CoinDesk Quarterly Review · macro assets such as stocks and gold swing between “safe haven”...
Transcript of CoinDesk Quarterly Review · macro assets such as stocks and gold swing between “safe haven”...
3CoinDesk Quarterly ReviewThird Quarter 2020
Setting thetone
The third quarter of 2020 felt in many ways like a
watershed in crypto asset markets, as the maturity of
existing markets deepened and innovation in some of
the newer areas practically exploded.
The growth in stablecoin market cap and transaction volumes, combined with supportive statements from
both U.S. and European regulators, reveal what is
likely to be a lasting shift towards developing new use
cases for fiat-based tokens, which should continue to
attract more liquidity into the ecosystem.
An expansion in crypto derivatives is also fundamental for market health, as these instruments boost market
liquidity by offering investors a broader opportunity
set. Both bitcoin (BTC) and ether (ETH) futures set
new all-time highs in both trading volumes and open
interest (O.I.), and there are signs that ether’s
derivatives market is starting to catch up in terms of depth.
The spurt of liquidity in decentralized finance (DeFi)
took many by surprise, as the innovative ways to
capture yield in a yield-starved investment landscape
attracted substantial inflows to smart contract
platforms. The novelty of the financial functionsoffered by some of these platforms is reflected in the
wacky food-based names of the tokens as well as
their astonishing returns – and in the risk, as some
platforms folded just days after launching.
In terms of performance, bitcoin had an erratic
quarter, underperforming most traditional macro assets for most of the period. A strong rally of over
20% in the latter part of July, however, allowed it to
maintain its typical quarterly outperformance over
stocks and gold. Spot exchange volumes fell towards
the end of the quarter, indicating that some investors
are choosing to sit on the sidelines while they wait for the confusing correlations and erratic volatility to
evolve into a clearer narrative.
Quarterly Review: Q3 2020
Note: We use Bitcoin with uppercasewhen referring to the network, and lowercase (or BTC) when referring tothe coin.
Return, volume, volatility and correlations
In spite of a relatively lackluster
performance for most of the
quarter, BTC still ended up with
strong outperformance compared
to most macro assets, largely due
to a sharp rally in July. BTC’s
correlation with both gold and
stocks remained higher than the
historical average for the quarter.
Returns
Quarterly Review: Q3 2020
Bitcoin had a weak start to the quarter, lagging behind the surge in stocks and bonds. The sharp rally in the final week of July, however, allowed it to regain and hold on to its typical outperformance, in spite of a lackluster August and a September in which it fell more than stocks and gold.
Performance of BTC and Macro Assets, Q3 2020
VolatilityAfter a somewhat turbulent year, bitcoin’s volatility seems to have settled back to its pre-March levels, with some erratic behavior that hints at persistent uncertainty. BTC’s volatility remains notably higher than most macro assets, a situation that is unlikely to change any time soon. Gold’s volatility briefly rose above that of the S&P 500 during the quarter, but slipped back below toward the end of September as the gold price corrected.
30d Annualized Volatilities: BTC, S&P 500, Nasdaq and Gold
Quarterly Review: Q3 2020Source: CoinDesk API, FactSet; Bitcoin price at 4pm Eastern; Stocks = S&P 500 Index; Nasdaq = NDAQ-US; Gold = SPDR Gold Trust.
Correlations
Quarterly Review: Q3 2020
As usual, the narrative told by the correlations between bitcoin and other macro assets such as stocks and gold swing between “safe haven” and “risk off.” The BTC-gold 60d correlation rose throughout the quarter, from about 0.3 to about 0.5, while BTC-S&P 500 correlation remained steady until the collective market jitters in September kicked it up a notch.
BTC: 60d Correlations With Gold, S&P 500, Nasdaq and Bonds
Source: CoinDesk API, FactSet; Bitcoin price at 4pm Eastern; Stocks = S&P 500 Index; Nasdaq = NDAQ-US; Gold = SPDR Gold Trust.
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VolumeQ3 daily dollar volumes on “transparent” spot exchanges were 45% higher than in Q2, with August figures surpassing the previous highs from June 2019. This reflects increasing interest from traders and investors, perhaps as a reaction to late July’s price spike, as well as to deepening concerns about inflation. Volumes declined towards the end of the quarter, however, as the BTC price corrected from highs above $11,000 to $10,000. This chart features data from cryptocurrency exchanges with a high granularity of trade data and full trade history, according to Nomics’ exchange transparency rating criteria (read more).
Verifiable Monthly Dollar Volume on Crypto Spot Exchanges
Quarterly Review: Q3 2020
Source: Nomics ‘transparent’ volume.
