Q9 Markets: DeFi-ing Gravity

9th July 2021

• High beta DeFi takes flight
• BTC flat, largest ever drop in mining difficulty
• Anticipation builds for ETH’s “London hard fork”

An incredibly interesting week for crypto markets as major DeFi names rallied, ETH overtook BTC in number of active addresses, BTC mining difficulty had its largest drop in history, and ETH prepares for the much anticipated “London hard fork”.

To get the somewhat “boring” stuff out the way first, ETH and BTC both tracked sideways again this week and remained in range, closing the week flat. The week started off positively for both as BTC reached 36k and ETH touched 2.4k on Monday before gradually sliding back down to 32.8k (-2.1%) and $2,120 (+0.3%) respectively. Overall, the market posted rather modest losses of $13bln in total market cap and annualised volatility dropped, falling to 51% for BTC and 103%. However, behind these numbers lie some very interesting stories.

While old large-cap names seemed to be a boring or bearish, a lot is happening in the new generation of DeFi tokens. COMP extended its rally from a week earlier posting +24.4% gains, ZRX and UNI both rallied +19.3% and +14.2%. The DeFi funding rate has been at the lower front, indicating the rally has been spot driven. The DeFi sector has performed poorly since the sell-off in May and betas (vs BTC) have fallen significantly compared to the range of 2–5X during the four-day long May sell off when the market was selling any name trading on the screen.

During the big drop on 19th May, whilst centralised exchanges struggled with technical issues causing delays with asset withdrawals and, in some cases, to temporarily shut the engine down, decentralised exchanges ran like clockwork, handling record trading volumes and seeing over $1bln notional in liquidations without any hassle and executing orders in a heartbeat.

This was a big win for DeFi but was likely not noticed at the time because the market was in extreme fear and distress. Now, after a month of broad market consolidation, investors are looking once again at fundamentals and the sharp decline with weeks of underperformance has made DeFi look cheap. While it is still a very nascent industry with infrastructure still being built and regulation still uncertain, the sector has been developing at breakneck pace.

Back to BTC now and looking behind some of this week’s movement, the small early week rally in $BTC prices coincided with the largest drop (-28%) in history of $BTC’s mining difficulty. This is positive news for existing miners and data shows that miner revenue jumped by 50% since the record difficulty drop.

ETH’s early week price increase overlapped with positive news that it had added over 5 million more unique addresses in just 30 days as the asset continues to gain momentum ahead of its scheduled “London Hard Fork” EIP-1559 and EIP-3554 upgrade. The much anticipated launch is likely to take place on August 4th and aims to lower gas fees, begin ETHs move from a proof-of-work to proof-of-stake mechanism, and make the tokenomics deflationary. EIP-1559 introduces a new fee structure to make Ethereum less inflationary, whilst EIP-3554 will incrementally increase the difficulty of mining, effectively “freezing” proof-of-work in preparation for Ethereum’s move to proof-of-stake.

The rapid increase in ETH adoption now means the token has for the first-time overtaken Bitcoin by the number of daily active addresses on its network — a major accomplishment. This trend of broader ETH adoption is likely to continue as layer two solutions seek to fix ETH’s issues in the near future. ETH 2.0 will also bring a substantial and gradual enhancement on layer two solutions when it is rolled out. Goldman Sachs has gone as far as to say that Ethereum will likely overtake Bitcoin in terms of market value. Market dominance still shows BTC as a clear leader (for now) at BTC: 43%, ETH:17%.

Number of Unique Ethereum Addresses (last 30 days)

Crypto volumes have dropped significantly since the May sell-off. In the last 24 hours, overall crypto volumes were $100bn, significantly down from the $500bn transacted on 20th May. Lower volumes can open the door for increased volatility as larger orders will clear a thinner order book in either direction.

In the News…

Visa announced it is partnering with over 50 crypto companies to allow clients to spend and convert digital currencies. The firm has also reported over $1 billion in crypto spending in H1 2021 on its networks; German neobank N26 is working with ‘top-tier crypto exchanges’ on a new trading feature; A bill has been proposed in Argentina to allow dependent workers and individuals who export services in Argentina to opt to receive all or part of their pay in cryptocurrency; The Israeli government has seized cryptocurrency addresses associated with Hamas donation campaigns.

Legacy Markets

The SPX was unchanged as it retreated from fresh highs printed earlier in the week. Oil futures fell -2.1% as investors await the next move in OPEC+ talks. 10-year US treasury yields dropped 17bps and the US Dollar held steady, posting a modest decline of -0.2%, while the Gold & Silver index dropped -2.1%.

Crypto Markets

• BTC/USD fell -2.1% while ETH/USD posted modest gains of +0.3%. The total market cap of crypto dropped below the $1.4tln mark and Bitcoin’s dominance is now just shy of 45%
• Among other majors EOS/USD dropped -8.4% and top DeFi name COMP continued to steal the limelight
• Annualised volatility dropped to 51% for BTC and 103% for ETH

Flows

• Our client pad continued to see light volumes but a strong buying skew — 4.2X buyers vs sellers
• Net buyers in BTC and EOS, net sellers in ETH
• Mild selling activity in LINK