Glassnode: BTC and ETH are diminishing returns, but capital may re-enter the encryption field
Compilation of the original text: The Way of DeFi
Original source: Glassnode
Compilation of the original text: The Way of DeFi
The market entered a period of consolidation after the collapse of LUNA and UST sparked a sector-wide sell-off. Bitcoin price is trading in a relatively tight range between a high of $31,300 and a low of $28,713.
Bitcoin markets are now down for eight straight weeks, the longest streak of weekly red candles in history. This article will look at short-term (monthly) and long-term (4-year) returns for Bitcoin and Ethereum. From this we can see that the current decline has had a clear impact on the market performance of the entire asset class.
Furthermore, an assessment of the derivatives market suggests that the market remains concerned about further declines for at least the next three to six months. Looking at the chain, we can see that the block space demand of Ethereum and Bitcoin has dropped to the lowest point in many years, and the speed of burning ETH through EIP1559 is also at an all-time low.
Combine that with poor price performance, worrisome derivatives pricing, and extremely subdued demand for Bitcoin and Ethereum block space, and we can deduce that headwinds are likely to continue on the demand side.
Are Bitcoin and Ethereum in Diminishing Returns?
It is widely believed that Bitcoin’s returns generally decline as market valuations grow. This reflects a number of factors, including (but not limited to):
Larger market sizes require more capital to move in either direction.
Bring in institutional capital, more advanced trading strategies, and derivatives for hedging and capturing volatility.
Compress information asymmetries to better understand risk, performance, correlation and cycle behavior.
Historically, Bitcoin has traded on a roughly 4-year bull/bear cycle, often associated with halving events. The chart below depicts Bitcoin's 4-year compound annual growth rate (CAGR).
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In the short term, we can also see that Bitcoin’s monthly returns have been underwhelming at -30%. In fact, Bitcoin has lost 1% of its market value on a daily basis over the past month.
real time chart
real time chart
Beyond that, we can see an interesting coupling between Bitcoin and Ethereum CAGR performance, especially during bearish trends. During the period of uncertainty after March 2020, and since the beginning of the bear market in May 2021, the CAGR curves of the two assets have converged. Ethereum also appears to be experiencing diminishing returns over time.
In bullish trends, ETH generally outperforms BTC, but these divergences appear to be getting weaker over time (smaller divergences to the upside). In more of a bearish trend, it can be seen that ETH's CAGR tends to lag BTC's performance.
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While Bitcoin remains the digital asset with the largest market valuation, it exists within an ever-growing ecosystem of blockchains, currencies, protocols, and tokens. For years, ethereum has been the second-largest market leader and is often seen as a bellwether for the market's appetite for other digital asset risk curves.
A popular tool for tracking this relative performance and industry rotation is "Bitcoin Dominance." The leading variables below only consider the relative performance of Bitcoin and Ethereum market capitalization. This attempts to distill this macro "sector rotation" (an investment strategy that shifts assets from one industry to another based on market laws and forecasts) into a very specific measure of the relative performance of large-cap stocks. From this, we can make some observations:
As investors begin to move further up the risk curve, a declining Bitcoin dominance rate divergence (green arrow) is typical of early bull markets.
Rising Bitcoin dominance divergence (red arrow)As is typical of an early bear market, bitcoin tends to outperform as risk appetite declines.
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Derivatives expected to see further downside
As for the derivatives market, we can see another coupling relationship between BTC and ETH, which is reflected in futures cash and arbitrage yields. Roughly equal rolling yields of $3 million can be obtained from both assets throughout the 2020-22 cycle, with little divergence. This is another data point that shows that traders are taking advantage of all the yield available in the market, as long as liquidity and volume allow.
The $3 million rolling benchmark yield for both assets is currently around 3.1%, historically low. However, this is higher than the 2.78% yield on the U.S. 10-year Treasury note, which may start to weighimage description。
real time chart
real time chart
Looking ahead to the end of the second quarter, we can see a strong appetite for put options with primary strikes at $25,000, $20,000 and $15,000. The pool of open call options is significantly lower, with open interest mostly concentrated around the $40,000 strike price.
real time chart
In the longer term, however, year-end options open interest is significantly more constructive. There is a clear preference for call options, concentrated around the strike price of $70,000 to $100,000. Also, the dominant put option strikes at $25,000 and $30,000 are above mid-year price levels.
real time chart
Abandoned city on the chain
Perhaps converging strongly with the short-term panic expressed in derivatives markets, on-chain activity in Bitcoin and Ethereum remains subdued. Ultimately, high demand for block space and network utilization often manifests itself in network congestion and spikes in transaction fees. While Bitcoin did triple the total fees paid last week during periods of volatility, its daily fees have been hovering around 10-12 BTC since May 2021.
costcostreal time chart
Despite having a fairly active blockchain ecosystem, Ethereum’s block space demand has also largely dried up. Despite the network’s plethora of applications, financial protocols, and tokens, Ethereum’s average gas price is still falling, standing at just 26.2 Gwei at the time of writing.
real time chart
A knock-on effect of lower demand for Ethereum block space is a reduction in the net number of ETH tokens burnt through the EIP 1559 protocol. During the Bored Ape Yacht Club 'Otherside' NFT minting, a record burn of 38,940 ETH/day was set, and the burn rate is now at an all-time low.
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To wrap up the relative demand for Ethereum block space, we can examine the on-chain activity associated with popular DeFi tokens: AAVE, COMP, UNI, and YFI. The chart below shows the number of active addresses interacting with these tokens, as well as the dollar-denominated transaction volume in each token. These are relatively simple indicators and comparisons, but the relationship to price performance is very clear.
Summarize
Summarize
Bear markets cause losses, and this bear market did just that. Bear markets usually get worse before they get better, before the market approaches some form of sustained bottom. What we observed in the section above was a relatively coherent story of price underperformance, diminished long-term returns, short-term derivatives market concerns being priced in, and a side of sluggish on-chain activity.
This effect is relatively common across digital asset markets, with both Bitcoin and Ethereum seeing significantly lower utilization and demand than during the bull run. This is even more true for DeFi tokens. There are signals that internal capital is rotating to BTC at this time, and perhaps the previous collapse of LUNA and UST will further exacerbate this trend. This rotation is a historical feature of bear markets, as investors turn to assets considered safer.
That said, the sector's price performance relative to the US dollar has been disappointing over the past 12 months, and this bear market has had a disproportionate impact on long-term returns.
However, bear markets do have a way of ending, just not now. As the saying goes, "bear markets create subsequent bull markets".
