The "Digital Assets: Insights and Market Trends First Half of 2024" report is produced by CME Group and Glassnode. This report synthesizes a wide range of information, including price performance, on-chain analysis, industry events and derivative financial instrument data. Key highlights of the report include:
Market Overview: A broad understanding of the current state of the digital asset market, focusing on the major asset classes, their market caps, and the dominance of Bitcoin and Ethereum in the ecosystem.
Capital flows and market cycles: Analyze the capital flows of Bitcoin, Ethereum and stablecoins to gain an in-depth understanding of market cycles and investor behavior in different market stages.
Derivatives Market Fundamentals: A detailed review of the growing futures and options markets for digital assets, including insights into open interest, trading volume and the growing dominance of institutional players like CME Group.
Here is a brief preview of the report:
Bull market correction retracement: Compared with previous cycles, the decline in the current bull market is relatively small. This trend indicates that the market is maturing, with less volatility and more stable price performance, providing a more predictable environment for investors.
Ethereum/Bitcoin Ratio: The Ethereum/Bitcoin ratio is a key indicator for assessing capital rotation and market sentiment. Although the market has been bullish since late 2022, Ethereum has still underperformed relative to Bitcoin due to competitive pressure and regulatory advancements.
Settlement volume comparison: Bitcoin’s daily on-chain transaction volume has reached levels comparable to traditional financial giants such as Visa and Mastercard. This milestone highlights Bitcoin’s growing importance in the global financial system and its potential for further integration and adoption.
The following is an excerpt from the report:
Image source: Glassnode
Introduction
Over the past few years, digital assets have transformed from a niche, exotic investment into a full-fledged asset class. The approval of the Spot Bitcoin ETF and its record inflows prove that the digital asset continues to offer unique opportunities and remains an attractive investment option.
However, they also present unique risks. To thrive in this market, investors need a deep understanding of these characteristics, including asset fundamentals, market cycles, and the vast data sets available on blockchain about market participant sentiment and behavior.
This report aims to provide investors with an in-depth understanding of the emerging digital asset class.
Overview of the digital asset landscape
The digital asset industry has grown rapidly in recent years and institutional investor interest has expanded, particularly as a general economic asset class. Bitcoin has historically led the market and will continue to do so in 2023 and 2024.
Since hitting cycle lows in November 2022, Bitcoin market cap has grown to over $1.13 trillion (+370%) as of the current ATH set in March 2024. Ethereum, the industry’s second-largest asset, has also seen its valuation increase by $354 billion (+267%) over the same period, roughly in line with the broader altcoin industry. The total stablecoin supply has also increased since March 2024, after a longer period of net redemptions starting in mid-2022.
Figure source: Glassnode Figure 1: Market: Main assets dominate performance since November 2022
Overall, the digital asset industry currently has a total market capitalization of approximately $2.56 trillion, with Bitcoin accounting for more than half of that at $1.33 trillion. Ethereum currently has a market cap of $451 billion, while the broader altcoin industry has a total market cap of $611 billion. Stablecoins have become an important pillar in the digital asset market structure, expanding to a total supply of $145 billion over the past four years. Tether (USDT) remains the dominant stablecoin with 74%, followed by USD-Coin (USDC) with 22%. USD-denominated stablecoins still account for over 99% of the total stablecoin supply, while overall adoption of other fiat currencies is negligible.
Over the past 16 years, Bitcoin has maintained its position as the largest digital asset, accounting for more than 52.7% of the industry’s total value. Bitcoin dominance is a metric often used by analysts to assess market cycles. Bitcoin’s dominance tends to grow during bear and bull markets as capital seeks a relatively safe haven. Historically, Bitcoin’s dominance has declined during the more speculative phases of bull markets as risk appetite increases. Ethereum has been the dominant asset in the altcoin industry for several years now and currently accounts for 41.7% of the industry. Since mid-2023, Ethereum’s dominance has declined slightly as the number of competitors in the smart contract blockchain industry has increased. Stablecoin capital currently accounts for approximately 5.7% of the entire digital asset market, peaking at 16.1% at the end of 2022.
