Why Bitcoin on Ethereum is Just Getting Started

https://insights.deribit.com/industry/why-bitcoin-on-ethereum-is-just-getting-started/

Since its inception over 11 years ago, Bitcoin’s use cases and narratives have shifted significantly, from peer-to-peer cash to anonymous darknet currency to digital gold just to name a few. Throughout this journey, one core piece arguably has not changed: its decentralized approach to finance. As Satoshi Nakamoto alludes to in the introduction of the original Bitcoin whitepaper.

Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust-based model.

The whitepaper carries on proposing a system for decentralized electronic transactions, introducing the concepts of blockchain and proof of work. While Bitcoin has made remarkable progress since then, it still has not been able to gain traction as a trustless tool for financial services. This is evident by the lightning network’s low adoption and increasing concentration, where 10% of nodes hold 80% of the Bitcoin staked, according to a research paper from the University of Zurich. Similarly, the declining transactions and supply of Tether (USDT) on Bitcoin’s Omni layer highlight the issues to conduct financial services in the Bitcoin blockchain. This is not to discredit Bitcoin—which I personally believe to have high potential as a store of value—but rather to emphasize the opportunity to expand its strong decentralization and security beyond its current use cases.

In parallel, Ethereum and other smart contract protocols have grown ecosystems around the concept of programmable money. Inspired by Bitcoin’s original ethos, a wave of new decentralized services are taking Bitcoin’s disruption of financial services a step further. Being open-source and permissionless, Ethereum has enabled an ecosystem of decentralized applications to flourish on top of it. While the term DeFi may be relatively new, I would argue the space has been led by, and would not have been made possible without Bitcoin. As these protocols reinvent finance, Bitcoin’s role within them has the potential to grow in a symbiotic relationship pushing crypto forward.

Bitcoin’s Journey on Ethereum Starts with Incentives 

Since Bitcoin cannot be easily moved cross-chain, tokenized versions of Bitcoin are available on the Ethereum blockchain. These ERC-20s are pegged 1:1 to the price of BTC being backed by the equivalent amount of Bitcoin. The first recognized Bitcoin ERC-20 to launch was Wrapped Bitcoin (wBTC), which was released in January 2019. Wrapped Bitcoin is led by a consortium akin to USDC’s Circle. While using wBTC does require trust in the custodians backing the token, trustless alternatives are emerging and growing quickly such as renBTC and tBTC.

At the beginning of 2020, the market capitalization of wBTC was under $5 million despite launching a year earlier. The low adoption during its first year was likely due to the lack of integrations and functionality thus, offering no clear benefit over Bitcoin at the time. This started to change as DeFi protocols integrated tokenized Bitcoin ERC-20s and provided user services on top of it. MakerDAO’s acceptance of wBTC as collateral for DAI loans in May was a breakthrough for Bitcoin on Ethereum with several protocols proceeding to offer financial services on tokenized Bitcoin. These integrations have been mutually beneficial as they increase the liquidity of DeFi protocols while locking Bitcoin supply.

While being able to get loans with your Bitcoin drove some demand for wBTC, being able to earn compound interest on top of it is what ignited its parabolic growth throughout the last few months. In particular, the sBTC/renBTC/wBTC Curve pool drove a substantial amount of Bitcoin onto Ethereum especially following the unexpected CRV token release. Within four days the Bitcoin supplied to Curve quadrupled from $45 million to over $200 million.

Source: Curve.fi Stats

This is particularly remarkable when considering that tokenized Bitcoin deposits grew at a faster rate than stablecoins deposited to Curve. As a result of this and other similar incentives, the amount of tokenized Bitcoin locked on Ethereum has reached $800 million, or roughly 0.38% of the circulating supply.

While the sustainability of Curve’s 50%+ APY on tokenized Bitcoin is still up for debate, the protocol has successfully generated a positive feedback loop. This starts with users supplying liquidity seeking CRV liquidity mining rewards, thus growing the value locked in Curve. By doing so, the potential value accrued by CRV governance tokens increases, in turn incentivizing more liquidity to be supplied. Additionally, this theoretically drives demand for the assets earning such yields. Bitcoin, therefore, should also stand to benefit as investors that pursue these rewards are also locking their tokenized Bitcoin, making it less likely to be sold.

