Sign up for our newsletter
Receive insights on the current developments at SEBA and stay ahead of the curve with our well-founded in house research papers.
First name
Last name
Email address
Continue
Price performanceIntroductionBitcoinOther Payment ChainsEthereumOther Platform ChainsDecentralised FinanceConclusion
Thursday, 5 August, 2021
The Digital Investor

Untangling the chain from the price

Abstract

Crypto markets struggled through most of July but managed to close on a strong note, up by almost 13%. With the increase in prices, market sentiment has also buoyed. We present an analysis of the on-chain metrics to show whether the on-chain activity supports the rise in prices.

Bitcoin’s on-chain metrics show old holders are accumulating, and there is minimal growth in new users. NVT and MVRV ratios of payment coins are also close to their long-term averages suggesting fair valuations.

Ethereum, Polkadot, and Cardano will be going through significant upgrades in the coming months. The "London" hard fork will overhaul Ethereum's monetary policy in August. Polkadot and Cardano will unlock greater functionality through parachains and smart contracts as they seek to build thriving ecosystems to rival Ethereum.

We also compare the concentration of DeFi tokens showing different holding patterns. Growth in the number of token holders for the protocols has stagnated, indicating a period of accumulation by old holders.

In conclusion, low on-chain activity and analysis suggest that we are at the beginning of the accumulation phase. The increase in prices may create a hype cycle and revive on-chain metrics, but there are no such indications.

Price performance

Table 1: Price performance in USD of the assets in coverage universe as of 31-Jul-2021

Source: SEBA Bank, Coinmetrics

Introduction

Blockchains are a transparent and open means of value transfer, quite contrary to the recent comments by United States Senator Elizabeth Warren. Blockchain transaction data can be parsed and analysed to gain an insight into the collective actions and behaviour of the participants. Based on this information, we built on-chain models and indicators measuring adoption, use and ultimately, price developments. With the help of these on-chain analytics, we estimate where we stand in the current crypto cycle.

The crypto market suffered through most of July as performance remained muted. However, in the last week of July, there has been an uptick in prices and sentiment. In this edition of the New Digital Investor, we look at on-chain metrics of various blockchains and projects to see whether they support the uptick in prices or not.

Bitcoin and crypto market cycles tend to have two distinct phases. The first phase is a long accumulation when holders slowly build their positions, and the price action is muted. Distribution is the second phase when there is a massive amount of new interest, and the price increases sharply with old holders booking profits. On-chain metrics suggest that we are in the accumulation phase, and from here, two options are available. Either prices create enough hype for the on-chain metrics to revive and catch up or the other way round, prices consolidate to match the on-chain activity. Currently, we do not observe a firm improvement in on-chain activity.

The alt chains under active development like Ethereum, Polkadot and Cardano will significantly improve their protocols in upcoming months. However, it is unclear whether they will generate enough momentum by themselves for the market sentiment to improve. Historically, bitcoin has always led the pack and dominates market sentiment. It will be a first if these coins can decouple from the premier crypto asset and turn the tide for themselves and the rest of the market. We do not believe this is likely, and we remain cautious.

Figure 1: Google search trend of “Bitcoin” shows waning interest

Source: SEBA Bank, Google

Bitcoin

Bitcoin hash rate bottomed out at the beginning of July and has started rising again as the uprooted miners find shelter in Kazakhstan and the United States. Such a significant move with a minimal impact on the network proves how resistant it is to external threats. The decentralisation of Bitcoin mining is also a positive fundamental change that adds to its censorship resistance.

Figure 2: Bitcoin hash rates and network difficulty start to recover

Source: SEBA Bank, Coinmetrics

“HODLer net monthly position” is a metric derived from coin days destroyed1 and blockchain liveness. During the distribution phase with high prices, old coins move around as investors book profits and coin days are destroyed. During periods of accumulation, there is lower activity, and more coin days are added.

Figure 3 shows that the current cycle had a less extreme and shorter distribution period compared to earlier cycles. A lengthier consolidation, unlike the previous cycles with a blow-off top, also reflected this. Since the crash in May, we have wholly entered the accumulation phase with monthly change in coin days returning to historical highs. The accumulation phase usually happens after the cycle top is entirely behind, as seen after the 2014 and 2018 market cycle tops.

Figure 3: Bitcoin holders have started to accumulate again

Source: SEBA Bank, Coinmetrics

The HODL wave also shows a similar story where the distribution to new addresses has topped off, and the accumulation phase of old addresses has started again. Figure 4 shows how price movement is directly related to new user growth. There is no indication of new users joining in the recent months.

