Market View
Appetite for bitcoin risk continues to be driven heavily by investor speculation regarding the approval of one or more spot bitcoin exchange-traded funds (ETFs) in the US. This week, CoinDesk reported that the US Securities and Exchange Commission (SEC) has opened a dialogue with investment firm Grayscale regarding the conversion of its Grayscale Bitcoin Trust (GBTC) to an ETF.
The progress seems particularly encouraging after a number of ETF applicants amended their prospectuses with updated language in recent weeks, suggesting meaningful interactions between these teams and the SEC. Although this is commonplace for such applications in other asset classes, this is a first for crypto, according to Bloomberg Intelligence. With a US government shutdown still looming on November 17, we think the window is open for the SEC to be proactive ahead of that possible event risk.
Consequently, CoinShares has reported six straight weeks of global crypto product inflows totaling a net US$767M as of November 6, contributing to positive YTD flows of $847M – mainly concentrated in bitcoin. Otherwise, ETH-linked investment products attracted $17.5M for the week though these are still net negative for the year. These inflows may continue following headlines indicating that BlackRock registered paperwork for an iShares Ethereum Trust, raising market expectations of an official filing with the SEC. Altcoin momentum appears to be healthy as well, as SOL, LINK and MATIC based vehicles also received fresh capital.
Onchain Excitement
Following the drop in bitcoin ordinal activity last month, ordinal transaction counts have since returned to previous highs. This surge in activity corresponds with a spike in transaction fees by more than 500% since November 1 in a pattern similar to that seen during the initial surge of ordinal usage in May 2023. See chart 1. Ordinal trading volumes (averaging $10M daily) over the past week have been comparable to NFT trading volumes on Ethereum (averaging $16M daily).
However, in our view, ordinals’ recent 99% peak-to-trough drop in daily transaction activity reflects its still nascent status in the space and highlights the non-zero risk of being supplanted by another standard in the future. Much of the core ordinal development has been completed by a handful of individuals, which may explain why Casey Rodarmor’s Rune proposal had such a dramatic impact on ordinal activity in late September.
Ether has reasserted its deflationary status alongside increased activity on the Ethereum network recently. See chart 2. Fee burn has been driven primarily by activity on Ethereum mainnet despite the fact that since November 1, the transaction count on layer-2s (including Arbitrum, Optimism, and Base) in aggregate have had 50% more transactions than the settlement layer (1.5M average daily transactions vs 1M average daily transactions). Indeed, the total execution transaction fees paid on these rollups were less than 5% of the fees paid on the mainnet (~1,200 ETH vs. ~25,500 ETH).
With the Dencun upgrade introducing blob storage and potentially reducing rollup transaction fees by another 10x, we think this means that even dramatically higher levels of activity on rollups may not meaningfully increase the burn rate of ether. That could potentially put a rollup centric future at odds with ETH's ultrasound money thesis. Still, transaction counts on Ethereum mainnet have remained relatively stable throughout the past several years despite rollup adoption, potentially indicating a “stickiness” for users and liquidity that value security over speed and cheaper fees. See chart 3.
Thus, rollups have not yet meaningfully cannibalized Ethereum activity, and in our view this is unlikely to happen in the near future as the network effect of liquidity and time-tested security keep mainnet an attractive platform for a certain cohort of users. But looking ahead, it's still possible to see rollups enabling a new wave of users who may lack the sophistication and resources to be competitive on the mainnet.
