Summary
In our quarterly outlook, we present 10 charts that cover some key crypto market fundamentals and technicals. We take a relative approach to measuring the impulse of on-chain activity on various layer-1 and layer-2 networks in the form of total value locked (TVL), fees/revenues and active addresses. We also look at correlations, volatility trends and the current state of crypto spot and futures market liquidity.
Moreover, one of the biggest preoccupations among the institutional crypto community is the possibility of spot bitcoin exchange traded products (ETPs) being approved in the US. We estimate the market implied probability of such products being approved, following the ruling in the Grayscale Investments LLC vs SEC case. We then consider how ether may perform if ether futures-linked ETPs materialize by reviewing the historical flows for bitcoin futures-linked ETPs.
Fundamental signals
Activity impulse: total value locked
This chart tracks the impulse of activity proxied by total value locked (TVL) on each network measured against the supply growth (i.e. inflation) of corresponding tokens. We normalize TVL by measuring August month-end data in standard deviation terms relative to the 90-day average. For inflation, we annualize the change in the token’s circulating supply over the last three months.
While Solana and Polkadot are the only networks to have registered a normalized TVL increase in recent months, SOL and DOT tokens also have some of the highest inflation rates in our sample.
Activity impulse: fees or revenues
We compare each network’s (1) average number of daily active addresses in August to the (2) average daily fees or revenues earned during the same period, both measured in standard deviation terms compared to the previous three months. It shows:
- Fees or revenues on Arbitrum and Polkadot have been stable despite a decline in active addresses
- Fees or revenues on Litecoin, Ethereum, and Optimism are trending in line with the change in active addresses
- Fees or revenues on Cardano and Solana are undershooting the decline in wallet activity
Layer-2 (L2) activity
One sector of the crypto ecosystem that has maintained its upward trajectory year-to-date has been layer-2 activity on the Ethereum network. The TVL for L2s ended August at US$3.7B, 1.4x above its end-2022 level (though slightly below the peak of $4.5B reached in May). Base currently represents around 9% of the total L2 TVL following its launch for all users on August 9.
Monthly gas usage has meanwhile continued its steady climb, even in the absence of ARB-related airdrop-farming incentives that attracted flows in 1Q23.
Correlations
Bitcoin returns remain relatively uncorrelated to the daily change in most macroeconomic factors based on a 90-day window, despite its relationship to US stocks showing some signs of recoupling in August. The relationship between bitcoin and gold returns is now negligible to nonexistent.
Meanwhile, the correlation between ether and S&P 500 returns is higher at a coefficient of 0.31, but this still represents a relatively weak positive relationship.
Volatility
Despite crypto markets having been punctuated by idiosyncratic periods of higher volatility since its inception, our measure of the rolling 30-day standard deviation of daily returns suggests a trend towards diminishing tops over the last three years. More recently, this measure has approached convergence with the Cboe volatility index (VIX) for US stocks.
In mid-August, volatility for the Coinbase Core Index (comprised of mostly BTC and ETH) fell to 16% before rebounding higher to 34% following a large liquidation event.
Technicals
Liquidity
Aggregate average daily spot and futures volumes for BTC and ETH declined by 30% in the last two months, compared to a daily average in 2Q23 of $54.6B. That’s not the largest drop off we’ve seen in recent history, however, as liquidity back in the same July and August summer months of 2021 fell 37% from the preceding quarter’s daily average, although that included exceptionally high May 2021 volumes. Moreover, the net daily average of $38.2B in August 2023 is still above the low of $30.7B observed in December 2022.
Exchange-traded products (ETPs)
Perhaps the biggest focus for the institutional crypto community in the near term is the possibility of spot bitcoin ETPs being approved in the US.
Based on the Grayscale Bitcoin Trust’s discount to net asset value (NAV), the market implied probability of one or more bitcoin spot ETPs being approved is currently near 80%. This assumes that the current GBTC discount reflects its lack of liquidity and redeemability for its shareholders, such that we believe trading at par to NAV implies a 100% probability of one or more spot bitcoin ETP approvals.
Flows
When the first bitcoin futures-linked ETF (ProShares’ BITO) launched on October 19, 2021, it accumulated $1.4B of flows in its first four weeks.
However, the subsequent impact of those flows on BTC/USD performance may have been compromised by macro-related events, such as the US Federal Reserve’s pursuit of contractionary monetary policy and quantitative tightening. In this chart, we use a detrended bitcoin time series that filters out the effect of such macro factors to approximate the observable impact of these flows on bitcoin’s price.
Futures open interest
The size of retail participation in traditional bitcoin futures (as opposed to perpetual futures) has stabilized over the last 8 months, after steadily declining between 4Q21 and 4Q22. The presence of institutional entities via CME futures, on the other hand, has been anchored over the last two years by bitcoin futures-linked ETPs in the US. Inflows into these products have helped the net notional value of CME futures rise by over 20% since mid-June (after several filings for bitcoin spot ETPs). CME futures currently represent 73% of the total market outstanding, compared to 52% at the end of 2021.
Bloomberg reported on August 17 that the SEC may allow the approval of ETH futures-linked ETFs by October 2023. Open interest on CME futures increased by 37.6% in the two weeks following this announcement, although due to ETH depreciation, the notional value of those contracts only increased by 23.6% in USD terms. CME ETH futures currently represent 45% of the total market outstanding.
