How DeFi is Driving The Spike in Ethereum’s Gas Price

https://insights.glassnode.com/defi-spike-ethereum-gas-price/

How DeFi is Driving The Spike in Ethereum's Gas Price

The amount of fees being spent on the Ethereum network is higher than ever before (now even higher than the single day in June with anomalous fees unrelated to regular network usage).

Over 17,500 ETH (USD$6.8 million) are currently being spent on fees daily on Ethereum.

How DeFi is Driving The Spike in Ethereum's Gas Price
Figure 1 – Over 17,500 ETH are currently being spent on fees daily on Ethereum (Glassnode Studio)

This spike in fees has been caused by a high demand for space on-chain, with the median gas price reaching an all-time high of 217 Gwei. The mean gas price is even higher, at 224 Gwei.

How DeFi is Driving The Spike in Ethereum's Gas Price
Figure 2 – Ethereum’s median gas price has reached an all-time high (Glassnode Studio)

However, in order to use the network effectively, users will need to pay far more than the median gas spent. Etherscan is currently recommending an average gas price of over 350 Gwei for a 20 second wait time.

So why are fees so high? Simply put, fees are skyrocketing due to massive demand for transactions on Ethereum. It’s alt season, and users are scrambling to allocate capital into the tokens and protocols that they expect to generate the most yield. But where is this demand coming from?

Stablecoins (especially USDT)

The growing dominance of USDT is a large factor in taking up network space, with transfers of this token accounting for 14% of all fees spent in August so far. USDT is clearly dominating the stablecoin market on Ethereum, with other stablecoins only accounting for 1.2% of fees spent.

How DeFi is Driving The Spike in Ethereum's Gas Price
Figure 3 – The distribution of fees on Ethereum for August 2020 across several categories

However, this is dwarfed by the “other contracts” category (which looks at fees spent on transactions other than for ETH, ERC-20, and stablecoin transfers), which accounts for over 65% of all gas spent this month.

“Other Contracts”

If we break down this “other contracts” category further, we start to see some interesting patterns.

DeFi and DEXs

With all the hype in the DeFi space right now, DeFi applications (specifically decentralized exchanges, or DEXs) are taking up the majority of the gas fees used by the “other contracts” category. Many of these protocols are not just transferring tokens between addresses, but instead are using more gas-intensive smart contracts to perform actions such as staking, pooling, and lending.

Among DeFi applications, DEXs are by far the most popular, and are a huge contributor to Ethereum’s gas price spike: for example, Uniswap is responsible for 39% of fees spent by the top 20 contracts this month, with several other DEX contracts also in the top 20.

How DeFi is Driving The Spike in Ethereum's Gas Price
Figure 4 – The top 20 fee-payers in the “other contacts” category for August 2020

Arbitrage Bots: Unwelcome Gas Guzzlers

When looking at the contracts in the top 20 chart above, we found something interesting – many of these contracts are not associated with known projects or entities. Their owners offer no source code or identifying features, but they mostly display the same patterns which imply that they are arbitrage bots (although this has not been 100% confirmed).

These contracts, most of which apply very similar trading patterns, are rapidly buying and selling tokens – mostly between Uniswap and Balancer.

This constant activity across multiple platforms (while also likely paying higher gas prices for front-running) is extremely fee-intensive; of the top 20 contracts this month, arbitrage bots make up for almost 20% of fees.

How DeFi is Driving The Spike in Ethereum's Gas Price
Figure 5 – The top 20 fee-payers (by type) in the “other contacts” category for August 2020

These suspected arbitrage bots in the top 20 have spent around USD$2.5 million worth of ETH on gas this month alone. Meanwhile, opportunists are also using stablecoin arbitrage to make huge profits, while consuming huge amounts of gas.

The fact that arbitrage is profitable enough to justify this immense spend demonstrates just how much money there is to be made by cleverly playing the landscape of DeFi products and protocols.

Ponzi Schemes

The next highest gas fee payer is ponzi schemes, the most prolific of which take the place of the 2nd and 19th most gas-intensive contracts in August so far (Forsage.io and Lionsshare.io respectively). Both schemes employ the same mechanism and have been widely reported as ponzi schemes, with warnings to avoid them.

When we wrote about Ethereum fees 2 months ago, Forsage.io was already the second-highest contract in terms of fees paid in 2020. At the time, however, it had contributed towards less than 3000 ETH in fees in the first 6 months of 2020. Now, it has contributed to nearly 5000 ETH in fees in the first 2 weeks of August alone, illustrating the sheer extent to which gas prices have increased.


Conclusions

DeFi, with all its complex mechanics, is taking up a significant portion of gas on Ethereum. Between decentralized exchanges, arbitrage bots, and other DeFi protocols, the ecosystem is responsible for a large portion of the unprecedented increase in gas prices that we are currently seeing.

However, the increased network demand (and therefore congestion) is coming from a number of places – both inside and outside of the DeFi ecosystem:

  • DEXs – Organic demand for buying and selling on decentralized exchanges means that this type of transfer is taking up a significant amount of Ethereum’s network capacity.
  • Arbitrage bots – The DeFi mechanics which lead to significant spread across different exchanges mean the market is ripe for these kind of opportunists.
  • USDT transfers – With increased trading comes an increased demand for a stable asset through which to realize gains.
  • Regular ETH transfers – Account-to-account transfers of ETH are also taking up a significant amount of gas as investors trade the base asset of the Ethereum blockchain.

Overall, the cause of Ethereum network congestion and high gas prices is simple: the anticipation of a bull market has created massive demand in all niches – large and small, familiar and arcane, dated and nascent.


Bonus: ERC-20 Transfers

While ERC-20 token transfers account for only 7.2% of fees paid this month (see Figure 3 above), an analysis of which tokens are taking up the majority of these fees is still interesting.

