Author: Tanay Ved Source: Coin Metrics Translation: Shan Ouba, Golden Finance

Key Takeaways:

  • Despite the overall sluggish performance of the cryptocurrency market, in the second quarter of 2024, ETH, BTC and SOL had year-to-date gains of 48%, 44% and 38%, respectively.

  • Bitcoin’s 30-day hash rate fell 7% to 580 EH/s after the halving, while looming Mt. Gox repayments and BTC sales by German authorities added to market pressure.

  • Ethereum staked reaches 33 million ETH (27% of supply), while 13.7 million ETH (11.5%) is locked in smart contracts and bridges, limiting liquidity.

  • In May 2024, stablecoin transfer volume reached a record high of $1.2 trillion, with DAI on Ethereum and USDT on Tron leading with $345 billion and $388 billion, respectively.

introduce

In this special edition of The State of the Network, we take a data-driven look at the major developments impacting the digital asset industry in the second quarter of 2024.

After a strong start to the year, the second quarter was a more muted market as the long-awaited launch of a spot Bitcoin ETF, Ethereum’s moves toward scalability, and stablecoin and layer 1 ecosystems gained momentum. Among the largest crypto assets, Ethereum (ETH) is up 48% year to date, followed by Bitcoin (BTC) and Solana (SOL), up 44% and 38%, respectively. Memecoins, real world assets (RWA), and artificial intelligence (AI) computing sectors performed well, with tokens such as PEPE and Fetch.ai (FET) both seeing sharp gains.

In May, the U.S. Securities and Exchange Commission (SEC) unexpectedly approved an Ethereum spot ETF, bringing more opportunities to an already challenging April and June. These months saw the fourth Bitcoin halving and the market was cautious about the issuance and distribution mechanism of new tokens, resulting in mixed performance across different sectors.

Macro trends and market performance

The fate of the market is not limited to events occurring within the crypto ecosystem but is also influenced by external market conditions and developments. Studying the performance of major traditional market indices, ETFs, and stocks, as well as the digital asset space, can provide important context for understanding the broader economic landscape.

In the second quarter of 2024, we witnessed a clear divergence between the crypto market and traditional risk assets, especially technology stocks. Artificial intelligence remains a focus for investors, with Nvidia's valuation exceeding $3 trillion, making it the world's most valuable company, while single-handedly contributing more than a third of the S&P 500's gains in 2024. Apple's stock price rose 24%, thanks to the company's announcement of a partnership with OpenAI during its annual Worldwide Developers Conference (WWDC), and together drove the seven major technology stocks index up 14.8% in the second quarter. Along this theme, some publicly traded Bitcoin miners positioned themselves as infrastructure providers for a wider range of computing applications, driving gains in the Valkyrie Bitcoin Miner ETF (WGMI).

Digital asset markets overall have lagged behind these bullish trends for tech and public miners — with Coin Metrics’ CMBI 10 Index (a performance benchmark for a basket of the 10 largest crypto assets) and the CMBI Total Market Index both posting double-digit declines in the second quarter.With stocks reaching new all-time highs, crypto market participants may be looking for a reversal catalyzed by rate cuts, a favorable outcome to the presidential election, or a reduction in the pressure currently enveloping the market.

Bitcoin is ready for a shock

As expected, Bitcoin entered its fifth era with the completion of the fourth halving in April. However, a number of developments could weigh on BTC prices in the near term. While the introduction of Runes after the halving increased transaction fee revenue, the reduction in block rewards from 6.25 BTC to 3.125 BTC squeezed miners’ profits, causing the 30-day moving average of Bitcoin’s hash rate to drop 7% to 580 EH/s. Although not as much as in previous halvings, BTC reserves held by miners also fell to their lowest level since April 2021, currently at 1.78 million BTC.

Additionally, market sentiment has been shaken by concerns about increased selling pressure due to an impending supply glut. Notably, the long-defunct exchange Mt. Gox announced that it would redistribute approximately 142,000 bitcoins (valued at approximately $8 billion), or closer to approximately 65,000 bitcoins, as an initial payment to creditors in July of this year. While former users will receive their bitcoins at a much higher market price, the extent to which they will hold or sell them remains uncertain. However, recent activity in wallets associated with the entity has raised concerns about a sell-off and may prompt some investors to preemptively sell.

Additionally, Germany’s Federal Criminal Police (BKA) seized 50,000 Bitcoin from the operators of Movie2k.to, an online platform that provided viewing of copyrighted films prior to 2013. As of July 8, wallets associated with the entity still held around 27.4K Bitcoin. Recent movements of funds between intermediary addresses and exchanges such as Coinbase, Bitstamp, and Kraken have sparked speculation about the entity’s sell-off strategy and its impact on the market. As a result, these developments triggered liquidations, with open interest in Bitcoin futures contracts closing out around $8 billion. While these events could put short-term pressure on Bitcoin’s price, their one-off nature suggests the impact could be temporary.