Returns, crypto assets
Quarterly Review: Q3 2020
The top two best performers on the CoinDesk 20 list of crypto assets in Q3 2020 were Chainlink (LINK) and Orchid (OXT), which rose 116% and 86% respectively. Both assets are issued exclusively on the Ethereum blockchain and give users access to specific decentralized applications on the network. Bitcoin rose 17% over the quarter and outperformed eight other crypto assets.
Quarterly Performance of Assets in the CoinDesk 20 (Excluding Stablecoins)
Source: Coin Metrics, Nomics
Asset
LINK
OXT
XMR
TRX
ETH
XRP
ZEC
ZRX
BTC
LTC
XLM
EOS
BSV
BCH
DASH
ETC
XTZ
115.78%
86.38%
59.48%
24.06%
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The CoinDesk 20 is a quarterly adjusted list of assets with the highest verifiable volume over two consecutive quarters (see our methodology here).
Stablecoinengines are revving
While growth in programmatic
stablecoins such as DAI has
exploded due to the surge in
interest in decentralized finance
(DeFi) applications, the market is
still dominated by fiat-backed
stablecoins, which account for
over 96% of the stablecoin
market cap.
Stablecoinsupply
Quarterly Review: Q3 2020
The total supply of fiat-backed stablecoinshas increased by almost 240% since the beginning of the year, with most of that growth coming in the third quarter.
Fiat-Backed Stablecoin Supply (Units)
Source: Coin Metrics*USDT’s supply includes tether on Omni, Ethereum and Tron.
USDT market capitalization
Quarterly Review: Q3 2020
Supply of market leader tether (USDT) has ballooned to $15.8 billion from $10.3 billion at the beginning of the quarter, a 54% increase. While impressive, thatgrowth is dwarfed by the increase in supply of USDC, the second-largeststablecoin in terms of market cap, whichgrew by over 150% from the start of thequarter, to reach $2.5 billion.Strong growth in stablecoins other thanUSDT have, for the first time, pushed theleader’s market share below 80%.
Fiat-Backed Stablecoin Supply Growth Q3
Source: Coin Metrics
*USDT’s supply includes tether on Omni, Ethereum and Tron.
Transactions and transaction sizeWhile transaction counts trended up over the quarter for all the major fiat-backed stablecoins, a look at the average on-chain transaction size of the two largest stablecoins, USDT and USDC, can point to the evolving use case preferences for each. The increase in the average size of USDC on-chain transactions hints at growing use as a settlement token by large investors. USDT’s average transaction size has remained steady in the face of a growing number of transactions, which could indicate a strong growth in the number of users.
Quarterly Review: Q3 2020
Percentage Growth in Number of Transactions and Average On-Chain Transaction Size
Source: Coin Metrics*USDT’s supply includes tether on Omni, Ethereum and Tron.
Price volatility
Quarterly Review: Q3 2020
One common misconception about dollar-backed stablecoins is that they are always priced at $1.00. This is not so: stablecoins are minted at $1.00, but usually trade at a price above or below that level. Of the two largest stablecoinsin terms of market cap, USDT varies more widely in price than does USDC. This implies fewer opportunities for arbitrage (minting and then selling in the market), which makes USDC’s recent growth even more remarkable.
Standard Deviation of USDT and USDC Price
Source: Coin Metrics
*USDT’s supply includes tether on Omni, Ethereum and Tron.
DeFi pushes Ethereum to its limits
Transaction activity on Ethereum
reached new highs in Q3 2020 as
a result of the ongoing DeFi
craze. In response, Ethereum
miners are stretching the network
to its limits by increasing block
capacity.
Network fees soarUsers of the Ethereum network are having to pay more for their on-chain transactions than ever before. In Q3 2020, transaction fees increased 150% on average from less than 0.003 ETH, which at time of writing is worth around $1.05, to above 0.008 ETH, which at time of writing is worth around $2.80. Fees reached their all-time high on Ethereum in early September shortly after the launch of decentralized finance protocol, SushiSwap, which gained over $1 billion in value over the course of three days.
Quarterly Review: Q3 2020
Average Transaction Fee on Ethereum
Source: Coin Metrics
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All-TimeHigh
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Average
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Exchange activity
Quarterly Review: Q3 2020
In mid-June, the number of on-chain transaction moving funds to and from exchange-labelled addresses on Ethereum surpassed that of Bitcoin. In Q3 2020, that differential between exchange transaction count on Ethereum and Bitcoin grew even wider. ETH transactions involving exchange-labelled addresses at the end of Q3 were roughly 25% higher than BTC transactions involving known exchange accounts. This suggests a rising level of liquidity for ETH as the gateway crypto asset for engaging with DeFi applications and tokens.