How DeFi is Driving The Spike in Ethereum's Gas Price
Figure 6 – The top 20 fee-payers in the ERC-20 token category for August 2020

The ever-popular and rapidly growing Chainlink (LINK) token is by far the most popular, with almost 800 ETH spent in transfer fees so far in August. Synthetix (SNX) comes in at second place, well behind LINK, but well ahead of the next token, the Green China Ecosystem (GEC), which mysteriously appears to have no online presence.

Once again, just like with the arbitrage bots, mysterious players seem to be making a large impact on the Ethereum network while remaining in obscurity.


Special thanks to Rick Klomp for helping with the data used in this analysis.

Live metrics on Glassnode Studio:


How DeFi is Driving The Spike in Ethereum's Gas Price

The Week On-Chain (11 Mar 2020 – 18 Mar 2020)

https://insights.glassnode.com/the-week-on-chain-19-mar-2020/

Bitcoin Market Health

The Week On-Chain (11 Mar 2020 - 18 Mar 2020)

After the massive BTC price drop last Thursday, the price continued to decline before stabilising around $5000-5500. At its lowest point, bitcoin experienced a 50% drop from its price a month ago.

However, we are seeing a rebound today, with BTC rising almost 16% in the last 24 hours and passing the $6k mark on many exchanges.

The Week On-Chain (11 Mar 2020 - 18 Mar 2020)

Meanwhile, on-chain fundamentals are varied. Transaction volume is up almost 2x since the beginning of the year, signalling increased economic activity.

The Week On-Chain (11 Mar 2020 - 18 Mar 2020)

For the second week in a row, transaction count has decreased while volume has increased, suggesting that the average value of transactions is much higher than usual. This could signal both large sales as people attempt to minimize losses, and large purchases as investors buy the dip.


HODLers Are Buying The Dip

The Hodler Net Position Change metric shows that long-term bitcoin holders are buying the dip.

When this metric is above zero (green), it means that, on average, hodlers are accumulating BTC. When below zero, it means hodlers are selling (likely realizing profits).

The Week On-Chain (11 Mar 2020 - 18 Mar 2020)
Hodlers are using this dip as an opportunity to accumulate more BTC (Glassnode Studio)

We can see that this February, when prices approached $10k, hodlers stopped accumulating more BTC, potentially having identified it as a market top. However, during the crash last week, hodlers began accumulating, signalling confidence in BTC at this price point.

Long-term investors appear have identified this as the bottom, which today’s price increase supports.


Community Narrative

Content and insights derived from Glassnode data by our community

Using Glassnode data, based on our summary of the MakerDAO zero-bid exploit, @RyanSAdams pointed out the dangers of relying on nascent infrastructure for something as important as financial applications.

Many commentators have used this as an example of the fact that core blockchain infrastructure has far to go before it can be trusted to support critical financial functions (such as lending) at scale.

Read the article for the full breakdown (and a TL;DR) of the exploit:

What Really Happened To MakerDAO?
Black Thursday: The sell-off of 12 March resulted in $4.5 million of unbacked DAI in the MakerDAO system. What really happened?
The Week On-Chain (11 Mar 2020 - 18 Mar 2020)

Remember to send us your own content using Glassnode data to be featured in our next weekly update.


The Week On-Chain (11 Mar 2020 - 18 Mar 2020)

Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

What The Upcoming Dilution Means For The Price Of MKR

https://insights.glassnode.com/what-the-upcoming-dilution-means-for-the-price-of-mkr/

What The Upcoming Dilution Means For The Price Of MKR

This analysis looks at the consequences of the MKR Debt Auction on the price of the MKR token. To learn more about the events leading up to the auction, read our explainer article:

What Really Happened To MakerDAO?
Black Thursday: The sell-off of 12 March resulted in $4.5 million of unbacked DAI in the MakerDAO system. What really happened?
What The Upcoming Dilution Means For The Price Of MKR


MKR Debt Auction Mechanics

The MKR Debt Auction will take place at approximately 10:28 ET (14:28 UTC) on March 19, with MKR being auctioned off in lots for 50,000 DAI. This DAI will then be burned in order to cancel out the Maker system’s DAI debt.

The auction mechanics allow Keepers to bid on how many MKR they are willing to accept for this price. Offers will start at 250 MKR per bundle (or 200 DAI per MKR), and Keepers can bid to buy less MKR for the same 50,000 DAI cost.

From the MakerDAO blog:

The protocol offers a Keeper (bidder) a lot of 250 MKR for 50,000 Dai, which translates to a price of 200 Dai/MKR. A second keeper bids 50,000 Dai but only requires 230 MKR, which translates to a price of 217 Dai/MKR. The bid prices increase through the Keepers’ willingness to take slightly less MKR in exchange for 50,000 Dai.


How Much Will MKR Sell For?

The auction mechanism means that it is unclear how many MKR will be added into circulation in order to redress the deficit faced by the protocol. The core factor that will affect the final amount minted will be the market value of MKR and DAI at the time of the auction (and how these affect demand at various price points).

While the exact number of MKR being minted is uncertain, some basic estimates can be made using widely available information and some assumptions about how much it will sell for in the auction.

The Current Price of MKR and DAI

The price of MKR a month ago was over $600, whereas since the crash, it has sat at slightly over $200 USD.

What The Upcoming Dilution Means For The Price Of MKR
Figure 1: MKR’s price and market cap over the past week (Glassnode Studio)

Due to higher-than-normal demand (and despite being under-collateralized), DAI is currently valued at around $1.02 USD per token, after peaking at a price of $1.11 on 14 March.

The following analysis will use current prices for these assets.

What is the minimum bid required to break even?

Taking the current MKR and DAI prices, ($214 and $1.02, respectively), and assuming these hold until the auction takes place, we can calculate a number of possible scenarios:

What The Upcoming Dilution Means For The Price Of MKR
Figure 2: Possible MKR auction outcomes based on current prices for MKR and DAI

Opening Price

Looking at the first row in Figure 2: if DAI and MKR stay at current prices, a successful bid at the opening price of 200 DAI/MKR (i.e. 250 MKR per bundle) would equate to $204 USD/MKR at $51,000 per bundle (50,000 DAI/bundle). This would result in a profit of:

  • 9.8 DAI/MKR ($10/MKR); or
  • 2450 DAI per bundle ($2500/bundle); or
  • 4.9% profit

This high profit margin means we can likely expect bids at higher prices (i.e. lower MKR amounts per bundle).