Ethereum ETF is coming soon & ETH’s inflationary pressure

A key development for Ethereum in Q2 was the unexpected approval of an Ether spot ETF. Prior to this, it was believed that an Ether ETF would take far longer than the expected summer deadline to come to market, largely due to regulatory uncertainty regarding ETH’s security status. However, these concerns were put to rest with the SEC’s approval of 19b-4s from eight issuers in May, providing clarity on ETH’s commodity status. The market reacted swiftly, driving ETH and other ecosystem-related tokens higher while the Grayscale Ethereum Trust’s (ETHE) discount to net asset value quickly compressed.

With Ethereum ETFs on the horizon, attention has shifted to how much inflows these instruments could attract into assets like Ether (relative to Bitcoin). Without delving too deeply into the size of the Ethereum ETF market, it may be helpful to understand the supply dynamics of Ether. With 33M ETH (~27% of supply) staked, and 13.7M ETH (~11.5% of supply) held in smart contracts and bridges, ~39% of ETH supply is “locked.” Meanwhile, supply on exchanges has trended down to 12M ETH (~10% of supply). This liquidity-constrained situation could increase price sensitivity in response to steady inflows from ETF-related demand.

On the other hand, as Ethereum continues to move forward on its scalability roadmap, adoption of layer 2 blob space has continued to grow since EIP-4844 in March. As rollups become more accessible with lower operating costs and fees, user activity has shifted further to Ethereum layer 2, while Ethereum mainnet has suffered as a result. As a result, total fees on Ethereum L1 have reached a year-low of 460 ETH ($1.4 million) following EIP-4844, which has reduced the supply burn rate, resulting in slightly net inflation in ETH supply. This highlights the interaction between Ethereum scalability improvements and the monetary system, with the need for increased layer 2 usage to maintain deflationary pressure on ETH.

Outside of Ethereum, Solana’s fees have increased by over 150% year-to-date to near Ethereum levels. While still 50% below its March highs, Solana’s high usage has resulted in significant fee revenue so far.

Pursuit of quality: altcoins fall out of favor

The attention of market participants has also been captured by the surge in token issuance and their associated token economics. In particular, tokens with low circulating supply (public supply) relative to FDV (fully diluted valuation) and tokens with large supply unlocks are prevalent. Check out our report “Floating in Air” where we explore this topic in more detail. As the barrier to entry for issuing tokens and creating new chains has lowered, projects like pump.fun have driven the rise of meme coins, while projects like Conduit have made it easy to deploy rollups, and a large number of L1, L2, meme coins, and infrastructure tokens have emerged.

As a result, the “altcoin” industry became bloated, leading to an oversupply of tokens. Arguably, this led to increased market attention on new token issuance, initial valuations, and distribution, making blue-chip assets with established demand more attractive.

The 14-day moving average of trusted spot volumes for majors (including BTC, ETH, and SOL) and altcoins (other assets in the datonomy universe) convincingly captures this dynamic. During the 2021 bull run, altcoin volumes easily outpaced majors, a trend that has reversed this time around. While majors volumes reached similar levels to their 2021 peak (around $42 billion), altcoin volumes fell 3x. Lately, the gap between the two baskets has also widened, with majors’ spot volumes increasing by $11 billion.

Stablecoins gain regulatory momentum

The stablecoin industry has continued to grow and liquidity has increased since Q4 2023. The total supply of stablecoins increased by 3.8% in Q2, totaling $159 billion, of which $60 billion was hosted on Ethereum L1 and $30 billion was hosted on Tron. On a monthly basis, stablecoin (adjusted) USD transfer volume hit a new high of $1.2 trillion in May, driven primarily by Dai on Ethereum ($345 billion) and Tether on Tron ($388 billion).

This growth coincides with major regulatory developments, notably the implementation of the Markets in Crypto-Assets (MiCA) regulation in the European Union. Circle, the issuer of USDC and EURC, became the first global stablecoin issuer to comply with MiCA, receiving the Electronic Money Institution Authorization. These measures are expected to promote a safer and more transparent stablecoin market, with implications beyond the EU and potentially influencing global regulatory standards. As a result, stablecoin issuers that adapt to these new requirements are likely to consolidate market share and capture growth opportunities in different jurisdictions.

in conclusion

The second quarter of 2024 saw a complex digital asset landscape marked by evolving regulatory developments, technological milestones, and market dynamics. The approval of an Ethereum spot ETF and progress in stablecoin regulation indicate growing institutional acceptance and regulatory clarity. However, challenges remain, including Bitcoin’s post-halving correction and potential selling pressure from Mt. Gox’s offering. Looking ahead, key areas to watch include the launch and adoption of an Ethereum ETF, the impact of Layer 2 scaling solutions on Ethereum’s sustainability, and ongoing regulatory developments in major markets. These factors, along with broader macroeconomic trends, will be critical in determining the direction of digital asset markets for the remainder of 2024 and beyond.