Figure 4: Bitcoin HODL wave shows no improvement yet in new user activity

Source: SEBA Bank, Coinmetrics

Other Payment Chains

The primary use of payment tokens is to settle value among the network participants. The network value to transactions ratio or NVT ratio compares the market capitalisation of a coin to the transaction value settled. Similar to a PE ratio, a higher NVT ratio indicates that the coin is highly valued, while a lower NVT ratio means the coin is undervalued.

Figure 5 compares the NVT ratios of the top payment coins and ether, which may not be strictly a payment coin, but its extensive network, wide acceptance, and time spent in the top 5 ranks qualifies it as a medium of exchange.

Relative to their histories, all payment coins are undervalued according to the NVT metric. For BTC, the NVT ratio is less than one standard deviation below the two-year average; for ETH, LTC and XLM, it is more than one standard deviation below the two-year average. ETH and LTC look relatively more attractive with NVT ratios of 24 and 32, respectively, whereas XLM and BTC are more expensive with NVT ratios of 175 and 78.

Figure 5: NVT ratios of BTC, ETH, LTC and XLM (RHS)

Source: SEBA Bank, Coinmetrics

The realised value metric sums up the value of all bitcoins at the price they were last moved. Market capitalisation to realised value (MVRV) metric measures the degree to which holders are in profit. At higher levels, holders are likely to take profits and selling pressure is expected. In contrast, holders are expected to hold onto their coins at lower levels, and there is lower selling pressure.

LTC MVRV ratio is the lowest at 1.08, meaning holders are only at 8% profit on average. It is followed by ETH at 1.73 and BTC at 2.10. XLM has the highest MVRV ratio at 2.16. MVRV ratios of all four coins are above their two-year average, and ETH is the only coin with MVRV more than one standard deviation above the two-year mean. As per the MVRV metrics, payment tokens are fairly valued, and ETH is slightly expensive compared to its historical levels.

Figure 6: MVRV ratios of BTC, ETH, LTC and XLM

Source: SEBA Bank, Coinmetrics

Ethereum

One of the most awaited updates to the Ethereum network is Ethereum Improvement Proposal 1559 (EIP-1559). It will be live on August 5 with the “London” upgrade. After implementing EIP-1559, the network will algorithmically determine the gas price instead of users exercising their discretion and overpaying or having to wait a long time. In addition, the network will also burn the base fees paid by the users instead of transferring them to the miners. Consequently, EIP-1559 aligns the interests of developers, holders, and users of the protocol as the more the network is used, the more ether is burnt, making it scarcer and more valuable. To read more about EIP-1559, please refer to the linked Crypto Market MonitorCrypto Market Monitorlink1.

Currently, Ethereum has an annual inflation rate of ~4.5%, of which more than 90% comes from proof-of-work block and uncle rewards paid to miners and the rest as proof-of-stake inflation paid to validators for the Ethereum 2.0 beacon chain. After EIP-1559, the net annual inflation of ether will be lower by the amount of ether burnt. This is a function of two variables – the gas price or the demand of the network and the split between base fee versus miner tip, i.e., the split between retail users versus sophisticated users and arbitrage bots. Table 1 shows the impact of EIP-1559 on the inflation of ether under different conditions. For context, the average gas price in 2021 has been ~105 gwei, and if there is a 70% split between base fee and tips, it would mean lower net inflation by ~35%, down to ~3% from ~4.5%.

Table 2: Reduction% in the inflation rate of ether under different circumstances

Source: SEBA Bank

Another indicator for a platform chain like Ethereum is the comparison of supply on smart contracts versus that on exchanges, i.e., how much ether is being productively used on chain in the decentralised applications (dapps) it enables, versus the supply on exchanges that may be more for speculation. This has seen a consistent improvement for Ethereum as more and more ethers are moving from exchanges to smart contracts, as seen in Figure 7.

Figure 7: Supply of ether on smart contracts exceeds that on exchanges by 2.4 times

Source: SEBA Bank, Coinmetrics

Other Platform Chains

Polkadot and Cardano are both going through a development phase, after which they will unlock new and broad use cases and look to capture user attention. For Polkadot, we look to its Canary Network, Kusama. Kusama parachain auctions have successfully concluded in July. Five promising parachains will bring decentralised finance (DeFi), computational cloud services, staking liquidity, cross-chain bridges and more to the Kusama ecosystem. After a period of testing on Kusama, parachain auctions are expected to go live on Polkadot too.