Break-Even Price

The fourth line in Figure 2 above indicates the break-even price, below which anyone who bid on the auction would be buying at a loss.

The minimum break-even MKR amount for a bid would be 238.32 MKR per bundle (i.e. 209.8 DAI/MKR).


To What Extent Will MKR Be Diluted?

Current MKR Supply

When MakerDAO was launched in late 2017, there were a total of 1,000,000 MKR tokens. Of these, 530,000 were released into circulation, while 470,000 were held by the Maker Foundation’s development fund. Because the supply of MKR is fluid, however, these figures are not fixed:

What The Upcoming Dilution Means For The Price Of MKR
Figure 3: MKR supply across its lifetime (Glassnode Studio)

The current supply is 985,464 MKR.

How much MKR might be minted?

Based on the system’s current deficit, we can calculate how much MKR will be added into circulation based on various auction scenarios.

MakerDAO deficit: 5,362,718 DAI

Number of bundles for sale (based on the deficit): 107.25436 DAI

What The Upcoming Dilution Means For The Price Of MKR
Figure 4: Possible MKR dilution scenarios

These figures show that if MKR is sold for a low price (i.e. the opening price of 200 DAI/MKR), the total supply will only increase by 2.72%.

The scenario is not very different if MKR is sold for market (break-even) price; then, the supply will only increase by 2.59%.

Even if all MKR were sold in bundles of 230 MKR (well below market price), dilution would still only be 2.50%.

This would bring the total supply to 1,010,133 to 1,012,278 MKR.


What Impact Will This Have On MKR?

The addition of ~25,000 MKR to the existing supply should, in theory, not affect the price of the MKR token too drastically (i.e. not more than a few percent).

Overall, given the current low market cap of MKR (and all cryptoassets) and the fact that the dilution event will not meaningfully increase the MKR token supply, holders should not be too worried about the effect of the auction on the price of their MKR tokens.

While a single inflation event of >3% is not insignificant, the effect of the dilution will probably have less of an effect on the price of MKR than the events that led to the auction itself. The more important effects to be aware of are:

  • The impact of the zero-bid exploit on the reputation of the Maker project.
  • The general state of crypto markets as a result of the COVID-19 pandemic.

Stay updated about the MKR auction via Glassnode’s Twitter, and subscribe to Glassnode Insights below for updates.


What The Upcoming Dilution Means For The Price Of MKR

Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

What Really Happened To MakerDAO?

https://insights.glassnode.com/what-really-happened-to-makerdao/

What Really Happened To MakerDAO?

The massive crypto sell-off on 12 March saw the price of ETH fall 43% from $194 to $111 – its largest ever loss in a single day.

This sell-off triggered unintended consequences for the MakerDAO ecosystem. Dubbed “Black Thursday”, this sent the Maker system into chaos as $4.5 million worth of DAI was left unbacked by any collateral, and users lost millions.

News outlets and industry commentators have been reporting on these events, but a clear account is hard to come by. Many market observers have been left asking: what really happened to MakerDAO?


TL;DR

  1. Ethereum Network Overwhelmed, Gas Prices Increased – On 12 March, the Ethereum network was overwhelmed by demand as the price rapidly plummeted. The transaction queue grew as network capacity was reached, and gas prices shot up by an order of magnitude.
  2. Price Oracles Failed – Due to uncharacteristically high gas prices, price oracles including the Maker ‘Medianizer’ failed to update their feeds.
  3. CDP Liquidations Lagged, Then Were Triggered En Masse – When the Medianizer feed was updated, the reported price instantly decreased by over 20%, causing many CDPs to be liquidated immediately.
  4. ETH Was Sold For Free Through Maker – Again due to high gas fees and network congestion, when the ETH collateral in these CDPs was auctioned off, many bids did not get through. This allowed some liquidators to win these auctions with bids of zero DAI by paying high gas fees, extracting over $8 million worth of ETH essentially for free.
  5. CDP Owners Left With Millions In Losses – This exploit means that over $4.5 million of DAI in the MakerDAO system is now unbacked. In addition, users whose CDPs were liquidated (and whose ETH was sold to the zero-bid liquidator) lost 100% of their collateral, resulting in millions of dollars of losses for the DeFi community.

1 – The Ethereum Network Was Overwhelmed As The Price Fell

As the price of cryptoassets across the market began to plummet early on March 12, on-chain volumes spiked massively, and ETH deposits to exchanges hiked as users scrambled to react to falling prices across the market.

What Really Happened To MakerDAO?

At the same time, many Ethereum dapps saw their highest ever daily activity. This, combined with increasing deposits to exchanges, overwhelmed the network.

The mean gas price for the day spiked over 6x to almost 80 Gwei, with mean hourly prices reaching almost 200 Gwei (according to Glassnode’s hourly data).

What Really Happened To MakerDAO?
Ethereum’s hourly mean gas price reached ~200 Gwei on 12 March, skyrocketing to over 400 Gwei the following day (Glassnode Studio)

2 – ETH Price Oracles Failed

The increase in on-chain activity was especially significant for DeFi apps, which were overwhelmed by the radical spike in demand.

One of the most notable consequences was caused by the failure of pricing oracles offered by projects such as MakerDAO and Chainlink. With gas prices so high and so many transactions in the queue, these oracles were unable to update their price feeds quickly enough to keep up with the rapidly decreasing price of ETH.

Chainlink’s ETH price feed stalled for hours as it waited for price updates to make their way through the queue of transactions. The Maker ‘Medianizer’ oracle also provided radically incorrect ETH price data, giving a price of $166 when the real price was around $130.


3 – CDP Liquidations Lagged, Then Were Triggered En Masse

Positively, this gave some network participants time to top up or pay off their Maker CDPs, which would otherwise have been liquidated. By paying high gas fees, they were able to rescue their CDPs before the Maker price oracle was updated on-chain.

