In the new year, the crypto asset market is still sluggish. The realized volatility of Bitcoin and Ethereum has dropped to extremely low levels. Based on previous experience, such a state generally occurs before drastic market fluctuations. The previous two times were manifested as asset valuations halved and triggered a new bull market.
Bitcoin has traded in a rare $557 range for more than three consecutive weeks, with the highest price ($169,000) being just 3.4% above the $164,000 range low. The end of the year is usually quiet for all markets, and the crypto asset space is no exception.
In this article, we will cover the following topics:
We are currently experiencing extremely low realized volatility. Based on past experience, such conditions usually precede sharp market fluctuations, most recently in November 2018 and April 2019.
BTC and ETH saw weak on-chain activity, consistent with lower overall market volatility, and a weak new year baseline.
The shrinking realized cap suggests 2022 has been one of the worst bear markets for capital losses to date.
Bitcoin: Second Week Price
The Bitcoin market is known for its high volatility, but it was unusually calm at the end of the year. Bitcoin’s realized volatility fell to a multi-year low of 24.6% last month (blue), with few examples of similar magnitude. All previous examples have signaled higher volatility in the future, and most have traded at higher prices, with only one (November 2018) trading significantly lower.
During the early bull run of 2012-13, the price of Bitcoin was between $5 and $14.
Several phases of the late 2015 bear market and the 2016 bull market.
In November 2018, it was followed by a -50% contraction within 1 month.
In April 2019, it then rebounded from $4,200 to a peak of $14,000 in July 2019.
In July 2020, Bitcoin rose to $64,000 in the subsequent bull run of 2020-21.
Bitcoin: Realized volatility over the last month
In contrast, Ethereum has had fewer quiet periods, with monthly realized volatility plummeting to 39.8%. Similar periods of low market volatility have historically been followed by extreme swings, such as November 2018 (-58% sell-off) and July 2020 (2020-21 bull run).
Ethereum: Last month’s realized volatility Bitcoin’s fundamentals are weak
From the perspective of on-chain activity, we can see that there was a surge in new Bitcoin addresses in the short term after the FTX crash, but it has since cooled down significantly. The monthly average of new addresses (red) is returning to the annual average baseline (blue), and on-chain activity has failed to maintain a sustained recovery. On-chain activity trends are a powerful tool for monitoring the recovery of network fundamentals.
Reminder: New Addresses (30D-SMA) falling below 405K/day could indicate low on-chain activity and heading towards a negative trend.
Bitcoin: New Address Growth Trend
Despite the short-term surge in new addresses, the total value of Bitcoin has been plummeting. Daily trading volume has plummeted from $40 billion/day in Q3 2022 to $5.8 billion/day today.
This brings daily settlement volumes back to pre-2020 bull run levels and largely reflects the impact of the expulsion of institutional-scale funds.
Bitcoin: Total transaction value (USD)
We can see this in our study of trading volume, where the dominance of trades above $10 million is the primary cause of the decline in volume. The percentage of large trades has dropped from 42.8% before the FTX crash to 19.0% today.
This indicates that institutional-scale fund flows have clearly stagnated, and large investors may have experienced a strong wavering of conviction. This may also be the expulsion of some funds associated with the FTX/Alameda entity.
Bitcoin: Transaction volumes of different sizes
Demand for Bitcoin Mining remains weak and the recovery in Bitcoin fee revenue has yet to have any significant impact, returning to positive territory but still -0.67 standard deviations below the mean.
Bitcoin: Miner Income and Expenses (4 Years)
The on-chain silence can also be seen in the USD-denominated exchange flows for BTC and ETH. The chart below shows the inflows (+ve) and outflows (-ve) of Bitcoin (yellow) and Ethereum (blue) associated with selected exchanges.
Currently, Bitcoin inflows are between $350 million and $400 million per day, a far cry from the billions of dollars seen throughout 2021-22. Also noteworthy is the expansion in Ethereum transaction flow, which has grown from 30% in May 2021 to 42% today. Note: The ETH share here takes into account the total Bitcoin and Ethereum transaction flow (inflows and outflows), calculated as ETH / (BTC+ETH).