For Cardano, smart contracts are being tested on the Alonzo test net. Alonzo phase-1 concluded successfully in July and has transitioned to phase-2. After three more phases, smart contracts are expected to go live on the main net in Q4 2021. In August, basic dapps such as a decentralised automated market maker like Uniswap and a collateral-backed stable coin like Dai will be tested. The Alonzo rollout is currently running behind schedule, and a smooth phase-2 will be essential to ensure that it is not further delayed.

Until these upgrades go live, we can only compare the adoption and interest in the two chains by looking at the number of active addresses and daily transactions (see figure 8). In July, Cardano counted more active addresses than Polkadot, respectively 58,000 and 22,000. However, Polkadot recorded more transactions with 116,000 versus 27,000 for Cardano.

Figure 8: Growing number of addresses and transactions on the new platform chains

Source: SEBA Bank, Coinmetrics

Decentralised Finance

DeFi has so far avoided regulation, but with the proposed Infrastructure BillInfrastructure Billlink1 in the United States and commentscommentslink1 from the Securities and Exchange Commission Chair Gensler, it seems like this may be coming to an end. We will cover the potential impact of such regulation in an upcoming Digital Regulator.

Following these updates, Uniswap Labs has delisted synthetic tokensdelisted synthetic tokenslink1 like Synthetix’s sETH, sBTC, sAAPL from the website – app.uniswap.org. In this case, it is crucial to understand that Uniswap Labs, a company based out of the United States and subject to the United States law, is different from the Uniswap protocol, a smart contract hosted on the Ethereum blockchain governed by UNI token holders. Uniswap Labs is a contributor to the Uniswap protocol and runs the website (app.uniswap.org). Uniswap Labs can only remove the securities from the specific front end they control. Users can still use other front ends that integrate Uniswap protocol like 1inch, Zapper and Zerion or even interact directly with the smart contract to trade any liquid tokens. The Uniswap protocol is an immutable smart contract that runs on the Ethereum blockchain, and no entity can delist any tokens even if they wanted to. As long as the Ethereum blockchain has users and miners, the smart contracts it supports will continue to run.

Uniswap governance had approved a USD 20 mn DeFi Education FundDeFi Education Fundlink1 in June. The fund's goals are to challenge misguided policies by funding DeFi education among policymakers, thought leadership and research, and advocacy of DeFi at a grassroots level. It will be crucial for the survival and growth of this still nascent industry that legislators take a more nuanced approach. Proactive initiatives such as the DeFi Education Fund will go a long way in helping towards that goal.

We have covered fundamental value drivers of DeFi dapps like total value locked for money markets and yield aggregators; volumes for decentralised exchanges in the previous Digital Investor. Another interesting aspect of dapps tokens that can be analysed is their distribution metrics. Dapp tokens can have varying degrees of concentration depending on age, original distribution method (ICO, liquidity mining, or airdrop), tokenomics, protocol treasury size and other market factors. Figure 9 shows that tokens with significant protocol and foundation treasuries like UNI and LINK have a higher concentration among large holders. YFI has the lowest concentration as a consequence of its free and fair launch. Usually, tokens with higher concentration can run up much higher without seeing a significant increase in selling pressure as large holders are usually insiders whose holding period is longer than that of speculators. However, highly concentrated tokens also bear the risk of the price being subject to manipulation if the large holders wish to do so.

Figure 9: Distribution of token concentration of DeFi protocols

Source: SEBA Bank, Coinmetrics

The number of holders is also an important metric to consider. A larger investor base signifies greater awareness of the project and a stronger brand. Similar to token concentration, age, original distribution method, tokenomics and other market factors may affect how many holders a token may have. This is an important indicator as a sharp increase in the number of holders may signify euphoria in the market. LINK has the highest number of token holders, and YFI has the fewest. The token holder base has not grown significantly in the recent months for all five projects. There was an average increase of 4% in July and 1% in June compared to 41% and 26% in January and February 2021.

Figure 10: Growth in the number of addresses holding DeFi tokens has slowed after Q1 CY2021

Source: SEBA Bank, Coinmetrics

Conclusion

On-chain metrics suggest that we are in the accumulation phase, and from here, two options are available. Either prices create enough hype for the on-chain metrics to revive and catch up or the other way round, prices consolidate to match the on-chain activity. Currently, we do not observe a firm improvement in on-chain activity.

The alt chains under active development like Ethereum, Polkadot and Cardano will significantly improve their protocols in upcoming months. However, it is unclear whether they will generate enough momentum by themselves for the market sentiment to improve. Historically, bitcoin has always led the pack and dominates market sentiment. It will be a first if these coins can decouple from the premier crypto asset and turn the tide for themselves and the rest of the market. We do not believe this is likely, and we remain cautious.