However, it also meant that when the price provided by the oracle was finally updated, many CDPs were suddenly liquidated en masse.

What Really Happened To MakerDAO?
Distribution of CDP liquidations through 12–13 March (source: whiterabbit)

CDP automation systems such as DeFi Saver were unable to rescue many users’ CDPs, as the price instantly dropped from above their configured minimums to below a 150% collateralization ratio. These users therefore had their CDPs liquidated despite having put safeguards in place, as their safeguards relied on accurate and regularly updated price data.

Further, some CDPs whose liquidations hadn’t completed (i.e. their collateral had not yet been purchased) were nonetheless liquidated even after the ETH price went back up, because price oracles were again too slow to reflect this change.


4 – ETH Was Sold For Free Through Maker

The tumbling ETH prices and slow oracles on 12 March led to a massive amount of Maker CDP liquidations, but high gas fees on Ethereum led to an even more dire situation for the MakerDAO ecosystem.

Refresher – How CDP liquidations work: When Maker CDPs (“vaults”) are liquidated, the collateral they contain gets auctioned off by the Maker system to pay back the CDP owner’s debt and the 13% liquidation penalty. Entities who purchase this collateral (“Keepers”) can make bids for bundles of 50 ETH, with auctions open for a limited amount of time, and ETH collateral selling for slightly less than market value.

The purpose of these auctions is to raise enough DAI to pay back the CDP debt. However, because gas prices on Ethereum on 12 March were so high and the queue was so long, bids which offered “regular” gas prices weren’t being processed fast enough.

Taking advantage of this network delay, a liquidator (likely a bot) was able to win these auctions with bids of zero DAI, essentially buying bundles of 50 ETH for free (aside from the comparatively nominal gas fee they paid to front-run the auctions). Several copycat liquidators also joined in on this exploit after noticing these strange auctions.

Over $8 million in ETH was liquidated for zero DAI by these few opportunists exploiting vulnerabilities in the MakerDAO auction system.

This resulted in a net loss for the MakerDAO system, as the auctions did not raise the amount of DAI required to pay back the attached CDP debt. Because of this anomaly, at least $4.5 million (at the time) worth of DAI was left unbacked by any collateral.


5 – CDP Owners Left With Millions In Losses

Not only did this exploit leave the Maker system undercollateralized, but the users whose CDPs were liquidated lost all of the additional collateral in their CDPs.

Because CDPs are overcollateralized by default, these users should have received the total ETH value of their CDP minus their debt and the 13% liquidation penalty. However, because their ETH collateral was sold for zero DAI, they were left with nothing.

Users took to Reddit to ask questions:

What Really Happened To MakerDAO?
The owner of Vault #4458 should have received ~74 ETH, but instead received zero (source: Reddit)
What Really Happened To MakerDAO?
The owner of Vault #849 lost over 1000 ETH as a result of the exploit (source: Reddit)

As u/BitBurst noted, many MakerDAO users lost their life savings. The largest liquidated CDP lost around 35,000 ETH, equivalent to ~$4 million USD at current prices. Community members are calling for MakerDAO to rectify the situation.


The Aftermath

Patching the System

Shortly after the exploit occurred, MakerDAO conducted a vote on how to prevent this from happening again. New system parameters have increased the maximum lot size from 50 to 500 ETH and increased the duration of auctions. Further solutions such as minimum bid amounts on auctions are also being explored.

Re-Collateralization of DAI

The Maker community vetoed an Emergency Shutdown in favor of less drastic measures. Instead, as per the Maker whitepaper, the main way in which the system will be re-collateralized is via the printing and auctioning of new MKR tokens:

If the Collateral Auction does not raise enough Dai to cover the Vault’s outstanding obligation, the deficit is converted into Protocol debt. Protocol debt is covered by the Dai in the Maker Buffer. If there is not enough Dai in the Buffer, the Protocol triggers a Debt Auction. During a Debt Auction, MKR is minted by the system (increasing the amount of MKR in circulation), and then sold to bidders for Dai.

This sale mechanism will dilute existing MKR holders, considered fair “punishment” for their failure to maintain steady backing for DAI via good protocol governance.

The community is also proposing a reduction of the DSR (Dai Savings Rate) and the Global Stability Fee, in order to bring the DAI price closer to its 1 USD peg.

Redress for Liquidated CDP Owners?

At this time, it is unclear whether further MKR tokens will be minted and sold in order to cover the losses suffered by CDP owners who were liquidated. Many community members are calling for this as an “act of good faith”, stating that it will also help the protocol’s reputation in the long run.

What Really Happened To MakerDAO?
(source: Reddit)

Other community members have pointed out the irony of Maker’s response to the event, stating that it “sounds a lot like the traditional system DeFi was supposed to disrupt.”

What Really Happened To MakerDAO?
(source: Reddit)

The system of “the richest few (MKR holders) must apply and adjust monetary policy to decide the fate of the many (DAI users)” does seem eerily similar to the way financial systems work in the traditional world, and users of the MakerDAO ecosystem are concerned for its future.


What Does This Mean For MKR?

To find out what this series of events means for the price of the MKR token, read our follow-up analysis:

What The Upcoming Dilution Means For The Price Of MKR
The MKR Debt Auction on 19 March will see the token supply diluted as more MKR are minted. What will this do to the price of MKR?
What Really Happened To MakerDAO?

Subscribe to Glassnode Insights below for updates.


What Really Happened To MakerDAO?

Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

Crypto Exchange Deposits Increase as Price Plummets

https://insights.glassnode.com/crypto-exchange-deposits-increase-as-price-plummets/

Crypto Exchange Deposits Increase as Price Plummets

As the crypto market continues to see massive losses, BTC inflow to exchanges has tripled over the past 24 hours, reaching new highs for this year.

Crypto Exchange Deposits Increase as Price Plummets

In its most active period yesterday, over $358 million USD worth of bitcoin was transferred to exchanges in a single hour, shortly before the price dropped even further from ~$6100 down to the low $5000s.