The value of Bitcoin and Ethereum trading platform traffic Ethereum chain is sluggish
Bitcoin is not the only network experiencing this extremely low on-chain utilization, with the average gas price paid on the Ethereum chain remaining close to cycle lows. The average gas price since September has been between 16 and 23 Gwei, levels last seen during the June-July 2021 consolidation and shortly after the pandemic panic in May 2020.
Reminder: Average Gas Price (7D-SMA) breaking above 30 Gwei could signal increased on-chain activity, indicating increased demand for Ethereum Mining.
Ethereum: Average transaction gas price
By dividing Gas consumption by track, we can see that the relative share of Gas consumption in several tracks is declining: MEV Robotics, Cross-Chain Bridges, DeFi, and ERC-20. These four tracks accounted for a total of 45.5% of Gas consumption between September 2020 and September 2021, with DeFi accounting for the majority.
Today, however, these four tracks account for less than half of their peak share, accounting for 22.6% of gas consumption.
Ethereum: Ethereum Gas Consumption in Different Tracks
The track with the most recent activity and attention is NFT, which has dominated gas consumption throughout 2022, recently increasing from 13% to 22%.
In general, the leading NFT track has maintained its main foothold on the Ethereum main chain, and so far, there has not been a large-scale migration of NFTs to cross-chain bridges and other chains. This may be due to several high-profile cross-chain bridge hacks in 2022 and the current lower gas fees on the main chain.
Ethereum: Ethereum Gas Consumption in Different Tracks 2022 is one of the bear markets with the most severe capital losses
Realized cap remains one of the most important metrics in on-chain analysis, helping us analyze the inflow and outflow of funds into and out of digital assets. Its underlying assumption is that when crypto assets are traded, their value is marked with a price, avoiding the need to value long-lost tokens (such as Satoshi’s) at spot prices like market capitalization.
The realized cap can be said to be one of the best tools to measure real capital inflows and compare the valuations of different assets. It can filter out lost tokens and take into account the loss of trading volume (the same crypto asset is constantly traded), better reflecting the real investment value of the market.
To put this in context, Bitcoin’s realized cap is down -18.8% since its ATH, which represents a net capital outflow of $88.4 billion from the network. This is the second largest relative decline in history and the largest realized loss. This has resulted in realized cap returning to May 2021 levels.
Bitcoin: Realized Cap Falls from ATH
Ethereum’s market cap has shrunk even more, with the relative size of Ethereum’s realized cap falling -29.2% since its ATH in January 2022. Ethereum holders have locked in a total of $67.1 billion in net realized losses during 2022.
This also makes the current bear market the worst in terms of realized losses in history, although the relative scale does not yet reach the 35.8% drop in the 2018-19 bear market.
Ethereum: Realized Cap Falls from ATH
Finally, we present a new interpretation of the “market cap share” metric that aims to address some of the shortcomings associated with market cap share mentioned above. The main problem with the widely used “Bitcoin market cap share” metric is that the market caps of relatively illiquid tokens are susceptible to manipulation (such as FTT and other tokens supported by FTX). As a result, entities with large and illiquid shares support inflated book valuations that are very different from the actual market.
The model below shows the simplest form of realized market cap. It is designed to track the relative structural capital inflows/outflows between the two major and most liquid digital assets, BTC and ETH.
The tool and principles can be applied to any token to track structural changes in share ratios, better reflect actual capital flows, and discount illiquid supply (such as unvested tokens, protocol treasury, or loss-making supply).
Summary of Bitcoin-Ethereum realized upper limit percentage
The crypto market has been quiet at the end of 2022, but this situation generally does not last long. In the past, such low volatility in Ethereum and Bitcoin usually occurred before extremely turbulent market conditions, and the trading prices of previous types of situations were also high and low.
Despite a brief recovery following the FTX crash, on-chain activity for both Bitcoin and Ethereum remains very weak. Using on-chain activity and realized cap reduction, it is safe to say that realized cap has returned to May 2021 levels. This process has been painful for investors, but it has also brought market valuations closer to their fundamentals.
Source: https://insights.glassnode.com
Original author: Checkmate, Glassnode
Original link: https://insights.glassnode.com/the-week-onchain-week-2-2023/