1"Coin days destroyed" measures the number of days a coin has been held before it is sold. For instance, 2 bitcoins held for 60 days and then sold is equivalent to 120 coin days destroyed.
Download pdf
Share:
Subscribe to the research newsletter and get weekly updates about the latest articles of SEBAresearch
Subscribe to newsletter

Authors


Yves Longchamp
Head of Research SEBA Bank AG
in
Kunal Goel
Research Analyst B&B
Analytics Private Limited
in
Aishwary Gupta
Research Analyst
B&B Analytics Private Limited
in
Ayaan Sohhel
Research Analyst
B&B Analytics Private Limited
in
research@seba.swiss | Disclaimer

Disclaimer

This document has been prepared by SEBA Bank AG (“SEBA”) in Switzerland. SEBA is a Swiss bank and securities dealer with its head office and legal domicile in Switzerland. It is authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This document is published solely for information purposes; it is not an advertisement nor is it a solicitation or an offer to buy or sell any financial investment or to participate in any particular investment strategy. This document is for distribution only under such circumstances as may be permitted by applicable law. It is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction.

No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained in this document, except with respect to information concerning SEBA. The information is not intended to be a complete statement or summary of the financial investments, markets or developments referred to in the document. SEBA does not undertake to update or keep current the information. Any statements contained in this document attributed to a third party represent SEBA's interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party.

Any prices stated in this document are for information purposes only and do not represent valuations for individual investments. There is no representation that any transaction can or could have been effected at those prices, and any prices do not necessarily reflect SEBA’s internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions by SEBA or any other source may yield substantially different results.

Nothing in this document constitutes a representation that any investment strategy or investment is suitable or appropriate to an investor’s individual circumstances or otherwise constitutes a personal recommendation. Investments involve risks, and investors should exercise prudence and their own judgment in making their investment decisions. Financial investments described in the document may not be eligible for sale in all jurisdictions or to certain categories of investors. Certain services and products are subject to legal restrictions and cannot be offered on an unrestricted basis to certain investors. Recipients are therefore asked to consult the restrictions relating to investments, products or services for further information. Furthermore, recipients may consult their legal/tax advisors should they require any clarifications. SEBA and any of its directors or employees may be entitled at any time to hold long or short positions in investments, carry out transactions involving relevant investments in the capacity of principal or agent, or provide any other services or have officers, who serve as directors, either to/for the issuer, the investment itself or to/for any company commercially or financially affiliated to such investment.

At any time, investment decisions (including whether to buy, sell or hold investments) made by SEBA and its employees may differ from or be contrary to the opinions expressed in SEBA research publications.

Some investments may not be readily realizable since the market is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. Investing in digital assets including cryptocurrencies as well as in futures and options is not suitable for every investor as there is a substantial risk of loss, and losses in excess of an initial investment may under certain circumstances occur. The value of any investment or income may go down as well as up, and investors may not get back the full amount invested. Past performance of an investment is no guarantee for its future performance. Additional information will be made available upon request. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment. Tax treatment depends on the individual circumstances and may be subject to change in the future.

SEBA does not provide legal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon both in general or with reference to specific investor’s circumstances and needs. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of individual investors and we would recommend that you take financial and/or tax advice as to the implications (including tax) prior to investing. Neither SEBA nor any of its directors, employees or agents accepts any liability for any loss (including investment loss) or damage arising out of the use of all or any of the Information provided in the document.

This document may not be reproduced or copies circulated without prior authority of SEBA. Unless otherwise agreed in writing SEBA expressly prohibits the distribution and transfer of this document to third parties for any reason. SEBA accepts no liability whatsoever for any claims or lawsuits from any third parties arising from the use or distribution of this document.

Research will initiate, update and cease coverage solely at the discretion of SEBA. The information contained in this document is based on numerous assumptions. Different assumptions could result in materially different results. SEBA may use research input provided by analysts employed by its affiliate B&B Analytics Private Limited, Mumbai. The analyst(s) responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting market information The compensation of the analyst who prepared this document is determined exclusively by SEBA.