Expanding Tokenized Bitcoin Beyond Whales & Early Adopters 

By analyzing key on-chain metrics from IntoTheBlock, we can determine that the growth in tokenized Bitcoin has largely been driven by whales and institutional investors. This is reflected in the average balance of a wBTC and renBTC holder reaching $95,000 and $217,000 respectively.

The adoption by large players may come as no surprise given the high gas fees users have to incur to tokenize their Bitcoin and deposit into DeFi protocols. Partly because of this, the total number of addresses holding these tokens has not grown as significantly, with only 4,600 and 750 addresses holding wBTC and renBTC respectively. Another potential reason is that aside from early adopters, the average retail user, in general, takes longer to trust and learn how to use these yield-generating Bitcoin alternatives.

As Ethereum 2.0 approaches and DeFi protocols start integrating layer 2 solutions, gas costs are likely to decrease, enabling users to tokenize smaller amounts of Bitcoin. Additionally, innovations like the new USDC “meta-transactions” feature—which allow users to transfer ERC-20 tokens without having to own ETH—are expected to reduce friction points for new users. While it is unclear how long these two will take to become implemented, they will certainly streamline the onboarding of Bitcoin into Ethereum.

With the crypto space increasingly shifting its focus into high yield opportunities, I suspect that a large percentage of Bitcoin hodlers will join the trend. By looking at Hodlers indicator, we can observe that 20.69 million addresses have been holding a total of 11.7 million Bitcoin for over one year. Most of these are unlikely to be earning on their positions as interest-bearing DeFi and CeFi solutions are still relatively new.

Source: IntoTheBlock’s Bitcoin Ownership Metrics

This indicates that nearly two-thirds of all Bitcoin holders of the circulating supply have not moved it over a year. I expect this number to decrease in proportion to the total as more long-term holders are enticed by DeFi’s high yields. Of course, there are risks and learning curves associated with these protocols so I still foresee the majority of Bitcoin users simply hodling over the next few years. This, however, is likely to be a multi-year trend as the industry and its use cases for Bitcoin evolve.

Final Thoughts on the Road Ahead 

Aside from existing DeFi protocols, demand for tokenized Bitcoin over the next decade is likely to come from projects that do not yet exist given the fast-pace of innovation. Due to DeFi’s permissionless nature, it will become easier for protocols to offer financial services supporting Bitcoin ERC-20s. Along with this, though, the risks of using Bitcoin on Ethereum are likely to increase in the short-term, especially if we continue to see protocols deploy unaudited smart contracts that manage to attract millions in capital overnight. Unfortunately, I’m inclined to believe that sooner or later there will be a hack exploiting access to tokenized Bitcoin that may halt its progress for at least a few months.

Beyond DeFi, I expect other sectors within Ethereum to come up with different reward schemes to kickstart hyper-growth cycles like the one we are currently experiencing with yield farming. Within these, tokenized Bitcoin should emerge as a potential incentive, rewarding users for providing value-added services that ideally set up positive feedback loops for these protocols. As explained earlier, these would be mutually beneficial, bringing Bitcoin demand while encouraging adoption for protocols on Ethereum.

Overall, Bitcoin has come a long way since Satoshi’s original whitepaper, sprouting many previously-unimaginable use cases. With DeFi being the driver for Bitcoin on Ethereum, I expect this trend to accelerate as costs are lowered and friction points are removed. As Ethereum takes the lead as the main platform where these protocols are built on, I would suggest the Bitcoin community to embrace them rather than sticking to zero-sum tribalism. After all, decentralizing finance has been a key objective since Bitcoin’s inception.

By Lucas Outumuro, the Senior Analyst at IntoTheBlock

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Inside Ethereum’s Testnet Headwinds & Growth in Tokenized Bitcoin: A Data Perspective by IntotheBlock

https://blog.coinmarketcap.com/2020/09/02/inside-ethereums-testnet-headwinds-growth-in-tokenized-bitcoin-a-data-perspective-by-intotheblock-2/

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Every week, IntoTheBlock brings you an on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry. 

This week, we analyze yearn.finance and how YFI holders are positioning themselves following its outstanding price performance. As well, we cover the reduction in ‘crops’ received by Compound yield farmers, and its implications on the token that catalyzed the explosive growth in liquidity mining.

