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Gm vari,
Today we wrap up September by diving into to the highlights of the quarter in crypto and their effects on-chain. We start by covering Ethereum's transition to proof of stake and how the resulting decline in issuance was slightly below expectations due to the decreasing network demand. Here we look at NFTs, DeFi and total transfer volume to paint a picture of Ethereum's on-chain activity in Q3.
We then look at Bitcoin's state in light of the macro environment.
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 in aggregate generated just under $30M from the network, declining from $42.9M in Q2 2022
Ethereum fees dropped even further, from $1.29B in Q2 to $264M in Q3
Despite the decrease in blockchain demand, prices have held relatively well with Bitcoin trending sidewards and Ether climbing 30% quarter over quarter
Exchanges Netflows - The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
Bitcoin recorded modest inflows into centralized exchanges of under $50M, higher than the $192M net outflows from Q2
Over $1B in ETH left exchanges for the fourth straight quarter, though outflows in Q3 were $57M lower than those from Q2
The Merge vs Decreasing Demand
The most awaited upgrade of the year in crypto was successfully implemented as Ethereum transitioned to proof of stake. With the merge, Ethereum now consumes 99% less energy than it used to as miners are no longer necessary for the network.
Another anticipated benefit from the merge was the resulting reduction in ETH issuance. The amount of ETH issued per day dropped by 85% - 90%; however, ETH did not become deflationary as many (including us) had predicted.
Decreasing Supply Meets Decreasing Demand - Deflationary ETH expectations failed to materialize due to decreasing network usage
Ethereum fees dropped approximately 80% quarter over quarter
The result has been less ETH being burned everyday as gas prices remain low due to lack of demand
One potential reason for low fees on Ethereum mainnet is the increased adoption of layer 2s, with Optimism and Arbitrum both registering nearly 3x increase in daily transactions during Q3, as per Etherscan
Another reason for the decline in ETH being burned is the decaying interest in NFTs, which have been in a downtrend since the Q1 2022 frenzy.
Bubble Burst? NFT volumes are down 95% in ETH terms since their highs in late January 2022
The total NFT volume transacted in dropped by 52% from 5.5M ETH in Q2 to 2.6M ETH in Q3
ETH burned and NFT volumes have been moving in tandem, with a correlation coefficient of 0.58 year-to-date suggesting a strong relationship between the two
Perhaps unexpectedly, new addresses using NFTs on Ethereum actually grew by 22%, suggesting that new users may still be trying NFTs but may be in less of a rush to do so (and thus less willing to pay higher gas fees)
DeFi Usage Also Declines - Bluechip protocols on Ethereum also recorded a decrease in demand
Uniswap v3 experienced a 30% decrease in volumes compared to Q2, and is on track for its lowest monthly volume in a year
Curve recorded a 57% drop in volumes quarter over quarter
Overall, it is evident that speculative activity in crypto has severely declined as we observed with NFT and DeFi volumes. This has led to significantly lower Ethereum demand that partially off-set the supply shock from the merge's reduced issuance.
Bitcoin & Macro
Let's address the elephant in the room: macro conditions continue to dictate the short-term path for crypto. This has been the case since the fed began indicating it would tighten monetary conditions back in November. Below we observe just how closely Bitcoin, the Nasdaq100 and S&P 500 trended throughout Q3.
Bear Market Accumulation - History is repeating itself with long-term holders increasing their Bitcoin stack as prices decline
Historical Bitcoin cycles have seen long-term players decrease their holdings following the breaking of new highs
Then as prices crash, hodlers are back to buying at discounted prices
In Q3, we saw hodlers increased their Bitcoin holdings by 5%, and 30% year-to-date
This accumulation pattern could be indication of Bitcoin's store of value thesis still being alive, as presumably the consensus among these long-term buyers is to expect greater prices or else they would not be buying more
Macro conditions have been catastrophic for financial markets in 2022. This made evident that crypto benefitted in 2021 from loose monetary policy as much as it is struggling now under tighter conditions and heightened uncertainty.
Despite the current risk-off environment, declining values of most fiat currencies vs the dollar could bring inflows to Bitcoin as the most liquid non-sovereign digital asset. More and more traditional institutions are holding Bitcoin custodially for their clients. Fidelity, Charles Schwab and Citadel announced they will soon be launching a crypto exchange.
With the infrastructure for institutional capital to enter crypto improving, and long-term holders keeping their conviction, it is possible that Bitcoin and crypto altogether begin to de-peg from macro conditions, barring any potential global crisis scenarios.
Maximal extractable value (MEV) is a hidden economic force that is growing. It can lead to both positive and negative outcomes for network participants and remains as one of the most misunderstood topics in crypto.
In this webinar we aim to shed light onto MEV by exploring how it happens on-chain and its effects. We evaluate the size of the MEV market and analyze ways how it is likely to evolve as it matures.
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