Carnage Gives Way to Indifference
There are few cohorts of people more excited to turn the page to a new year than crypto investors. After nearly 12 months of unwinding leverage, we have finally reached a point in the cycle where indifference has crept into the market, as demonstrated by the continued decline in volumes and realized volatilities.
Aggregated ETH volume is the best proxy for trading activity in crypto. It is the second largest cryptoasset by market cap, and the data is not skewed by wash trading on Binance. Spot volumes continue to decline, now at the lowest level in over two years.
We did see some interesting price action among several lower-cap altcoins, which we will discuss further below, but the tight range in which ETH and BTC continue to trade is substantiated by persistently subdued on-chain activity.
Below we see that bitcoin wallet activity has remained in a sideways pattern since the start of this ongoing bear market. The activity started to perk up in Q4, but this was primarily due to on-chain transfers in the wake of the FTX collapse. We can see in the chart below that activity has since continued its descent.
The trend for ETH on-chain activity is quite similar. While we have seen rather impressive levels of adoption on layer 2 networks, this activity has yet to manifest on the mainchain. On-chain activity on the Ethereum network has maintained a downward trend since the market’s peak in 2021.
Naturally, realized volatility for both BTC and ETH has continued its descent, with 1-month realized volatility reaching 25% for BTC and 40% for ETH. This is something that we continue to keep an eye on, as a 1-month realized volatility of 20% has historically preceded favorable near- and long-term returns for bitcoin.
Shanghai Is Coming
The Ethereum Core Developers held their first meeting of the year this week. In it, they discussed the upcoming Shanghai network upgrade and determined which improvement proposals would be prioritized in the code updates. While there has been public debate over what initiatives developers should set their near-term sights on, the call resulted in staking withdrawals being the sole focus of this upgrade.
Withdrawals are currently being tested on an exclusive testnet. The plan is for a public testnet to launch next month and a mainnet launch to follow sometime in March.
Naturally, liquid staking provider tokens surged on the news. This focused upgrade should de-risk ETH staking immensely, as stakers will now be able to achieve liquidity if they wish to do so. The major liquid staking provider, Lido ($LDO), has had one of the better first weeks of the year, rising over 50%. Other staking provider tokens, such as $RPL and $SWISE, had a similarly positive week of price action.
As a brief recap, services like Lido, RocketPool, and Stakewise allow users with less than 32 ETH and without the proper infrastructure to commit their assets to a node operator. Users are then provided with a liquid staking derivative (LSD) token, which allows the holder to earn yield, can be used throughout DeFi, and ultimately allows for the holder to redeem the underlying assets staked to Lido (Lido’s LSD is $stETH).
These LSDs often deviate from the underlying asset due to an inherent illiquidity discount, but many funds are now likely to scoop any heavily discounted LSDs off the open market so that they can redeem ETH once withdrawals are permitted and can harvest the spread between the LSD and underlying asset.
LDO is Lido DAO’s governance token. Governance tokens are another way to gain exposure to liquid staking. These tokens vary in value accrual mechanisms but broadly allow holders to vote on governance issues. There is also speculation that at some point, respective LSD DAOs will enable token holders to receive some of the revenue from staking services provided. Thus, these tokens are likely beneficiaries of the impending Shanghai upgrade.
As we can see in the chart below, liquid staking currently accounts for a plurality of staking on the Ethereum network.
Among staking depositors, Lido accounts for the greatest percentage of ETH staked. We think it is likely that Lido will continue to grow in TVL but will also face increased competition from LSD market entrants.
Solana Likely Found a Bottom
Solana has experienced some interesting recent price action. Last week, we witnessed some outsized selling pressure, possibly related to year-end fund redemptions. Solana fell into single-digit territory on high volume. Following this drawdown, short positions on SOL began to accumulate, as many speculated on the knife continuing to fall.
When traders returned to their stations following the holiday weekend, we witnessed a sizeable relative increase in spot price, from $8 to $14, on the back of a substantial short squeeze. This activity continued throughout the week.
This rally in SOL was undoubtedly driven by investors being positioned offsides. As demonstrated by the chart below, there was no fundamental change in on-chain transaction activity on the Solana network over the previous two weeks.
Despite the persistent lack of fundamental demand for the SOL token, we did see impressive volume in the spot market during both the year-end selloff and this week’s liquidation-fueled bounce.
Below we see that volume as a percentage of market cap spiked twice to over 20%.
Zooming in, this data becomes even more intriguing, as there was an element of symmetry to the volume data before and after the holiday weekend.
Solana is a beleaguered name that unfortunately benefitted from a particularly unsavory character promoting scams built atop the network.
We will address this further in our annual outlook in a few weeks, but we think too many people have written the network off entirely. It will be a long and challenging road for Solana developers to restore confidence in the ecosystem, but the risk/reward is favorable at these levels. Further, the volumes and price action witnessed over the previous few weeks suggest that we may have found a long-term bottom for the token.
On-Chain Price Discovery
We are clearly going through a period of consolidation in both BTC and ETH. Markets are less liquid, volumes are down, and trading ranges are tight. But what is interesting about bitcoin is that the network’s accounting model allows us to view the cost basis for each bitcoin held outside of exchanges. Below we examine interesting behavior that has transpired over the past two months.
UTXO Realized Price Distribution (URPD) shows at which prices the current set of Bitcoin UTXOs were created. In other words, each bar shows the number of BTC that last moved within that specified price bucket. The x-axis below is divided into percentiles from 0 to bitcoin’s ATH of $69k. The first percentile is removed from the frame as this bucket contains Satoshi’s coins and thus skews the data. Also, it is worth noting that these figures exclude BTC on exchanges.
Below is how the distribution of BTC looked as of November 1st, prior to the fallout from FTX. There is a cluster of UTXOs created in the $19k – $22k range. This is a clear product of consolidation throughout Q2 and Q3 of last year. Coins that were initially purchased in higher-tiered buckets were sold, and investors started to stack within this tight $19k-$22k range.
However, fast-forward to today, and we see that we have witnessed even greater capitulation and subsequent appetite to buy BTC at the very specific level of $16.5k – $17.2k. This paints an incredible picture of a strong buy wall at current market prices and suggests a strong bottom is forming.
Below is a comprehensive summary of the movement in UTXOs from November to January. The red areas indicate BTC that was sold between the two dates, the green represents BTC purchased at each respective level, and the white areas are BTC that has not moved within that time frame.
We are compiling our outlook for this year, which we will present to our clients and subscribers on January 19th, but at a high level, it is likely right to hold off on being too aggressive with market buys. Investors might not be compensated for the risk incurred in the immediate term (< 1 month). For those with a longer-term investment horizon, current levels offer favorable entry points for both $BTC and $ETH (12+ months).