Figure source: Glassnode Figure 2: Market: Breakdown of market realized value net capital changes
Figure 2 shows how these waves of capital have flowed between various sectors of the market over the past six years. Digital assets exhibit internal market cycles as capital rotates through various sectors of the market over time. We can model these capital rotations using on-chain data, measuring 30-day changes in capital flows into Bitcoin, Ethereum, and changes in the total stablecoin supply. Historically, during market downturns and in the early stages of market recoveries, capital tends to turn to Bitcoin as the largest asset. Capital has historically rotated downward into Ethereum as investor confidence in the industry grows, and then further up the risk curve later in a bull trend. Stablecoins have become the preferred quote currency on both centralized and decentralized exchanges. Therefore, the growth of total stablecoin capital can provide a proxy for further demand along the risk curve.
Bitcoin Basic Indicators
Bitcoin has a predetermined supply schedule, with the currency issuance rate decreasing by 50% every 210,000 blocks (approximately every four years). The total supply in circulation is currently 19.696 million Bitcoins, and the issuance rate has recently been halved from 6.25 Bitcoins/block to 3.125 Bitcoins/block on April 20, 2024. These newly mined currencies account for a large portion of the revenue stream for Bitcoin miners, and the halving event will significantly reduce this revenue. As the Bitcoin network continues to grow, increases in the dollar exchange rate and user transaction fees become increasingly important to offset the decline in rewards for newly mined currencies.
Figure Source: Glassnode Figure 3: Bitcoin: Circulation Supply and Issuance
The Bitcoin network is a mechanism for storing and settling value among a network of peer-to-peer nodes and miners. The network is decentralized and operates without the need for trusted intermediaries such as banks and payment processors.
On an unfiltered basis, Bitcoin currently has around $46.4 billion in daily on-chain transaction volume, which is comparable in size to traditional payment processors such as Visa and Mastercard.
Glassnode is a pioneer in applying advanced filtering heuristics that evaluate whether on-chain transaction volume is economical or internal to wallet management by exchanges like Coinbase and Binance. Once this filtering is applied, the economic transfer volume approaches $6.5 billion per day, which is very similar to the daily spot trading volume on centralized exchanges.
Centralized exchanges are the primary place for investors to trade Bitcoin, depositing and withdrawing billions of dollars worth of Bitcoin every day through on-chain transactions. In March 2024, total deposit volumes on exchanges hit an all-time high, with over $4.37B of Bitcoin deposited across 89.6K deposit transactions (average deposit size $487K). Increased trading volume and activity associated with exchanges tends to be a feature of increasing adoption, while in less speculative periods such activity tends to decrease.
Bitcoin miners provide the computing work that powers the network’s decentralized security system. Miners are responsible for constructing blocks and containing transactions. Miners are rewarded with newly minted Bitcoins through issuance, while also receiving transaction fees paid by users.
The Bitcoin hash rate is a measure of the total computing power applied by miners, and this metric has grown at a staggering exponential rate since the network’s inception. The hash rate recently hit an all-time high of over 617 exahashes per second, driven by more mining rigs coming online and increased efficiency in ASIC chips that increase computational efficiency.
Hash price is an important metric for assessing miner profitability and reflects the dollar value ($/EH/day) earned per unit of hash rate applied. Although total miner revenue (in USD) is nearing a high of over $33 million per day, hash prices continue to decline due to a highly competitive mining environment. Following the fourth halving, hash prices recently hit an all-time low of $48,000 per exahash per day.
Bitcoin Price Performance Indicators
Figure source: Glassnode Figure 4: Bitcoin price performance after halving
The halving event is a widely watched event in the Bitcoin calendar, both because it reflects the programmed scarcity of the asset and from a market performance perspective, which has historically followed halving events. Figure 4 shows the index performance over the 365 days following the past four halving events. The 2016 (blue) and 2020 (green) cycles may be more relevant comparison points, as they represent a more mature and developed digital asset landscape. Following the halving, the first two cycles both experienced several months of relatively quiet performance before experiencing significant peak returns of +350% and +650% respectively. The Bitcoin market in 2024 has been following a similar trajectory in the weeks following the fourth halving in April 2024. Since the incident, Bitcoin price has been trading within a range of just a few percentage points.
Figure source: Glassnode Figure 5: Bitcoin bull market retracement
The 2024 uptrend has also experienced a relatively shallow pullback compared to previous bull markets. The deepest pullback since November 2022 saw prices fall -20.3% from local highs. Previous cycles have seen deeper corrections, ranging from -25% to -35% in 2016-17 and as high as -50% to -63% in the 2020-21 cycle. As the Bitcoin market grows in size and becomes more widely institutionally adopted, many analysts expect volatility, returns, and pullback conditions to compress over time.