Austria: SEBA is not licensed to conduct banking and financial activities in Austria nor is SEBA supervised by the Austrian Financial Market Authority (Finanzmarktaufsicht), to which this document has not been submitted for approval. France: SEBA is not licensed to conduct banking and financial activities in France nor is SEBA supervised by French banking and financial authorities. Italy: SEBA is not licensed to conduct banking and financial activities in Italy nor is SEBA supervised by the Bank of Italy (Banca d’Italia) and the Italian Financial Markets Supervisory Authority (CONSOB - Commissione Nazionale per le Società e la Borsa), to which this document has not been submitted for approval. Germany: SEBA is not licensed to conduct banking and financial activities in Germany nor is SEBA supervised by the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht), to which this document has not been submitted for approval. Hong-Kong: SEBA is not licensed to conduct banking and financial activities in Hong-Kong nor is SEBA supervised by banking and financial authorities in Hong-Kong, to which this document has not been submitted for approval. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in Hong-Kong where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction. This document is under no circumstances directed to, or intended for distribution, publication to or use by, persons who are not “professional investors” within the meaning of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules made thereunder (the “SFO”). Netherlands: This publication has been produced by SEBA, which is not authorised to provide regulated services in the Netherlands. Portugal: SEBA is not licensed to conduct banking and financial activities in Portugal nor is SEBA supervised by the Portuguese regulators Bank of Portugal “Banco de Portugal” and Portuguese Securities Exchange Commission “Comissao do Mercado de Valores Mobiliarios”. Singapore: SEBA is not licensed to conduct banking and financial activities in SIngapore nor is SEBA supervised by banking and financial authorities in Singapore, to which this document has not been submitted for approval. This document was provided to you as a result of a request received by SEBA from you and/or persons entitled to make the request on your behalf. Should you have received the document erroneously, SEBA asks that you kindly destroy/delete it and inform SEBA immediately. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in Singapore where such distribution, publication, availability or use would be contrary to law or regulation or would subject SEBA to any registration or licensing requirement within such jurisdiction. This document is under no circumstances directed to, or intended for distribution, publication to or use by, persons who are not accredited investors, expert investors or institutional investors as defined in section 4A of the Securities and Futures Act (Cap. 289 of Singapore) (“SFA”). UK: This document has been prepared by SEBA Bank AG (“SEBA”) in Switzerland. SEBA is a Swiss bank and securities dealer with its head office and legal domicile in Switzerland. It is authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This document is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product.

SEBA is not an authorised person for purposes of the Financial Services and Markets Act (FSMA), and accordingly, any information if deemed a financial promotion is provided only to persons in the UK reasonably believed to be of a kind to whom promotions may be communicated by an unauthorised person pursuant to an exemption under the FSMA (Financial Promotion) Order 2005 (the “FPO”). Such persons include: (a) persons having professional experience in matters relating to investments (“Investment Professionals”) and (b) high net worth bodies corporate, partnerships, unincorporated associations, trusts, etc. falling within Article 49 of the FPO (“High Net Worth Businesses”). High Net Worth Businesses include: (i) a corporation which has called-up share capital or net assets of at least £5 million or is a member of a group in which includes a company with called-up share capital or net assets of at least £5 million (but where the corporation has more than 20 shareholders or it is a subsidiary of a company with more than 20 shareholders, the £5 million share capital / net assets requirement is reduced to £500,000); (ii) a partnership or unincorporated association with net assets of at least £5 million and (iii) a trustee of a trust which has had gross assets (i.e. total assets held before deduction of any liabilities) of at least £10 million at any time within the year preceding the promotion. Any financial promotion information is available only to such persons, and persons of any other description in the UK may not rely on the information in it. Most of the protections provided by the UK regulatory system, and compensation under the UK Financial Services Compensation Scheme, will not be available.

© SEBA / Kolinplatz 15, 6300 Zug, Switzerland

Research

more
Tokenomics
Tokenomics describes the role a cryptocurrency plays in a blockchain ecosystem. Understanding the key components of tokenomics is essential in assessing the potential of a project.
Read more
The DeFi Regulatory Challenge
Decentralised Finance (DeFi) generates benefits and is growing in importance. A regulatory endorsement is crucial for mass adoption. This might be achieved through the constructive cooperation between...
Read more
It Pays to be Smart
In the previous edition of The Digital Investor, we noted that platform chains had significant developmental upgrades coming up while Bitcoin's on-chain fundamentals looked weak. Over the past month, ...
Read more

Join us as we

redefine finance.

Contact us
SEBA logo

SEBA Bank AG
Kolinplatz 15
6300 Zug
Switzerland

CompanyResearchCareersContact
Receive the newest insights, research and news from SEBA Bank directly to your inbox
Newsletter subscription
© 2021 SEBA Bank AG