On-Chain Data Signals YFI Holders Looking to Take Profits

Yearn.finance’s native YFI token has been on a hot streak, increasing by over 10x in August alone. Having launched with a fair distribution and near-zero market cap, YFI is up a staggering 1,300x within two months of its inception reaching a market cap of over $1 billion. With such eye-popping returns, it is worth going over how yearn.finance works and analyzing some of its key on-chain metrics to gain an understanding of where YFI may be heading. 

Previously known as iEarn.Finance, the protocol started out of a developer’s frustration of having to manually search and constantly reallocate capital in protocols providing returns on top of stablecoins. The developer and founder, Andre Cronje, realized this process could be automated such that the iEarn.Finance protocol would integrate into lending protocols, programmatically allocating stablecoins to the highest yield opportunity while also allowing other users to invest their capital in it. Andre Cronje later decided to rebrand the project to “y”Earn.Finance as in you earn to emphasize its collective, community-focused approach. 

In its v2, yearn.finance introduced its most popular product, yVaults. Through yVaults, depositors’ capital is allocated in a more active, risky manner than with the original earn feature. It got started following the COMP yield farming release, with the vault simultaneously earning depositors yield in the form of interest rates plus the dollar equivalent in farmed tokens, while also lowering gas costs as these are split evenly between participants. Additionally, vaults generate revenues in the form of a 0.5% withdrawal fee and a 5% fee to subsidize gas. These are distributed to YFI token holders as staking rewards. 

The recent price run in YFI is in part due to anticipation of the yETH vault, which allows anyone holding ETH to automatically earn the best yield, as reported by Decrypt. This has led to speculation that yETH will simultaneously drive demand in ETH, which would be stored to generate yield, and YFI, which would accrue revenues from locking this ETH. The recent price growth, along with its already remarkable appreciation, has had implications in on-chain activity. For one, we can verify that YFI holders are sitting on outsized profits.

As of September 1, 2020 10PM (EST) using IntoTheBlock’s YFI financial indicators

The average balance of a YFI holder is currently of over $135,000, eclipsing that of other DeFi leaders. In comparison, LINK has an average balance of $73,000 and LEND of $6,000 despite their parabolic price action. The biggest factor driving this divergence is likely YFI’s fair launch, which allowed early adopters to profit significantly, to say the least. 

Another interesting insight from this chart is that the average balance of YFI holders has not kept up with price action, indicating that large holders have been selling their positions or at least taking profits. We can corroborate this pattern by analyzing inflows into centralized exchanges.

As of September 1, 2020 10PM (EST) using IntoTheBlock’s YFI on-chain flows

As can be seen in the graph above, the dollar inflows of YFI into centralized exchanges recently hit an all-time high. This is a potential indication of large holders seeking to sell their positions following the parabolic run-up. That being said, the $30 million in inflow volume is still relatively small in proportion to YFI’s billion dollar market capitalization. 

While yearn.finance’s yield optimization and fair launch has allowed it to become one of the most innovative and respected protocols in DeFi, its price action signals a high amount of risk for those speculating in YFI’s token price. As evidenced by on-chain data, holders are appearing to take profits as prices retrace from nearly $40,000 to $27,000 within a couple of days.

Compound Reduces COMP Distribution by 20%

Another DeFi protocol that has been on a tear recently is Compound and its COMP token. While Compound did not invent the concept of yield farming (also referred to as liquidity mining), its initial COMP token release is widely recognized as the catalyst igniting the current DeFi frenzy. Given the speculative activity taking place with COMP farming, its governance has recently approved a proposal reducing COMP emissions by 20%. 

The vote was proposed by the blockchain simulation and testing platform Gauntlet, which stated that a high amount of COMP was being held by short-term holders and centralized exchanges. Compound governance, which uses COMP to stake votes, approved the proposal, with a low total of 63 addresses voting out of 1,070 voting addresses and over 30,000 total addresses holding COMP. With the backing of large organizations, Compound’s emission reduction proposal received backing from venture capital firms a16z and Polychain Capital, while ConsenSys and InstaDapp voted against it. 

