62% of the Ethereum Supply Has Not Moved in at Least a Year

Summary

Trading View (next 2-4 weeks): We like to be slightly bullish ethereum.

Investment View (next 1-3 years): We like to hold ethereum.

Macro Signals

• The labour market is still hot.
• We expect the Federal Reserve (Fed) to hike twice more this year.
• We think the Fed’s two planned hikes are unlikely to break the broader risk market rally.

On-Chain/Flow Signals

• We have three bullish signals, two bearish, and one neutral.

Overall View

• With the macro backdrop neutral and our on-chain/flow metrics slightly bullish, our overall signal is slightly bullish ethereum (Chart 1).

Macro: The Labour Market Is Still Hot

The labour market is still hot. The US ADP private sector employment report revealed 497,000 private-sector jobs were added in June against expectations of 220,000. Furthermore, despite a negative surprise in nonfarm payrolls (NFPs), the details continue to show a strong labour market: labour demand growth is slowing from the unsustainable highs of the pandemic but remains well above pre-pandemic levels.

The Fed will hike twice more this year. The Fed is on track to hike 25bps this month, and we expect a second 25bp hike in November. Markets are convinced of a July hike but are yet to fully price a November hike, which is Dominique’s base case. Furthermore, they are also overestimating Fed 2024 rate cuts.

Will rate hikes break the risk rally? Dominique sees the two rate hikes planned by the Fed this year as unlikely to break the broader risk market rally, though signs of inflation persistence temper her optimism longer term.

On-Chain/Flow Metrics: HODLers Dominate

We have two bullish signals this week:

• Liquidity demand: bias for exchange outflows.
• P&L: the profitability of the coin supply has ticked up recently, and realised profits still dominate on chain (SOPR > 1).
• HODLer behaviour: 62% of the coin supply has not moved in at least a year, and the uptrend in the proportion shows no signs of abating yet.

We have two bearish signals:

• Institutional demand: ETF outflows resume.
• : total value locked in DeFi for ethereum falls.

The remaining signal is neutral:

• Futures activity: futures open interest has not moved meaningfully on a MoM basis despite funding rates remaining positive on average (though trending down in magnitude).

On balance, on-chain/flow metrics are giving a slightly bullish bias for ethereum. Here are the details of each metric (with explanations in the Appendix).

Institutional Demand: Bearish Ethereum

Our preferred metric to track institutional demand is flows into ethereum ETFs. After a brief period of inflows toward the end of June, outflows have resumed (Chart 2). In general, the year so far has had a bias for outflows. This is bearish for ethereum.

Demand for Liquidity and Exchange Activity: Bullish Ethereum

On exchange flows:

• Short term, a bias exists for exchange outflows with net 109,000 ETH exiting exchanges over the past two weeks (Chart 3).

• Longer term, the 30-day change in the exchange balance remains in deep negative territory with the total exchange balance down 1.2mn ETH MoM (Chart 4).

On balance, the bias for exchange outflows is bullish for ethereum.

Futures Activity: Neutral Ethereum

On futures markets:

• Futures open interest, a good proxy for investor interest, is currently around $4.9bn (-2% MoM, Chart 5).

• Perpetual funding rates have been trending down, though they remain positive on average, meaning traders are paying a premium to keep open long positions (Chart 6).

Futures open interest has not moved meaningfully on a MoM basis and, despite funding rates remaining positive on average, their magnitude has been decreasing. Overall, this is neutral for ethereum.

HODLers: Bullish Ethereum

On HODLer metrics:

• The 30-day moving average of the coin days destroyed (CDD) metric is down -5% MoM, suggesting reduced movement of older coins over the past month (Chart 7).
  
• Splitting the entire coin supply into those who have held for under one year and those for one year or more reveals the latter vintage continues to set new all-time highs, with 62% (+62bps MoM) of the coin supply having not moved in at least a year (Chart 8).

A sizeable proportion of the ethereum supply remains dormant, pointing to a strong investor base that continues to hold despite ongoing macroeconomic and regulatory headwinds. This is bullish for ethereum.

Investor Profit and Loss: Bullish Ethereum

On profitability of the coin supply:

• The percentage of circulating supply in profit (PSIP) is 60% (+11bps MoM, Chart 10).

• Net unrealised profit/loss (NUPL) is now 0.15 (15% of market cap, +5bps MoM, Chart 11). This means that the overall ethereum supply remains in a state of unrealised profit (NUPL > 0) as market cap exceeds realised cap.

• The spent output profit ratio (SOPR, price sold/price paid) has been falling on average this month, but it still maintains a bias for levels above one (realised profits, Chart 12). Year to date, 80% of days have seen realised profits. Furthermore, over the past 30 days, 80% of days have had a SOPR value above one.

The profitability of the coin supply has recovered to over 50% and realised profits on-chain (SOPR > 1) still dominate. Overall, this is bullish ethereum.