Bitcoin on-chain indicators
The database contained in the ledger of Bitcoin and other digital assets is transparent, allowing analysts and data providers to examine total transaction volume and transaction volume across the network. This allows each coin to be price-tagged based on the last time it moved on-chain. Price markers also enable analysts to calculate the average cost basis of all tokens in the supply and determine the proportion of the supply that is "profitable" or "losing".
Figure Source: Glassnode Figure 6: Bitcoin: Market Cap and Actual Market Cap Valuation Model
Real market cap is an important on-chain metric for Bitcoin because it captures the total value of all coins, calculated at the price they last traded on-chain. In many ways, it is similar to a kind of "on-chain market capitalization." The actual market cap, currently at $591 billion, assesses the level of cumulative capital inflows into Bitcoin over its history.
Historically, late in bear markets, spot market cap trades near or below realized market cap, meaning the average token holding has unrealized losses. We can also identify periods in an uptrend when the market cap is higher than the realized market cap, meaning the average token holding has increasingly larger unrealized profits.
Ethereum basic indicators
Ethereum is the second largest asset in the digital asset ecosystem, with a current supply of 119.76 million Ethereum coins in circulation. Ethereum’s issuance rate is more nuanced than Bitcoin’s, and has gone through several phases through developer and community-driven changes, often in response to changing technological and economic factors. Originally launched as a proof-of-work blockchain, Ethereum differs from Bitcoin by using an algorithm that favors GPU mining chips. In September 2022, the Ethereum project transformed its consensus mechanism into a proof-of-stake system, shifting the role of block construction from miners to validators. Instead of using computational work to build the blockchain, validators hold 32 ether as collateral that can be slashed in the event of adverse behavior. This shift, known as the “consolidation,” resulted in a significant drop in daily issuance from approximately 14.3K Ethereum/day to just 2.6K Ethereum/day.
Figure Source: Glassnode Figure 7: Ethereum: Circulation Supply and Issuance
Validators replace miners in the Ethereum proof-of-stake system and are responsible for transaction ordering and proposing the next valid block. Each validator is required to post 32 Ether as collateral and is rewarded with newly minted Ether and a portion of transaction fees paid by users. There are currently over one million active validators participating in the Ethereum Proof-of-Stake network, with very few net decreases in validator numbers to date.
Currently, validators have a total of 32.2 million Ether locked as staking collateral. The amount of Ether staked usually increases over time, with only short periods of time when the total amount decreases. This currently accounts for over 27% of the circulating Ethereum supply.
Newer technologies like Liquid Staking Tokens allow validators to use their staked Ethereum collateral as a mobile asset in the growing decentralized finance ecosystem. These tokens are issued by entities such as centralized exchanges and staking pools, which manage the technical requirements of validators for users. This process greatly improves the user experience and the capital efficiency of the network.
Figure source: Glassnode Figure 8: Ethereum: issuance and supply destruction
Ethereum has a supply burning mechanism that was made available in August 2021 as part of the EIP1559 upgrade. This mechanism burns a portion of transaction fees, which may sometimes exceed the total amount of newly minted Ether issued to validators. Therefore, during periods of peak network activity, the Ethereum supply may experience periods of net deflation, reducing the overall circulating supply. Figure 8 shows the total amount of Ethereum destroyed daily (green) compared to the new Ethereum issued to miners/validators (blue). The sharp drop in new issuance can also be seen as Ethereum’s transition from Proof-of-Work to Proof-of-Stake.
Ethereum Price Performance Indicators
Since its rise in 2017, Ethereum has maintained its position as the second largest asset in the digital asset ecosystem. Since the inception of the Ethereum protocol in 2015, its market performance has tended to be more similar to Bitcoin's performance during earlier growth market cycles. We can see that after the Bitcoin halving, the price of Ethereum became more volatile, with larger declines and larger increases. In the 365 days following Bitcoin’s halving event, Ethereum’s market performance was even more divided, with the 2016 cycle falling -45% and then rising over 3,400%, while in 2020 its price rose by more than 3,400% in the following months. It more than doubled and went on to rise 2,150%.
Figure source: Glassnode Figure 9: Ethereum: Price performance after halving
Ethereum has experienced a relatively deep correction compared to Bitcoin, with its largest drawdown so far in the 2022-24 cycle being -42%. In previous cycles, corrections exceeded -65% both early and late in the overall economic bull market.