The proposal was executed on August 31, effectively reducing the amount of COMP rewarded from 0.44 to 0.352 per block. According to the proposal, this would be a short-term solution with the focus long-term shifting towards implementing something similar to Synthetix’s vesting period which locks users rewards for one year. 

From the moment the proposal was created on August 26 all the way to its implementation, the COMP token managed to increase by nearly 50%, approaching its all-time highs. It is likely that some holders saw that this emission reduction would alleviate sell-side pressure as yield farmers would have smaller amounts to sell, similar to how miners are affected by block reward reductions. As a result, the number of addresses profiting from COMP increased substantially.

As of September 1, 2020 11PM (EST) using IntoTheBlock’s COMP financial metrics

At the time of writing, 84% of COMP holders are profiting from their holdings as indicated by the In the Money clusters above. Additionally, this percentage is expected to be even larger, since IntoTheBlock’s In/Out of the Money indicator assigns a cost to an address’s holdings based on the price at the time they received their tokens. Since many addresses received COMP through yield farming, with the only cost being gas costs, the percentage of addresses profiting is expected to be even higher. 

By tracking exchanges inflows and outflows, IntoTheBlock is able to determine the net amount entering centralized exchanges. This provides an idea of how exchanges’ token holdings change over time.

As of September 1, 2020 11PM (EST) using IntoTheBlock’s COMP on-chain flows metrics

COMP tokens just had the highest net outflow since it began to be traded. This means that less COMP is now available to be sold in centralized exchanges. The decrease coincided with COMP’s price increase, pointing to the likelihood of holders buying and deciding to store their COMP elsewhere. 

Whether this is because of the 20% COMP emission that just took place or not is hard to determine. Ultimately, the effects from this proposal and future actions taken towards reducing short-term yield farming will be monitored as Compound solidifies its position as one of DeFi’s leaders.

This article contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of CoinMarketCap, and CoinMarketCap is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. CoinMarketCap is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by CoinMarketCap of the site or any association with its operators.

This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice. 

The views and opinions expressed in this article are the author’s own and do not necessarily reflect those of CoinMarketCap.

The post Inside Ethereum’s Testnet Headwinds & Growth in Tokenized Bitcoin: A Data Perspective by IntotheBlock appeared first on CoinMarketCap Blog.

Inside Ethereum’s Testnet Headwinds & Growth in Tokenized Bitcoin : A Data Perspective by IntoTheBlock

https://blog.coinmarketcap.com/2020/08/26/inside-ethereums-testnet-headwinds-growth-in-tokenized-bitcoin-a-data-perspective-by-intotheblock/

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Every week, IntoTheBlock brings you an on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry. 

This week it’s all about the Ethereum ecosystem, and Bitcoin’s role within it. We start by covering the sharp growth in Bitcoin tokenized on Ethereum, specifically through the Ren Protocol’s renBTC. We then dive into the headwinds experienced with Ethreum’s Medalla testnet and its implications on Ethereum 2.0.

Bitcoin on Ethereum Gets Yield Farming Boost

The amount of tokenized Bitcoin on Ethereum has more than doubled in August. While Bitcoin-pegged ERC20s like wrapped Bitcoin (WBTC) have been around since January 2019, it wasn’t until this summer that they started to gain momentum. This growth has been largely as a result of DeFi protocols adopting tokenized versions of Bitcoin and providing users services on top of it. 

In May of this year, MakerDAO led the way with the integration of WBTC as collateral, allowing users to mint DAI loans in return for locking their tokenized Bitcoin on their Oasis portal. Later in mid-June, BTC was introduced to yield farming through the partnership between Synthetix, Ren and Curve. 

Through this initiative, users providing liquidity to tokenized Bitcoin pools (in the form of WBTC, renBTC or sBTC) were rewarded with SNX and REN tokens, while the Curve team committed to reward liquidity providers with their native CRV token once it got released. 

This brings us to Curve’s unexpected CRV early release by an anonymous “chad.” Following confirmation from the Curve team that they adopted the CRV deployed, capital rushed into the Curve protocol. As a result, BTC tokens on Ethereum saw a spike in demand as users rushed to farm CRV with them. In turn, the total supply of Bitcoin locked and tokenized through Ethereum reached new highs approaching the 50,000 Bitcoin mark (over $500 million). 