Number of ETH Vs. BTC Transactions Involving Exchange-Labelled Addresses
Source: Coin Metrics
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DeFi market capitalization
Quarterly Review: Q3 2020
Ethereum’s market capitalizationincreased 60% in Q3 2020, growing from$25 billion to $40.5 billion by the end of September. The market capitalization of the top 10 DeFi coins by total value lockedsaw an even greater increase over thequarter, growing over 345% from $1.2 billion to $5.3 billion. Aggregated as one, the market capitalization of DeFi nowsmakes up roughly 12% of total marketvalue on the blockchain.
Market Capitalization of ETH and Top 10 DeFi Coins By Total Value Locked, Q3 2020
Source: CoinGecko, DeFi Pulse
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Gas limit increasesOn Ethereum, the total amount of transaction fees that can be collected in a block is capped by what is called the “gas limit.” This is to ensure that block sizes never get too large on the network and thereby delay miner communications. However, during times of network congestion, miners have voted to increase the gas limit to allow for more transactions in a block. This has happened five times since Ethereum’s creation in 2015 as a result of various trends such as the ICO boom of 2017. The most recent increase, which boosted network transaction speeds from around 35 transactions per second (TPS) to 44 TPS, happened this past quarter as a result of DeFi’s sustained popularity on Ethereum.
Quarterly Review: Q3 2020Source: Etherscan
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Crypto derivatives reach new highs
The third quarter of 2020 marked
a watershed moment for futures
and options markets ex-bitcoin,
with ether derivatives reaching
new highs and settling at a new
normal for both size and activity.
ETH futures
Quarterly Review: Q3 2020
Aggregated open interest (O.I.) in ether futures set a dramatic new record, reaching $1.7 billion on Aug. 15. In September, O.I. has fallen back to an elevated new normal. This time, there was no panic like the March 12 crash to shrink the size of these markets back down to 2019 levels. In addition to their significant size, the ether futures markets have more than doubled in their level of activity.
ETH Futures – Aggregated Open Interest
Source: Skew
Ether Futures Aggregate Daily Dollar Volume (USD Billion)
Ether Futures Aggregated Open Interest vs. Time (USD Billion)
Source: skew
BTC futures
Quarterly Review: Q3 2020
Bitcoin futures also set new all-time highs in both volume and open interest, but unlike ether futures, these did not usher in a new normal. Market size remained elevated throughout the month, before falling back to where it was at the first half of the year. Volume showed a modest increase over the $175 billion traded on March 9, as traders got into position for a macro decline. Volumes have also fallen back to about where they were in the first half of 2020.
Source: Skew
Bitcoin Futures Aggregated Daily Dollar Volume (USD Billion)
Source: skew
Bitcoin Futures Aggregated Open Interest vs. Time (USD Billion)
ETH options volume
Quarterly Review: Q3 2020
It took time for bitcoin options to reach a scale where they could be used as signals. Ether options may not be there, yet, but they grew by a multiple of four, crossed $500 million for the first time and stayed in the neighborhood, even as ETH spot prices retreated. Activity on ether options markets, as measured by volume, lags the size of those markets in proportional growth, indicating traders setting up positions and not yet trading as actively as they might be in bitcoin options.
Ether Options Aggregated Daily Dollar Volume (USD Million)
Source: skew
Ether Options Aggregated Open Interest vs. Time (USD Million)
BTC options
Quarterly Review: Q3 2020
Bitcoin options hit a new milestone in the third quarter, crossing $2 billion in open interest for the first time – and $2 billion days have since become a regular occurrence, in what is possibly the strongest signal of growing maturity in bitcoin markets. New money in bitcoin options has proven more active than the equivalent increases in ether options, with BTC options volume hitting a high more than double its previous all-time high.
Bitcoin Options Aggregated Daily Dollar Volume (USD Million)
Source: skew
Bitcoin Options Aggregated Open Interest vs. Time (USD Million)
CME bitcoin futures
Quarterly Review: Q3 2020
The CME provides the largest U.S.-regulated crypto derivative in its bitcoin futures product. The size of the market for that product hit an all-time high in August, nearly reaching $1 billion in open interest. Activity fell far short of highs set in the 2019 Q2 run-up, when furious trading pushed volume briefly up to $1.7 billion.
CME Bitcoin Futures Daily Dollar Volume (USD Million)
Source: skew
CME Bitcoin Futures Daily Open Interest vs. Time (USD Million)
Monthly Review: Month 2020
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