The number of ETH exchange deposits also spiked massively, more than doubling in half a day as the price crashed by 30% and investors rushed to minimise losses.

Crypto Exchange Deposits Increase as Price Plummets

Stablecoin Activity: Investors Look to Buy the Dip

But it wasn’t just panic sellers who were transferring their coins to exchanges. The inflow of Tether to exchanges also saw a massive increase, suggesting that many investors are looking to buy the dip.

Crypto Exchange Deposits Increase as Price Plummets

This makes sense, as Bitcoin’s Stablecoin Supply Ratio has reached record lows, meaning that stablecoins’ buying power over bitcoin is currently at its strongest point ever.

Crypto Exchange Deposits Increase as Price Plummets

Based on these figures, have we reached the bottom yet, or does crypto have further to fall before recovering?

Take our Twitter poll to have your say and see what the community thinks:


Crypto Exchange Deposits Increase as Price Plummets

Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

The Week On-Chain (4 Mar 2020 – 11 Mar 2020)

https://insights.glassnode.com/the-week-on-chain-12-mar-2020/

Bitcoin Market Health

The Week On-Chain (4 Mar 2020 - 11 Mar 2020)

Bitcoin has fallen back down to $6k, in its worst day since 2017. Earlier today, the price dropped by 19% in a single hour as over half a billion USD worth of BTC longs were liquidated on BitMEX.

Over the past week, we saw BTC recover briefly to above $9k after dropping into the $8200-8800 range the previous week. However, it quickly sunk back below $9000, and then below $8000. As of the publication of the table below (Wednesday 11 March), bitcoin was still in the high $7000s:

The Week On-Chain (4 Mar 2020 - 11 Mar 2020)

But on Thursday morning, crypto markets plummeted, with BTC reaching lows close to $5000 on some exchanges.

The Week On-Chain (4 Mar 2020 - 11 Mar 2020)
Bitcoin crashed below $5k on some exchanges on Thursday morning (data: CoinMarketCap)

This crash came after Trump announced a travel ban for those travelling from Europe into the US, but it is likely that a number of fears about coronavirus and its effect on the economy played a role.

Current BTC price (Thursday 12 March): ~$6100


Aside from price movements, on-chain fundamentals have not experienced significant changes, and are all still up for the year.

The Week On-Chain (4 Mar 2020 - 11 Mar 2020)

This week, on-chain volume has experienced a notable increase, while the number of transactions has decreased – in other words, the average USD value per transaction has increased. This may suggest a shift from trading-based behaviour to buying and selling larger amounts as investors make decisions about whether or not to stay exposed to BTC.


Net Unrealized Profit/Loss Falls into “Fear” Zone as Price Plummets

The Week On-Chain (4 Mar 2020 - 11 Mar 2020)

Bitcoin investor sentiment just crossed into the “Fear” zone according to Net Unrealized Profit/Loss (NUPL).

NUPL represents the difference between unrealized profit and unrealized loss to determine whether the network as a whole is currently in a state of profit or loss. Values above zero indicate a state of net profit, so the current value of ~0.22 means that despite the price dump, the network is still in a state of profit.

However, today’s crash has taken this value significantly lower, well into the orange “Fear” zone. Historically, when this happens, NUPL usually drops all the way into the red “Capitulation” zone (net loss) before recovering to profitable levels.

The Week On-Chain (4 Mar 2020 - 11 Mar 2020)
NUPL usually drops all the way down into the red zone after descending into the orange zone (Glassnode Studio)

If we don’t see this value recovering soon, the market may take more significant losses before recovering into a state of net profit.


MVRV Ratio: Bitcoin’s Market Cap Approaches Parity with Realized Cap

The Week On-Chain (4 Mar 2020 - 11 Mar 2020)

MVRV (market-value-to-realized-value) ratio is, as the name suggests, the ratio of an asset’s market capitalization to its realized capitalization. By comparing these two metrics, MVRV can be used to get a sense of when price is above or below “fair value”, thereby helping to spot market tops and bottoms.

Bitcoin’s market cap is converging on its realized cap as the price decreases, bringing the asset closer to its “fair value” based on the average price when each coin was last moved. If MVRV falls below one, BTC will officially be “undervalued” as defined by this metric.

The question is whether the market will acknowledge this and rebound, or whether wider fears of economic turmoil will cause people to keep selling.

Stay tuned with data from Glassnode Studio.


The Week On-Chain (4 Mar 2020 - 11 Mar 2020)

Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

BTC Price Drop: How Are Long-Term Holders Responding?

https://insights.glassnode.com/btc-price-drop-long-term-holders-responding/

Long-Term Holders Haven’t Lost Faith

BTC Price Drop: How Are Long-Term Holders Responding?

LTH-SOPR remains close to 1 despite the recent price drop, indicating that long-term holders haven’t lost faith.

LTH-SOPR uses the SOPR (Spent Output Profit Ratio) metric, but applies it only to spent outputs that are at least 155 days old. As such, it provides a signal for whether long-term holders are, on average, selling at a profit or loss. When the value is above 1, investors are selling at a profit, whereas values below 1 indicate that investors are selling at a loss.

BTC Price Drop: How Are Long-Term Holders Responding?
LTH-SOPR has held above 1 since the last bear market, indicating that long-term holders are not inclined to sell at a loss when fundamentals are strong (Glassnode Studio)

While LTH-SOPR has decreased with the recent price dip and is testing the 1-line, it appears not to be dropping too far past this point (especially when compared to STH-SOPR, which looks at the profit ratio of short-term holders).

As we have seen during previous sell-offs, long-term holders usually stay confident and wait for the price to increase again. This makes sense, considering that long-term holders:

  • Have likely been through many ups and downs in crypto markets (depending on how long they have been holding), and are accustomed to volatility.
  • Are less likely than short-term holders (such as FOMO investors or leverage traders) to need the money in the short- to medium-term, so can afford to wait out the dip.
  • Are more likely to be invested for ideological reasons or because they believe in the fundamentals of bitcoin (so periodic peaks and troughs aren’t enough to scare them into selling at a loss).