While WBTC is still the tokenized version of Bitcoin with the most BTC locked, renBTC has benefited disproportionately from Curve’s CRV yield farming. This has allowed renBTC to capture a greater market share of the total amount of Bitcoin on Ethereum, growing to over 20% from 10% in June based on data from DeFi Market Cap. This may have to do with Ren’s trustless method of tokenizing Bitcoin — as opposed to WBTC’s custodial approach — which better aligns with the ethos of decentralization in the community. 

Following the anticipated, yet unexpectedly early release of CRV, liquidity quickly flowed into Curve as yield farmers seeked to receive liquidity mining rewards. Within a few days, the TVL in Curve surpassed the $1 billion mark, making it only the third protocol to achieve this milestone. While much of this was fueled by stablecoin deposits, tokenized Bitcoin deposits actually grew at a faster rate following the launch.

Source: Curve.fi Stats

As can be seen in the graph above, the dollar amount of tokenized Bitcoin locked in Curve quickly grew from $45 million to over $200 million within four days. In other words, the total amount of Bitcoin locked in Ethereum more than quadrupled within four days. 

While such parabolic growth may lead one to believe that people are “FOMOing” to farm CRV with their Bitcoin, IntoTheBlock’s data shows that most likely it is only a few whales and institutional investors leading this trend. 

IntoTheBlock’s Large Transactions Volume indicator aggregates the total dollar amount transferred in transactions of over $100,000 within a 24-hour period. By filtering out smaller transactions, the Large Transactions Volume metric acts as a proxy to the total amount transacted by whales and large players. 

As can be seen in the graph below, the total amount of large transactions volume per day in renBTC was near-zero throughout most of June. This quickly changed following the release of the CRV token.

As of August 25, 2020 10PM (EST) using IntoTheBlock’s renBTC Financial Indicators

The large transaction volume seen in renBTC grew from $2.5 million to over $140 million within three days of the CRV launch. While certainly not all of this volume ended up locked in Curve, its native token release evidently acted as a catalyst spurring large players to get into renBTC. This trend can be corroborated by looking at the average balance of a renBTC holder.

As of August 25, 2020 10PM (EST) using IntoTheBlock’s renBTC Financial Indicators

With this indicator reaching over $300,000 on August 17, it is safe to say that it wasn’t average crypto traders that led the growth into renBTC. Instead, it is likely that institutional players are stepping into DeFi as yield farming expands beyond “traditional” Ethereum tokens and attracts a new wave of whales. 

Overall, while $500 million in Bitcoin locked in Ethereum seems like a very high amount — considering it was at under $10 million at the beginning of the year — this trend may just be getting started. Currently just over 0.25% of Bitcoin’s circulating supply is represented by a tokenized version on Ethereum. As yield farming and other incentive schemes offer a decentralized way for BTC holders to earn on top of their holdings, it is likely that Bitcoin’s journey into DeFi is just getting started.

Ethereum Medalla Testnet Issues Not Expected to Affect ETH 2.0

As the anticipated phase 0 of Ethereum 2.0 approaches, the Ethereum community recently launched its final multi-client testnet, Medalla. The name, which translates to “medal” in Spanish, pays tribute to the original ETH1 testnet Olympic released back in May 2015. 

As reported in Decrypt, the Medalla testnet, which has over 26,000 people operating nodes, is an open network implementing the proof of stake upgrade. Multiple teams are running different implementations of Ethereum 2.0 through it, mostly by community members with the Ethereum Foundation, with Ethereum clients only having a minor stake in it. However, after a couple of weeks running, the Medalla testnet faced major issues due to a critical bug. 

In short, the issue consisted of nodes not being able to sync with respect to their time. As a result, certain nodes’ times were reporting to validate transactions as much as four hours into the future. Trying to correct this issue, participants in the testnet were asked to restart their nodes to update to the latest version. Unfortunately, this ended up causing everyone trying to sync with the chain without anyone actually being able to do so, basically creating a situation like “finding a needle in a haystack,” as described by Raul Jordan from Prysmatic Labs

Contrary to what was reported in several articles, though, the Medalla testnet did not stop working, with blocks still being produced and node operators only losing fake money. By working through these issues, participants claimed to have made remarkable progress, leaving them and the testnet in a much more robust state. Since then, the issues have been solved, with the testnet reliably running with over 75% participation from nodes. Most importantly, the mishap experienced is not expected to further delay Phase 0’s vague Q4 target release. 

