that date (Figure 4). The highest number resides in wallets which are 1–6 months old followed by completely new wallets. Although 55% of Tether is still liquid and is not typically held for long — since it is widely used as an exchange token on crypto exchanges, such a large amount of Tether becoming illiquid signifies that it is taking up an additional role as a store of value as people move to digital dollars.

Ethereum

Figure 5

The second-biggest crypto has experienced the opposite dynamic to Bitcoin and Tether, with 8.2 million Ethereum (or 7.3% of supply) becoming liquid and held for less than one month since mid-March (Figure 5). Part of this shift to liquid, young Ethereum is attributed to decentralized exchanges that process trades by moving Ethereum on the blockchain, making Ethereum liquid and young.

However, the bigger reason is the explosive growth of DeFi that we have seen this year — which encourages people to move their Ethereum as they chase yield on their ETH-based assets. The total value locked in such assets stood at $11.27 billion at the time of writing. The flourishing DeFi market has also caused Ethereum to become increasingly valuable relative to Bitcoin since mid-July.

It is good to see cryptocurrencies developing individual use cases. Critics certainly have their work cut out.

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