
Whales Buying Ethereum Ahead of Merge
By Bilal Hafeez and Dalvir Mandara
(12 min read)
By Bilal Hafeez and Dalvir Mandara
(12 min read)
Trading View (next 2-4 weeks): We like to be bullish ethereum.
Investment View (next 1-3 years): We like to hold ethereum.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Trading View (next 2-4 weeks): We like to be bullish ethereum.
Investment View (next 1-3 years): We like to hold ethereum.
Crypto markets have been rallying throughout the second half of July, with smart contract platforms like ethereum taking centre stage. Our latest Crypto Index Tracker revealed our Smart Contract Index is leading gains among other crypto sectors like DeFi and the Metaverse.
Ethereum has by far outperformed the rest this month. So far, it is up a staggering 45% in July (Chart 2). For comparison, bitcoin is up just 14%. This is ethereum’s second-highest monthly return for July since 2016. Only July 2020 beat it, when ethereum gained 50%. We still have a around a week left to see if ethereum will break the record for July gains.
Bitcoin has been outperforming ethereum this year, with the ETH/BTC cross reaching yearly lows of around 0.05 in June. However, July has flipped this trend on its head, with the cross shooting up (Chart 3). But what is driving this outperformance? The answer lies in the upcoming ethereum merge (when the protocol moves from proof of work to proof of stake).
Delays have plagued the ethereum merge. Yet the developers clarified a tentative timeline in a call on 14 July, and ethereum subsequently staged an impressive rally (Chart 4). The tentative date for the merge is 19 September.
Big investors accumulating ethereum has also bolstered sentiment. The total supply held by addresses with a balance of at least 100,000 coins has been increasing in line with price action ever since that developer call (Chart 5).
In a previous ethereum update, we discussed the implications of the merge. The punchline was it would be bullish for these reasons:
We have six bullish signals this week:
We have one neutral signal:
On balance, on-chain/flow metrics are giving a very bullish signal for ethereum. Here are the details of each metric (with explanations in the Appendix).
Our preferred metric to track institutional demand is flows into ethereum ETFs. Inflows have returned (Chart 6). This is bullish ethereum.
On exchange flows:
Futures open interest is trending up – it is currently around $6bn, up 30% over the past 14 days (Chart 9). Around $4.9bn (82%) of this comes from perpetual futures contracts.
Perpetual funding rates reveal the directional bias of investors. On average, they have resumed an uptrend (Chart 10).
Overall, futures open interest is increasing sharply, and funding rates are positive: this is bullish ethereum.
The 30-day moving average of the coin days destroyed (CDD) has been elevated over the past week (Chart 11). This suggests more distribution of older coins.
Splitting HODLers into those who have held for under one year and those for one year or more confirms this as the 1y+ vintage is decreasing materially (Chart 12). This vintage now dominates 54% of the coin supply compared with 60% at the start of June and the year highs of 63% in March.
That older hands are selling could be viewed as bearish. But the <1y vintage correlates with price action more than the 1y+ vintage, and since we are seeing an uptick in the <1y vintage, this could be viewed as bullish. On balance, we view these HODLer metrics as neutral for ethereum.
On profitability of the coin supply:
Overall, we have seen a jump in the profitability of the ethereum supply, which is bullish.
The hash rate has been in a broad downtrend since May 2022 (Chart 16). However, it is starting to recover and is up 3% over the past week. Miner revenues have also benefitted from the ethereum rally – they are up 10% over the past week (Chart 17).
Our latest Crypto Index Tracker revealed our Smart Contract Index leads gains as crypto markets rallied last week. The total value locked (TVL) in DeFi across all protocols is currently around $85bn – up 6% over the past seven days. All chains in the top five by TVL are up in terms of their TVL on the week (Charts 18 and 19). However, ethereum TVL is up the most at 8%. This is bullish ethereum.
We have introduced a framework for understanding the flow and microstructure dynamics of ethereum markets. The seven key metrics are:
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.
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.
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.
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.
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.
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.
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.
OR
Already have a Macro Hive Prime account? Log in