Considering the fact that on-chain fundamentals remain strong, these long-term holders are taking a rational approach instead of panic selling; hence why they are not selling at a loss, unlike short-term holders.

Short-Term Investors More Likely to Sell at a Loss

As STH-SOPR indicates, short-term holders are much more likely to sell at a loss than long-term holders:

BTC Price Drop: How Are Long-Term Holders Responding?
STH-SOPR is much more likely to regularly dip below 1 (Glassnode Studio)

This disparity is not surprising, seeing as short-term holders are more likely to consist of:

  • Short-term traders who are more exposed to volatility (and who are selling at a loss in USD terms, but may or may not be selling at a net loss, depending on which pairs they are trading between).
  • FOMO investors and panic sellers (such as the hairdressers and Uber drivers and friends’ aunts’ cousins who notoriously FOMOed into bitcoin as it rode up to $20k in early 2018).

Additionally, STH-SOPR is also more likely to drop below 1 because the line between profit/loss is much higher when investors bought recently (when the price was high), as opposed to long-term holders who bought when the price was lower. As such, the price of BTC generally has to be lower for long-term holders to be selling at a loss, as they (on average) bought at a lower price.

This means that LTH- and STH-SOPR alone can’t tell us whether long-term holders are selling in greater volumes; only whether they are selling at a profit or loss. Hence, we need other metrics to paint a clearer story.

SOAB Shows Long-Term Holders Still Holding

SOAB (Spent Output Age Bands) represents the percentage of spent outputs on a given day which were a certain age (e.g. X hours/days/weeks/months old). It allows us to see whether long-term holders or short-term holders are responsible for more of the total on-chain transactions in a given time period.

BTC Price Drop: How Are Long-Term Holders Responding?
SOAB shows that long-term holders are not selling more than usual (Glassnode Studio)

Since the price started dropping after 7 March, transactions from both short-term and long-term holders have remained within standard fluctuations, with neither taking up a meaningfully larger share of network activity.

(Note that the large spike on 4 March was caused by an exchange aggregating “dust”, and does not represent on-chain economic activity or trading).

The biggest increase was seen in the (short-term) 1d-1w age band, whose share increased from 12.78% to 18.59% since 7 March.

BTC Price Drop: How Are Long-Term Holders Responding?
SOAB values for 7 March and 9 March (Glassnode Studio)

Increases weren’t limited to short-term age bands though. The 6m-12m age band (which represents LTH movements, being more than 155 days old) saw a meaningful increase from 1.17% to 2.03%. Given that a large number of people who bought in this age band would have purchased BTC at prices higher than the current price, this explains why LTH-SOPR is also decreasing (albeit not as drastically as STH-SOPR).

While SOAB indicates spent output lifespan as a fraction of total transactions, it doesn’t shed light on the absolute volume of coins being moved in each transaction, meaning more granular metrics are required to determine whether recent on-chain movements are primarily based on movements by short-term or long-term investors.

Recent Transactions Have Been High-Frequency, Low-Lifespan

CDD (Coin Days Destroyed) indicates the cumulative age of all spent outputs within a given time period. An increase in CDD, as has occurred in the past few days, means that coins being moved on-chain have a greater cumulative age, which may imply movements from long-term holders.

However, the average lifespan of spent outputs (ASOL) has actually decreased since the price started to drop, suggesting that the spike in CDD was caused by a larger number or higher value of transactions from short-term holders, rather than movements by long-term holders.

BTC Price Drop: How Are Long-Term Holders Responding?
CDD has spiked in the past 2 days, but low ASOL values suggest that this is not due to movements from long-term holders (Glassnode Studio)

Along with conclusions drawn from STH- and LTH-SOPR, as well as SOAB, this low ASOL value (especially relative to CDD) supports the narrative that long-term holders are not selling in meaningful volumes at this point.

Conclusions

Overall, on-chain indicators overwhelmingly support the thesis that most long-term holders are staying confident, despite recent price dips. Along with this, on-chain fundamentals remain strong, and with the halving coming up soon, supply will be restricted, applying further upwards price pressure.

While some market commentators speculate that coronavirus fears and economic turmoil may uproot confidence in bitcoin and overturn long-existing narratives, for the time being, those invested in the underlying value of BTC appear to remain assured in its long-term potential.


BTC Price Drop: How Are Long-Term Holders Responding?

Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

Retail Interest in Bitcoin: Addresses with ≥ 0.1 BTC Reach All-Time High

https://insights.glassnode.com/bitcoin-addresses-with-balance-above-0-1-btc/

Bitcoin Adoption on the Rise

Retail Interest in Bitcoin: Addresses with ≥ 0.1 BTC Reach All-Time High

2,973,761 unique Bitcoin addresses now hold at least 0.1 BTC. Having experienced large spikes in early 2016 and again in late 2017, the recent increase in this metric sets an optimistic tone for bitcoin adoption, especially by retail investors.

Retail Interest in Bitcoin: Addresses with ≥ 0.1 BTC Reach All-Time High
BTC Addresses with Balance ≥ 0.1 experiencing increased growth, reaching ATH (Glassnode Studio)

Since mid-February, the growth rate of this metric has increased, moving more sharply upwards. This coincides with the number of addresses with >1 BTC experiencing increased growth over the past month, suggesting more widespread awareness and adoption.

Retail Interest in Bitcoin: Addresses with ≥ 0.1 BTC Reach All-Time High
BTC Addresses with Balance ≥ 1 has also reached an ATH (Glassnode Studio)

Network Activity Increasing in 2020

At the same time, the number of new entities and active entities in the Bitcoin network have been on a general upward trajectory since January, reaching levels of activity not seen since the lead-up to the $12k price spike June/July last year.

