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Gm Ope,
Happy last day of the second quarter of 2023. This week, following our last few quarters' tradition, we provide a brief overview of what happened in crypto from an on-chain perspective. We review the major events that drove on-chain activity for Bitcoin and Ethereum in Q2 2023, shedding some light on the effects they had on the market and analyze what are the potential implications for crypto over the next few months.
Network Fees - Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
Bitcoin fees increased by over 4x compared to the previous quarter, with Ordinals-related activity driving these to their highest since Q2 2021
Ethereum quarterly fees grew by 83%, with meme token speculation in May being one of the main drivers
Exchanges Netflows - The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
$2.3B worth of Bitcoin left CEXs throughout Q2, with persistent outflows and some impact from the Binance and Coinbase lawsuits
Over $5B worth of ETH was withdrawn from CEXs, with a significant portion of that leaving Kraken and Coinbase's staking service for liquid staking options
Q2 2023 On-Chain
Crypto markets went through a roller coaster ride in the second quarter of 2023, with emotions ranging from FOMO through the meme token frenzy to despair upon the SEC's lawsuits against the major crypto exchanges. These two events, along with the recent Blackrock ETF filing and the Ethereum Shapella upgrade are likely the most representative of what took place in crypto over the past three months.
In terms of having an impact on-chain, the PEPE-led meme token episode was perhaps the most significant. And for the first time, it wasn't just Ethereum seeing an increase in activity led by meme tokens. Bitcoin's new BRC-20 standard, though still controversial among the Bitcoin community, enabled the creation of tokens worth hundreds of millions on top of the Bitcoin blockchain, driving Bitcoin on-chain activity higher.
Bitcoin Transactions Set New All-Time High - In the peak of the meme token frenzy, BTC daily transactions surpassed 600k for the first time in history
Bitcoin transactions had already been accelerating in Q1 as Ordinals enabled the minting of "inscriptions", NFT-like artifacts tied to a satoshi (Bitcoin's smallest unit)
Towards the end of Q1 a pseudonymous developer extended Ordinals' functionality further by allowing to create BRC-20 tokens, a similar concept to Ethereum's ERC-20 tokens, but where the supply of each token is itself a set of satoshi inscriptions
Less than four months later, there already over 30,000 BRC-20s, mostly comprised of meme tokens
When PEPE spiked by over 2,000% on April, the meme token speculation spread into Bitcoin and the aggregate market cap of BRC-20s surpassed $1B
Fees Galore -Bitcoin fees rose in conjunction with the BRC-20 speculation
Bitcoin fees reached their highest since May 2021, when BTC first breached the $60,000 price tag
In contrast to previous fee spikes, the Q2 growth in Bitcoin fees comes at a bear market (or potential beginning of a bull market)
For the first time since 2017, Bitcoin transaction fees surpassed the amount of BTC minted per block
While Bitcoin fees have since crashed 80% from the highs in May, they sustain at a higher level
Ordinals-related activity is providing a potential glimpse of a more sustainable future for Bitcoin where miners don't have to rely on inflationary rewards to sustain the network's security
Similarly, Ethereum fees also had a strong impact in Q2 2023.
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ETH's Most Deflationary Month - May 2023 marked the month where Ether's supply shrunk the most in its history
Ether's annualized net issuance rate (the rate of inflation - ETH burnt) reached as low as 3.75% in May in the midst of the meme token mania
Following the merge to proof of stake last September, the amount of ETH issued per block dropped by 90%, making ETH more likely to become deflationary upon fee spikes, when more ETH gets burnt
This trend has since stabilized as Ethereum fees drop back to the range of 15-25 Gwei over the past few weeks
An increasing amount of ETH staked is also leading to slightly higher issuance.
Shapella Outflows, A Blip Prior to Inflows - After more than two and a half years, ETH validators were finally able to withdraw funds when the Shapella upgrade went live in April
The amount of ETH staked dropped for just two weeks (mostly coming out of CEXs' staking products) prior to continuing to grow
As we had previously estimated, liquid staking services like Lido grew significantly the amount of ETH staked, attracting new deposits as well as funds migrating out of CEXs
The amount of ETH staked with Lido has grown by more than 1.5M ETH ($2.8B) since the Shapella fork took place in April 12, 2023
The Shapella upgrade and the meme token episode increased the risk appetite in the crypto industry, which was then waned down following the SEC's crackdown in early June. Now, looking into Q3, it appears that Bitcoin whales have reawaken following the Blackrock ETF filing. While the ETF news is still far from certain, it is likely to keep things interesting over the next few months.
Webinar Recording: The Path for Crypto Post-US Crackdown
Following the SEC's actions against Binance and Coinbase, crypto may be at a pivotal point.
In this week's webinar we analyzed the implications of the recent crypto crackdown in the US and the opportunities to emerge out of this longer-term.
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