Does Jackson Hole Matter for Ethereum?
- By Bilal Hafeez and Dalvir Mandara
- 9 min read
Summary
Trading View (next 2-4 weeks): We are bearish-neutral ethereum.
Investment View (next 1-3 years): We like to be long ethereum.
Macro
- History suggests correlations between ethereum and major markets are set to change.
- We expect the Fed to hike more than the market is currently pricing.
- The probability of recession within the next year has risen to above 75% – its highest level since before the dot-com crash.
- The near-term risk bounce is facing into a more hawkish Fed alongside elevated macro-political risks from US/China tensions.
On-Chain/Flow Signals
- Our metrics remained mixed this week: two bullish signals, three bearish, and two neutral.
Overall View
- The macro backdrop remains bearish, while our on-chain/flow signals bullish, our overall view is bearish-neutral ethereum (Chart 1).
Will Ethereum Survive Jackson Hole?
Ethereum had rallied alongside more traditional risk assets since the middle of June. However, the rally ended. Hawkish rhetoric returned to markets with a dose of weakness for risk assets – ethereum has collapsed 18.1% from its August highs while equities also fell. The change in market behaviour came as Federal Reserve speakers pushed for more aggressive market pricing ahead of the Jackson Hole Symposium (JH).
But should ethereum care? Will today’s drivers of the coin survive a speech from Chair Powell? Probably not. At least, that is what history tells us (Table 1). One-month correlations, 30 days prior to JH, tend to look very different by the day of the symposium, and, again one month later. That is, one-month correlations between etheruem and major assets have changed by 20 percentage points, on average, in the month leading up to JH, and another 32 percentage points one month after JH. This year, we have seen ethereum’s correlation with US 10Y yields change most (+41.7pp), while they have barely moved for other assets. So, if history is to repeat, correlations between ethereum and major markets are set to change.
Macro Signals Remain Bearish for Ethereum
We have long felt that macro signals are bearish for ethereum. Little has done to change our view; the Federal Reserve remains underpriced in our eyes. This means US yields have a lot further to rise, and, as a result, we would likely see another leg lower in US equities. It is hard to present a bullish case for ethereum in this backdrop.
On-Chain/Flow: ETF Inflows Return
Two metrics give a bullish signal this week:
- Liquidity Demand: Outflows to exchanges remain.
- HODLer Behaviour: The CDD is falling.
Two metrics give neutral signal:
- Mining Activity: The hash rate and miner revenue have steadied.
- Defi: Ethereum did not lose as much as the biggest loser while Tron managed to post a gain.
Three metrics give a bearish signal:
- Institutional Demand: Outflows have been stronger than inflows.
- Futures Activity: Open interest has fallen sharply.
- Investor PnL: Profitability has taken a hit as of late.
On balance, on-chain/flow metrics are giving a neutral signal. 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. While there have been inflows, the outflows have been stronger (Chart 3). This is bearish ethereum.
Demand for Liquidity and Exchange Activity: Bullish Ethereum
On exchange flows:
- Short term, a bias exists for outflows to exchanges. This is bullish ethereum.
- Longer term, the 30-day change in the exchange balance reveals fluctuations in the supply held on exchanges month on month. This metric remains mostly negative following consistent outflows over the past week (Chart 5). This is bullish ethereum.
Together, we view this as bullish ethereum.
Futures Activity: Bearish Ethereum
Futures open interest had been recovering but has recently taken a sharp fall lower – it is currently $6.6bn (Chart 6). We view this as bearish ethereum.
HODLers: Bullish Ethereum
The 30-day moving average of the coin days destroyed (CDD) metric has plunged recently, suggesting less distribution of older coins (Chart 6). Meanwhile, the 1y+ supply metric dipped slightly following a recent rise (Chart 7). The different vintages of coin supply are now roughly equal.
We view these HODLer metrics as bullish for ethereum.
Investor Profit and Loss: Bearish Ethereum
On profitability of the coin supply:
- The percentage of circulating supply in profit (PSIP) is 54% (Chart 8). This is 7pp lower than our last report and heading towards an all-time low.
- Net unrealised profit/loss (NUPL) is now c.+0.1 (Chart 9). This means the overall ethereum supply has moved back into an unrealised profit.
- The spent output profit ratio (SOPR, price sold / price paid) had been above one for large portions between now and our last report. However, this week has seen it move below one (Chart 10).
Overall, we view this as bearish ethereum.
Mining Activity: Neutral Ethereum
The hash rate has been in a broad downtrend since May 2022, though it has since steadied (Chart 11). Meanwhile, miner revenues had been boosted by the last rally, but have calmed as of late (Chart 12). We view this as neutral ethereum.
Defi: Neutral Ethereum
Tron (+3% WoW) was the only chain in the top five by TVL to post a gain over the past week. Ethereum, meanwhile, weakened by 11% over the same period. This is more than Avalanche (-10% Wow) and BSC (-6% WoW), but less than Solana (-18% WoW; Chart 14).
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 ethereum 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.