Retail Interest in Bitcoin: Addresses with ≥ 0.1 BTC Reach All-Time High
2020 has seen increased activity in the Bitcoin network (Glassnode Studio)

Historically, these types of metrics have increased when retail interest is on the rise. When combined with signs of high confidence from long-term HODLers, this suggests favourable conditions for bitcoin’s value.


Retail Interest in Bitcoin: Addresses with ≥ 0.1 BTC Reach All-Time High

Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

The Week On-Chain (26 Feb 2020 – 4 Mar 2020)

https://insights.glassnode.com/the-week-on-chain-5-mar-2020/

Bitcoin Market Health

The Week On-Chain (26 Feb 2020 - 4 Mar 2020)

For the third week in a row, BTC suffered a price drop – however, it is showing signs of recovering over the past few days. Since the table below was published (Wednesday 4 March), the price of bitcoin has risen back above the $9k mark.

Current BTC price (Thursday 5 Mar): ~$9100

The Week On-Chain (26 Feb 2020 - 4 Mar 2020)

Along with price, on-chain fundamentals also show signs of recovering, with the number of transactions and active entities in the network on the rise.

While the 7-day moving average of on-chain USD volume appears to have decreased, this figure was brought down by the dip earlier in the week; absolute values (with no MA applied) are in fact on par with volumes seen a week and a month ago.

The Week On-Chain (26 Feb 2020 - 4 Mar 2020)

Last week, we predicted a recovery for BTC, with a support level at $8200-8500. At its lowest point last week, the price dipped briefly below $8500 before settling back up around $8800, as predicted by on-chain data and technical analysis.

While coronavirus fears threatened to push prices below this support level, this threat appears to have passed for the time being as markets recover both in and out of crypto.

Outside of these short-term trends, there is ongoing debate about whether overall crypto market sentiment is bullish or bearish. On-chain metrics continue to paint an optimistic picture…


Reserve Risk Indicates Current BTC Price is Very Attractive Due to Low Risk/Reward Ratio

The Week On-Chain (26 Feb 2020 - 4 Mar 2020)

BTC’s Reserve Risk is currently at low levels, indicating an attractive risk/reward ratio for investing in bitcoin. This metric, which is used to assess the confidence of long-term holders relative to price, shows high investor confidence in BTC at current price levels. Along with other on-chain fundamentals, it suggests that BTC has more room to grow imminently.

Reserve Risk is defined as the current price divided by HODL Bank, which represents deferred spending as a result of HODLing, demonstrating investor confidence. The attractiveness of the current BTC price (i.e. Reserve Risk) can be determined in relation to this sum total of confidence built over time.

When confidence is high and price is low, there is an attractive risk/reward to invest (Reserve Risk is low). Current levels suggest that holding BTC is attractive at this price, and potential rewards outweigh the risks of entering the market now.

Low ASOL Values Also Indicate Strong Investor Confidence

ASOL (Average Spent Output Lifespan) represents long-term investor confidence by showing when long-term HODLers are exiting the market. Historically, increases in this metric have come simultaneously to big sell-offs as long-term investors sell their positions.

The Week On-Chain (26 Feb 2020 - 4 Mar 2020)
Historically, high ASOL values have coincided with large sell-offs as long-term investors exit (Glassnode Studio: ASOL)

Close market observers may have noticed a significant spike in ASOL over the past few days. However, this is no cause for alarm; Glassnode’s data scientists have traced this spike to an exchange aggregating BTC “dust” (i.e. very tiny amounts of BTC spread across many addresses) from Omni transactions.

The Week On-Chain (26 Feb 2020 - 4 Mar 2020)

When this activity is filtered out, ASOL levels remain low, supporting the thesis that long-term investors are not exiting their positions. Despite bitcoin’s recent dip, confidence remains high.


Community Narrative

Content and insights derived from Glassnode data by our community

The whole crypto market has seen meaningful gains in 2020, and one of the best-performing assets is Kyber Network’s KNC token, which has seen a radical +335% price increase since December 2019. Glassnode Studio user @Alex_Ged uses Glassnode’s on-chain adaptation of the Herfindahl Index to illustrate why.

The Herfindahl Index measures addresses’ shares of the current supply of a given token; a large score indicates high concentration of supply, whereas a small score is an indicator for more evenly distributed funds across addresses.

In his thread, Gedevani looks at KNC’s decreasing Herfindahl Index value to show that KNC is becoming increasingly distributed, as more people enter the market and accumulate the token in anticipation of the launch of its staking mechanism this year, which will allow holders to receive a portion of network fees.

He points out: “Adoption is still one of the most useful yet overlooked indicators in crypto“.

View his twitter thread for the full analysis, and send us your own content using Glassnode data to be featured in our weekly update.


The Week On-Chain (26 Feb 2020 - 4 Mar 2020)

Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

Bitcoin Unrealized Profit Suggests Current Market Is Nowhere Near Top

https://insights.glassnode.com/bitcoin-unrealized-profit-3-march/

Bitcoin Unrealized Profit Suggests Current Market Is Nowhere Near Top

Bitcoin’s recent drop back below $10k has caused some concern for long-term HODLers and investors.

However, on-chain metrics such as Unrealized Profit suggest that BTC has more room to grow before any meaningful downward correction takes place.

Bitcoin Unrealized Profit Suggests Current Market Is Nowhere Near Top

What is Unrealized Profit?

Unrealized Profit is defined as the total profit (in USD) of all coins whose price at realization time was lower than the current price (normalised by the market cap). In other words, it represents the total profit accrued by UTXOs which were created when the price of the asset was lower than the current price.

This metric is part of the profit/loss family of metrics, which serve to answer the question: If all bitcoins were sold today, how much would investors stand to gain or lose?

What does this mean for the market?

Currently, Unrealized Profit is at a value similar to historical levels seen at the beginning of bull markets. Its relatively low current level supports the interpretation that the price of bitcoin has more room to grow before investors start realizing their profits en masse.

Another way of looking at this is that investors have more to gain by waiting for a price increase than they do by realizing profits now.

If you were worried about the downturn of late February, rest assured that on-chain fundamentals for BTC are still healthy.