Key on-chain indicators remained strong despite the headwinds faced with the Medalla testnet. In fact, the total number of addresses holding Ethereum surpassed 45 million for the first time on August 20.

As of August 25, 2020 11PM (EST) using IntoTheBlock’s Ethereum Addresses Stats

This milestone further elevates the number of addresses holding Ethereum from that of Bitcoin. At the time of writing, there are 31.24 million addresses with a Bitcoin balance, meaning that Ethereum is by far the crypto-asset held by most addresses. It is important to consider, though, that one address does not necessarily equate to one user. 

Additionally, there has been a continued trend amongst ETH holders withdrawing their tokens out of centralized exchanges. Using IntoTheBlock’s exchanges Net Flows indicator, we can assert that more ETH has been leaving than entering exchanges over the past few months.

As of August 25, 2020 11PM (EST) using IntoTheBlock’s Ethereum Exchanges On-chain Flows

Since IntoTheBlock’s Net Flows indicator looks at over 85% of the ETH believed to be held by centralized exchanges, the decrease of over $55 million in exchanges’ reserves over the past 30 days shows a clear trend of users withdrawing their tokens. This trend potentially signals that ETH holders are opting to either use their ETH to pay for gas in order to use decentralized protocols or to hold their ETH long-term in cold storage. 

Despite the issues experienced with the Medalla testnet, Ethereum holders keep showing interest and optimism for ETH as evidenced by key on-chain indicators. While this does not guarantee that the initial phase of Ethereum 2.0 will not get delayed, it does highlight the high community support in spite of the technical issues and frequent postponements of the release. Ultimately, it is yet to be seen if they are able to meet the Q4 tentative target, but Ethereum’s bustling community is likely to persist regardless.

This article contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of CoinMarketCap, and CoinMarketCap is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. CoinMarketCap is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by CoinMarketCap of the site or any association with its operators.

This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice. 

The views and opinions expressed in this article are the author’s own and do not necessarily reflect those of CoinMarketCap.

The post Inside Ethereum’s Testnet Headwinds & Growth in Tokenized Bitcoin : A Data Perspective by IntoTheBlock appeared first on CoinMarketCap Blog.

Key Insights Behind the Recent Bitcoin & Ethereum Run-Up

https://blog.coinmarketcap.com/2020/07/29/key-insights-behind-the-recent-bitcoin-ethereum-run-up/

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Every week, IntoTheBlock brings you on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry. 

This week, we provide analytics into the rise of the top two tokens, Bitcoin and Ethereum. 

While Bitcoin has managed to appreciate 17% in the last seven days, Ether has achieved a whopping 28%, despite increasing less in the last two days. Without a doubt, this price growth has been impressive. The same is the case for their on-chain activity, which has picked up to levels not seen since last summer or even January 2018. Going over Bitcoin and Ethereum’s key on-chain indicators, we can have a better idea of the fundamental growth fueling the recent price run. Let’s dive into it!

Key Analytics Behind Bitcoin’s Recent Rise

As discussed last week, Bitcoin’s on-chain metrics had been turning bullish despite the price stagnating. One key indicator that demonstrated Bitcoin demand had been growing prior to the recent price increase is the total number of BTC holders, as measured by the aggregate amount of addresses with a Bitcoin balance.

As of July 28 4PM (EST) using IntoTheBlock’s Bitcoin addresses stats

As can be seen in the graph above, the number of Bitcoin holders had previously peaked at 30.48 million a few weeks before the anticipated block reward halving. In the following two months, the number of addresses holding BTC dropped slightly and stagnated, signaling a lack of new money entering the market. 

This trend shifted towards the second week of July, with the total number of holders hitting new highs as Bitcoin received stamps of approval from major organizations such as PayPal, MasterCard and the US Office of the Comptroller of Currency. While Bitcoin’s price lagged at that moment, the number of Bitcoin holders kept growing to reach almost 31 million. 

Similarly, the number of Bitcoin addresses using the network daily had been in an uptrend prior to the price breakout. On July 24, the number of Bitcoin daily active addresses reached a level not seen since January 2018.

