With several coins hitting new all-time highs over the past week, crypto markets surged again. Ethereum (ETH) has been one of the top performers, rallying 16%. It is currently trading above the previous all-time daily close high of $4,414 (Chart 1) and has registered a new intra-day all-time high of $4,661. The total crypto market cap is now over $2.75tn, with over $520bn coming from ethereum alone. That puts it above some of the largest companies in the world (e.g., JPMorgan Chase, Alibaba, Johnson & Johnson, and Walmart).
Previously, we compared ethereum with bitcoin by seeing how much bitcoin we could buy with one ether. We observed that the cross was trending down, indicating ethereum was underperforming bitcoin. Recently, the cross has resumed an uptrend and is currently around 0.073 (Chart 2), approaching the highs of 0.078 from early September. Additionally, the gap between the market cap of bitcoin and ethereum was increasing until more recently, when it flipped to a downtrend (Chart 3). If the repricing of ethereum compared with bitcoin continues this uptrend and the market cap gap continues to narrow, the cross could likely return to the highs of 0.078. That would imply ethereum could approach $5,000 soon.
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With several coins hitting new all-time highs over the past week, crypto markets surged again. Ethereum (ETH) has been one of the top performers, rallying 16%. It is currently trading above the previous all-time daily close high of $4,414 (Chart 1) and has registered a new intra-day all-time high of $4,661. The total crypto market cap is now over $2.75tn, with over $520bn coming from ethereum alone. That puts it above some of the largest companies in the world (e.g., JPMorgan Chase, Alibaba, Johnson & Johnson, and Walmart).
Previously, we compared ethereum with bitcoin by seeing how much bitcoin we could buy with one ether. We observed that the cross was trending down, indicating ethereum was underperforming bitcoin. Recently, the cross has resumed an uptrend and is currently around 0.073 (Chart 2), approaching the highs of 0.078 from early September. Additionally, the gap between the market cap of bitcoin and ethereum was increasing until more recently, when it flipped to a downtrend (Chart 3). If the repricing of ethereum compared with bitcoin continues this uptrend and the market cap gap continues to narrow, the cross could likely return to the highs of 0.078. That would imply ethereum could approach $5,000 soon.
To validate these moves, we examine our ethereum flow metrics. The punchline is that all are giving bullish ethereum signals. Here is a rundown of our metrics.
Institutional Demand: Bullish Ethereum
Our preferred metric to track institutional demand is flows into ethereum ETFs (Appendix). Flows have been increasing sharply since mid-October (Chart 4). The approval of the first bitcoin futures ETF last month undoubtedly helped, bringing much institutional attention to the space. This is bullish ethereum.
We also track news around ethereum, where momentum has been positive. The approval of the first US-listed bitcoin ETF has brought focus onto the potential approval of an ethereum ETF as early as the first quarter of 2022. CME Group announced it will launch a micro ether futures contract on 6 December subject to regulatory approval. Lastly, Facebook’s decision to rebrand as Meta as they push their metaverse initiative has boosted various tokens built on the ethereum blockchain. So, both the news and ETF flows are positive.
Demand for Liquidity and Exchange Activity: Bullish Ethereum
A measure of ethereum bullishness is whether investors prefer to hold it in illiquid form (e.g., in a private wallet) or liquid form (e.g., on an exchange). Increased flows onto exchanges can signal bearishness – it suggests investors want to hold ethereum in a liquid form. Conversely, increased outflows can signal bullishness as investors are happy to hold onto their coins (Appendix).
Since mid-October, there has been a significant bias for outflows – 16 October was the last day we saw net inflows onto exchanges (Chart 5). Over the last seven days, a net value of 567,247 coins flowed out of exchanges. This is bullish ethereum.
In tandem with continued outflows, the overall exchange balance (the total number of ethereum coins held on exchange addresses) has continued a downtrend since August 2020 (Chart 6). Currently, 12.1% of the ethereum supply is held on exchange addresses (Chart 7) – down 6.7% from the start of October. The last time the coin supply was this low was November 2018.
With the price of ethereum rallying to all-time highs, the decreasing supply confirms investors are willing to hold in anticipation of further price increases. This is broadly a bullish sign for the market and could trigger a supply shock. But notably, as more supply is drained, institutional investors/whales may face liquidity issues.
Futures Activity: Bullish Ethereum
We track the growing market of ethereum futures. Open interest – the sum of long and short contracts – provides a good measure of investor interest. Throughout October, open interest maintained an uptrend and surpassed the previous all-time high of $11.7 billion from the beginning of September. Currently, open interest is at new all-time highs of $13.1 billion (Chart 8). The picture on the CME exchange is also positive: open interest has been increasing since the start of October and is currently $1.2 billion (Chart 9). Together, these suggest strong support for ethereum.