Bitcoin Unrealized Profit Suggests Current Market Is Nowhere Near Top

Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

The Week On-Chain (19 Feb 2020 – 26 Feb 2020)

https://insights.glassnode.com/the-week-on-chain-27-feb-2020/

Bitcoin Market Health

The Week On-Chain (19 Feb 2020 - 26 Feb 2020)

After the downward correction last week, BTC has continued to drop in price. Since the table below was published (Wednesday 26 February), the price of bitcoin has decreased even further, dropping below $9k.

Current BTC price (Thursday 27 Feb): ~$8800

The Week On-Chain (19 Feb 2020 - 26 Feb 2020)

This retrace coincides with some significant reductions in on-chain economic activity. USD volume, raw transaction count, and the number of active addresses/entities have all fallen in the past week, since bitcoin peaked above $10k.

The Week On-Chain (19 Feb 2020 - 26 Feb 2020)

Last week we posed the question of whether we’d reached a local top and could expect a retrace, or whether we were looking at another upcoming rally. Although the price has continued to drop, last week’s decrease in active entities has slowed to a halt, signalling a potential recovery in on-chain economic activity and providing hope for a rally in the coming weeks.

This is supported by analysts and backed by BTC’s 200-day moving average, which suggest that the bullish trend of 2020 is not over – with the general consensus identifying support at the $8200-8500 level.

However, traders are also preparing for the possibility that BTC may fall below $8000, at which point there are chances of an even stronger decline. Fears of the ongoing effect of coronavirus on markets (both traditional and crypto) make this possibility more likely, despite healthy fundamentals. Is there enough bullish sentiment to hold up prices, despite decreasing confidence in the market’s ability to withstand the crisis?

Let’s see how market predictions stack up against on-chain metrics…


Bitcoin’s MVRV Z-Score: More Room to Grow

The Week On-Chain (19 Feb 2020 - 26 Feb 2020)

The MVRV Z-Score is used to assess whether bitcoin is overvalued or undervalued relative to its “fair value”, as underlined by its realized cap. When the metric is too high (red-zone), this usually indicates market tops, while a lower ratio (green-zone) indicates market bottoms.

The present low MVRV Z-Score suggests that BTC is still undervalued, with significantly more room to grow before reaching the next market top. This provides support for many analysts’ prediction that bitcoin will stay above $8000 for the time being.

Readers should continue to monitor the MVRV Z-Score to identify any potential trend changes early.

Short-Term Investor Trends: BTC Still Undervalued, According to STH-MVRV

The Week On-Chain (19 Feb 2020 - 26 Feb 2020)

Short Term Holder MVRV (STH-MVRV) is MVRV that takes into account the behaviour of short-term investors. This ratio provides a clean support/resistance line that correlates with upward and downward market trends.

As of 16 January this year, STH-MVRV (7-day MA) has climbed and remained comfortably above 1. Historically, this has correlated with uptrends in the price of BTC, suggesting fundamental support for higher prices. Barring any radical events that might affect confidence in the market, this metric suggests that BTC has room for more imminent growth.

Stay tuned on Glassnode Studio for the launch of STH-MVRV next week.


Community Narrative

Content and insights derived from Glassnode data by our community

In a compelling tweet thread, @caprioleio uses data from Glassnode Studio to support his bullish prediction: “🚀Bitcoin $100K within 5 years”.

Based on estimates of Bitcoin’s Energy Value, combined with evidence of demand increasing along with supply contracting, he predicts that the price of bitcoin will increase at least 10x over the coming years.

Overall, despite unforeseeable events affecting price in the short-term, he believes that BTC fundamentals still paint an optimistic picture, and HODLers should remain confident.

View his twitter thread for the full analysis, and send us your own content using Glassnode data to be featured in our weekly update.


The Week On-Chain (19 Feb 2020 - 26 Feb 2020)

Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

The Week On-Chain (12 Feb 2020 – 19 Feb 2020)

https://insights.glassnode.com/the-week-on-chain-20-feb-2020/

Bitcoin Market Health

The Week On-Chain (12 Feb 2020 - 19 Feb 2020)

Despite passing the $10k mark again this week, the price of BTC has dropped since last week. Since the table below was published (Wednesday 19 February), bitcoin suffered a rapid price drop late on Wednesday evening, levelling out at ~$9500-9600 on Thursday morning and remaining there throughout the day.

The Week On-Chain (12 Feb 2020 - 19 Feb 2020)

Have we reached a local top for the time being, or will BTC rally once again in the coming days? Looking at on-chain fundamentals, Bitcoin network activity this week has suffered stagnation and some meaningful decreases.

The Week On-Chain (12 Feb 2020 - 19 Feb 2020)

Particularly interesting is the 16% drop in entity-adjusted transaction volume since last week. Entity-adjusted metrics filter out transactions in which BTC doesn’t change hands, providing a clearer signal of actual economic activity.

The sharp decrease in this metric over the past week suggests that, at least on-chain, economic activity may be slowing down.

How do these fundamentals stack up against other on-chain metrics?


Bitcoin Active Entities Trending Upward in 2020: Will this Continue?

The Week On-Chain (12 Feb 2020 - 19 Feb 2020)

The number of unique active entities in the Bitcoin network has been on the rise in 2020, for the first time since the price peak in mid-2019. This is a potential sign that Bitcoin market participants are returning to the network, with more participants actively transferring BTC on-chain.

However, despite the general up-trend in this metric, the past week has seen a decrease in active entities on-chain. Observed in the context of BTC’s rapid 6% price dip late on Wednesday, as well as the overall decrease in on-chain activity over the past week (as seen in the statistics above), this may trigger some concern.

That said, we saw a similar pattern in late January (a drop in active entities and price) before these both quickly recovered into an upward trajectory.

Could this decrease in on-chain activity signify that we have reached a local top? Or is this just a brief dip, and will activity recover and continue to increase? Market observers should continue monitoring active entities and addresses to see if the general trend continues up.


The Week On-Chain (12 Feb 2020 - 19 Feb 2020)

Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.