As of July 27 at 5PM (EST) using IntoTheBlock’s Bitcoin addresses stats

Ultimately, the growth in Bitcoin’s daily active addresses and total number of holders acted as a leading indicator, pointing to increasing demand for the top cryptocurrency a few days before the breakout above $10,000 and $11,000. Taking advantage of blockchain’s public nature, we derive crypto-native indicators that can signal emerging trends before they affect price as just described. While there is no guarantee (as with any indicator) that price will follow, on-chain indicators are a valuable addition to any crypto trader’s tool set.

ETH Addresses Making Money Eclipse Total BTC Addresses

A lot has happened in the Ethereum blockchain since the last time ETH was above $300. Through all the developments that have happened in the last twelve months — from a pandemic to a Cambrian explosion in yield farming initiatives — the Ethereum blockchain has managed to accelerate its growth and usage. Leveraging IntoTheBlock indicators, we can dive deeper into key metrics assessing the current state of the Ethereum blockchain versus how it looked a year ago. 

IntoTheBlock’s Historical In/Out of the Money (HIOM) indicator analyzes investors’ on-chain positions based on addresses’ average cost for a token, in this case ETH. Based on this, the HIOM calculates the percentage and the total number of addresses that are “in the money,” or profiting on their positions on paper. By comparing variations in the HIOM over time, we can determine buying/selling activity based on the number of addresses profiting at a specific price level. 
The last time ETH prices were above $300,13.5 million addresses (less than 50% of all holders) were in the money. Comparing these numbers to the ones observed as ETH surpassed the $300 barrier a few days ago, we see that the number of ETH holders profiting at a price of $310 has more than doubled.

This massive increase signals that millions of new addresses bought ETH below $300. Additionally, since the growth in addresses profiting is greater than the increase in the total number of ETH addresses with a balance, we can establish that approximately 1 million previous ETH holders opted to bring their average cost down.

At the time of writing, 73.24% Ether addresses are making money in their position (on paper at least) at a price of $321. This means that the number of Ether addresses profiting (31.86 million) has now surpassed the total number of Bitcoin addresses with a balance (30.83 million). In other words, more addresses are making money in Ethereum than the total number of addresses holding Bitcoin.

Following the increased growth in DApps built on top of Ethereum, the number of daily transactions on the Ethereum blockchain is now within reach of its all-time high of 1.34 million.

As can be seen in the graph above, the number of transactions has been on a consistent uptrend throughout 2020, despite slowing down in the second half of 2019. While the price of ETH is still lower than the high reached in the summer of 2019, the peak in the number of daily transactions is approximately 25% higher now than what we saw last year. 

This growth in transactions highlights the increased demand to use the Ethereum blockchain, pointing to ETH’s utility value as infrastructure for a decentralized economy being significantly stronger than a year ago. 

While the number of transactions occurring in the Ethereum blockchain has outpaced the demand to use Bitcoin’s blockchain —which had 329,000 daily transactions over the last seven days— most would argue that Bitcoin is priced at a premium vs. Ether, because many see it as a store of value.

Despite the difficulty of determining the specific metrics to classify whether an asset is a store of value or not, a key characteristic of stores of value is that people believe they will retain their worth. In Bitcoin, the trend to “hodl” propagates store of value properties, as long-term investing removes short-term downward price pressures from trading instead. 

At IntoTheBlock, we classify an address with a holding time of over one year as a hodler. As can be seen in the graph below, the number of ETH hodlers has increased by over 10 million within the last twelve months.

Overall, these on-chain metrics suggest that Ethereum may be undervalued, at least in relation to its valuation a year ago. As new addresses have taken the opportunity to buy ETH below $300, existing holders have opted to hodl and in many cases lower their average costs. Finally, Ethereum’s outstanding transactions growth evidence the high demand to use ETH and the thriving DeFi ecosystem built on top of it. 

This article contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of CoinMarketCap, and CoinMarketCap is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. CoinMarketCap is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by CoinMarketCap of the site or any association with its operators.

This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice. 

The views and opinions expressed in this article are the author’s own and do not necessarily reflect those of CoinMarketCap.

The post Key Insights Behind the Recent Bitcoin & Ethereum Run-Up appeared first on CoinMarketCap Blog.