HODLers: Bullish Ethereum
HODLing refers to buy-and-hold strategies in the context of cryptocurrencies. We categorise HODLers by the length of time they have held ethereum (Appendix). Short-term HODLers (3m-6m) have dropped to almost 0% as medium-term HODLers (6m-1y) increase (Chart 10), suggesting short-term HODLers have either sold to realise profits at the new highs or converted to medium-term HODLers. Medium-term HODLers still maintain the largest single share of all vintages, possessing 33% of ethereum in existence.
We also note an uptick in the proportion of longer-term HODLers: 1y-2y and 5y-7y vintages are up 5.9% and 2.4% since the start of October, respectively. Overall, we view these HODLer dynamics as bullish for ethereum.
Investor Profit and Loss: Bullish Ethereum
An attractive feature of public blockchains and crypto markets is that we can track each transaction more easily. One measure of transactions is spent outputs – that is, some computing output is spent to enable a transaction. The spent output can tell us when a transaction has occurred, by whom and at what price. This allows us to track the profit and loss (P&L) of investors. We can then use this data to calculate three P&L-related measures: percent supply in profit (PSIP), net unrealised profit and loss (NUPL) and the spent output profit ratio (SOPR) (The Appendix details each).
The share of the supply in profit (PSIP) is currently 99.99%, up approximately 4.5pp from the start of October and 3.2pp week-on-week (Chart 11). The size of the unrealised profits (NUPL) is currently 70.5% of market cap, up 6.3pp from the start of October and 3pp week-on-week (Chart 12). Realised profits are healthy with a SOPR value above one (Chart 13).
Since the start of October, SOPR has been bouncing between lows of 1.03 and highs of 1.16, suggesting spending spikes throughout the rally as investors realise profits at the new highs. However, SOPR is currently 1.07, which is relatively low versus the highs of 1.27 from the May price rally to the then all-time ethereum highs of around $4,127. Muted realised profits during the current all-time highs suggest investors still believe prices will continue to increase. To some extent, an ethereum rally would naturally lead to these ratios improving, but they nevertheless provide a bullish signal for ethereum.
Mining Activity: Bullish Ethereum
We track the hash rate for ethereum. A higher rate means more computing power is available to maintain the network, deliver more security (resistance to attacks), and facilitate more transactions. We view this as a bullish sign (Appendix). Conversely, we view a falling hash rate as bearish. The hash rate is currently at new all-time highs of 763 TH/s (terahashes per second) (Chart 14). It is currently up 10% since the beginning of October, 67% since bottoming out in June, and 170% year-to-date.
Naturally, during a price rally it is more profitable for miners to mine coins as they receive block rewards in the native coin. Since August, ethereum miners have outperformed bitcoin miners in total miner revenue (Chart 15). The gap has become starker with the current push to new ethereum all-time highs: ethereum miners have collected $3.2 billion in total revenue since the start of October versus $1.8 billion for bitcoin miners.
DeFi: Bullish Ethereum
A benefit of ethereum over bitcoin is its role in decentralised finance (DeFi). DeFi offers payments, lending and other financial products using coins such as ETH as the underlying protocol. The more DeFi products created, the more ETH gets locked into the DeFi system and removed from the broader ETH market. This reduction in ETH supply should lead to higher ETH prices.
We can track the total value locked (TVL) in DeFi and what share comes from ETH. The TVL surpassed $250bn this week, registering new all-time highs. While the share of this coming from ETH has fallen as more protocols enter the space, it is still by far the most dominant player, maintaining a 67% market share since the start of October (Chart 16).
Bottom Line
We have introduced a framework for understanding the flow and microstructure dynamics of ethereum markets. The seven key metrics are:
- Institutional demand: increased institutional flows and positive news. Bullish ETH.
- Liquidity demand: less flows onto exchanges and exchange supply decreasing. Bullish ETH.
- Futures activity: open interest increasing. Bullish ETH.
- HODLer behaviour: medium-term HODLers dominate and long-term HODLers increase. Bullish ETH.
- P&L of investors: realised and unrealised profits increasing and SOPR remaining close to one during the rally. Bullish ETH.
- Mining activity: hash rate increasing and miner revenue outperforming that of bitcoin. Bullish ETH.
- DeFi activity: more ETH directed to DeFi and TVL in DeFi at new all-time highs. Bullish ETH.
On balance, the metrics are giving a bullish signal for ethereum.
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, possibly implying more bearishness.
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 long 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.
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 very 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.
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.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.