DeFi: Bearish Ethereum

Of the top five DeFi protocols by total value locked (TVL), all are down in terms of their TVL (Charts 13 and 14). Ethereum’s TVL is down the most (-3% WoW) – this is bearish.

Appendix

Institutional Demand

Perhaps the largest institutional vehicle for ethereum is the Grayscale ETHE Trust, with over $27bn in assets. It invests solely in ETH, and so many investors, notably institutional, who cannot hold ETH directly can get exposure through investing in Grayscale. Consequently, if the trust trades at a premium to ETH prices, it may imply ‘excess’ demand from institutions, but ‘excess’ supply if it trades at a discount. Alternatively, the discount may suggest investors have found other ways to get exposure to ETH, whether through ETFs or directly holding ETH. We therefore focus on how the discount has changed in recent months to gauge investor interest. Alternatively, investors may be using other vehicles to get exposure such as ETFs or holding ETH directly. We put more weight on ETF flows than the Grayscale premium.

Liquidity Demand

Another measure of cryptocurrency bullishness is whether investors are willing to hold it in illiquid form (e.g., a private wallet) or prefer a liquid form (e.g., on an exchange). The former would suggest investors are bullish, as they are comfortable with being unable to sell easily. Conversely, holding it in liquid form would suggest investors are bearish, as they prefer being able to sell easily.

Therefore, large flows onto crypto exchanges would suggest investors want to convert their holdings to a more liquid form, implying more bearishness.

Futures Activity

We track the growing market of ethereum futures. Open interest – the sum of long and short contracts – is a good measure of investor interest.

Perpetual funding rates reveal the directional bias of investors. Exchanges set funding rates to prevent a lasting divergence in the price of the futures contract and the underlying since perpetual contracts have no expiry date so never settle in the traditional sense. Consequently, we can interpret funding rates as the cost of holding ethereum via perpetual futures. Positive funding rates imply longs pay shorts and vice versa. We use it as a proxy for trader sentiment since a positive funding rate implies traders are paying a premium to keep open long positions.

HODLers

In our introductory bitcoin flow framework, we explained ‘HODLers’ and ‘HODLing.’ HODLing refers to buy-and-hold strategies in the context of bitcoin and other cryptocurrencies. Those who HODL for extended periods are die-hard adherents.

We can categorise HODLers by the length of time they have held ETH. We define long-term or staunch HODLers as those who bought ETH five or more years ago and have held it ever since, medium-term HODLers as those who bought 6-12 months ago, and short-term HODLers as those who bought 3-6 months ago.

The coin days destroyed (CDD) metric is defined as the number of coins in a transaction multiplied by the number of days since the coins were last spent. So, increasing CDD suggests older coins are being spent (more coin days are destroyed) and vice-versa.

Profit and Loss

• The percent supply in profit (PSIP). This tracks the share of circulating ETH supply in profit. That is the percentage of circulating ETH whose current price is higher than when it was last transacted (movement).

• Net unrealized profit and loss (NUPL). This is the ratio of unrealised profits over total market capitalisation. While PSIP just focuses on whether ETH coins are in profit or not, the NUPL focuses on the size of profits. So, we could have a situation where the PSIP is low – that is, a low share of supply is in profit – but the NUPL could be high if the size of those profits is large.

• Spent output profit ratio (SOPR). While PSIP and NUPL focus on unrealised profits or mark-to-market, this measure focuses on realised profits. SOPR is the realised value of a transaction divided by the value at initiation (or creation) – more simply, price sold divided by price paid. If SOPR is above one, investors in aggregate have realised profits, while below one means they have realised losses. In broad uptrends, SOPR spends a significant amount of time above one, whereas the opposite is true for broad downtrends.

When SOPR is rising, sellers are increasingly realising profits. The opposite is true when it is falling. A price rally with a flatter SOPR trend indicates investors are not yet realising their profits with the rally. The reluctance of investors to sell and realise a profit may be because they believe the price will increase further, which would be bullish. At the same time, more profit taking could precede a correction. Typically, buying as SOPR moves around one during bullish periods has proven to be a profitable strategy.

Mining Activity

Computing power is central to the crypto market. Miners use advanced computing hardware to solve complex problems that confirm ETH (and other coins) transactions on the public ledger or blockchain. The miners are rewarded with new coins for their efforts. A measure of the complexity of the problems and so the computing performance required to solve them is the hash rate. The higher this rate, the more computing performance is needed to maintain the blockchain. The rate can fluctuate depending on demand for crypto.

DeFi

We track the total value locked (TVL) in decentralized finance (DeFi) – the sum of all assets deposited in DeFi protocols, many of which use ethereum as the underlying protocol. The more DeFi products are created, the more ethereum gets locked into the DeFi system and removed from the broader market. This reduction in supply should lead to higher ethereum prices.

Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.