As market cycles evolve, cryptocurrency markets experience internal rotations of capital between various assets along the risk curve. Historically, Bitcoin, the largest asset, has tended to lead the market during bear and early bull markets, but lag during the more speculative phases of later bull markets. The Ethereum/Bitcoin ratio is a tool used by many analysts to assess the extent of capital rotation, based on Ethereum’s role as a bellwether asset for general risk appetite. However, an interesting shift from the cyclical norm occurred during the 2023-24 cycle, as the Ethereum/Bitcoin ratio continued to decline, despite the market having been in a bull run since late 2022. There are two possible reasons for this relative underperformance. The first was the early approval of a Bitcoin spot ETF in the United States in January 2024, which created significant additional buyer pressure on the market leader. The second is that the competitive landscape of proof-of-stake blockchains is becoming increasingly fierce, with Ethereum directly competing with it in terms of liquidity, capital, user experience, and scalable functionality. However, with the launch of a U.S. Ethereum spot ETF, this could be the catalyst to reverse this downward trend.
Figure Source: Glassnode Figure 10: Ethereum: Annualized Realized Volatility
As the assets and ecosystem surrounding Ethereum mature and market caps continue to rise, Ethereum’s volatility has experienced a similar compression. During the 2017 bull market, realized volatility reached 135% to 165% over a rolling window of three months to one year. Realized volatility in 2024 has fallen to between 50% and 65%, half the volatility seen in previous market cycles.
Ethereum on-chain indicators
Figure Source: Glassnode Figure 11: Ethereum: Market Cap and Actual Market Cap Valuation Model
Ethereum’s realized market cap captures the value of each token at the time of its last transaction on the chain. Ethereum uses a different blockchain accounting model than Bitcoin, which utilizes accounts rather than individual tokens.
Ethereum’s ecosystem is also more complex, with tokens used as collateral and used in lending markets and liquidity pools on decentralized exchanges. Therefore, calculating Ethereum’s realized market cap requires a different approach to account for these nuances.
Ethereum’s realized market cap currently stands at $240 billion and has frequently intersected with market cap during the latter stages of bear markets. This means that the average unit of Ethereum is at an unrealized loss.
Derivative financial products market
The derivatives markets for Bitcoin and Ethereum have grown significantly in recent years, reflecting the maturity and institutionalization of the asset class. The futures market has tended to account for the bulk of the industry's trading volume and open interest since 2021. Currently, open interest in the Bitcoin and Ethereum futures markets exceeds $29 billion and $14.7 billion respectively. Open interest in the Bitcoin market has now surpassed the $12.9 billion high seen during the 2021 bull run, while the announcement of a U.S. spot Ethereum ETF just pushed open interest in Ethereum contracts to new highs.
Futures markets remain the dominant source of trading volume in digital asset markets, typically 5 to 10 times larger than spot trading volumes. Trading volumes in the futures market have picked up since October 2023, with daily contract volumes for Bitcoin and Ethereum exceeding $34.4 billion and $26.7 billion respectively. Daily trading volumes of this size are similar to previous market cycles, although they are still below the all-time high peak seen in the first half of 2021.
Perpetual swap contracts have no expiration date and are commonly used for investing in Bitcoin and Ethereum. In order to keep these products consistent with the corresponding spot index prices, perpetual swap contracts use financing rates, and traders receive a certain interest rate income based on the deviation between the futures price and the spot index price. The financing rate is designed so that when the perpetual price is higher than the spot index price, traders holding long positions will periodically pay interest rates to short traders. The opposite is true when the perpetual price is lower than the spot index price. Financing rates are typically paid in eight-hour increments and incentivize market makers to provide liquidity and capture arbitrage opportunities through cash holding yields.
Figure source: Glassnode Figure 12: Options: Open Interest
The options market is another key sector in the growth and maturation of the digital asset industry, with total open interest for Bitcoin and Ethereum climbing to $30.2 billion and $14.6 billion respectively.
The size of open interest in the options market is now similar to that of the futures market, reflecting the overall maturity and increasing liquidity of the options market. Bitcoin and Ethereum options trading volumes also hit all-time highs in 2024, reaching $3.2 billion/day and $2 billion/day respectively. The maturation and deepening liquidity of the options market has provided institutional investors with greater risk management, hedging flexibility and the tools to execute more complex strategies.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: "MarsBit"
Original author: CME & Glassnode
