Coin Metrics’ State of the Network: Issue 59 – The Rise of Stablecoins

https://coinmetrics.io/coin-metrics-state-of-the-network-issue-59-the-rise-of-stablecoins/

Weekly Feature

The following is an excerpt from an in-depth research report on the rise of stablecoins following the March 2020 crypto crash. Access the full report here.

The Rise of Stablecoins

By Nate Maddrey and the Coin Metrics Team

Stablecoin supply has exploded in 2020 but it’s unclear exactly why. After it took 5 years for stablecoin supply to reach 6 billion, it only took another 4 months for it to grow from 6 billion to 12 billion following the March 12th crypto crash. 

A large majority of the supply growth was due to Tether. On March 12th 2020, the price of most crypoassets dropped over 50% after global equity markets crashed due to the rise of COVID-19. Within two weeks of the crash over 800M new USDT_ETH were issued. For context, about 740M USDT_ETH were issued from January 1st through March 11th. Additionally, USDT_TRX supply would increase by over 2B by the end of June.

Following the price crash, stablecoin markets were suddenly thrown into disarray. Stablecoin prices can fluctuate during times of market volatility due to sudden changes in supply and demand. For example, when Bitcoin price suddenly plummets, the demand for stablecoins often increases as investors look to move into a safe haven asset. This increased demand can cause the price of a stablecoin to rise above $1 on select exchanges. 

The below chart shows stablecoin prices on an hourly basis (using Coin Metrics’ hourly reference rates) from March 11th through March 14th. The price of most stablecoins jumped up to between $1.03 and $1.06 from 2:00 to 6:00 UTC on March 13th. This corresponds with the timing of the BitMEX liquidation spiral, when Bitcoin price dropped to as low as $3,900. 

USDT, USDC, PAX, BUSD, and HUSD appear to have recovered relatively quickly, returning close to their $1 pegs within days after the crash. But as seen in the below chart, USDT’s price remained above $1. Notably, USDT’s price remained significantly higher than USDC, PAX, BUSD, and HUSD through mid-May (DAI and GUSD are excluded from the following chart due to their extreme divergence). 

Because of their nature as price-pegged assets, deviations in stablecoin prices create arbitrage opportunities. For example, when a stablecoin’s price is above $1, new supply can be printed at $1 each, and then sold on an exchange for a profit. Done at a large enough scale, this can lead to significant profit even if the price is only slightly over a dollar. 

Continue reading the full report…

Network Data Insights

Summary Metrics

Bitcoin (BTC) and Ethereum (ETH) continued to show positive momentum this week, with small growth in usage metrics including active addresses and transactions. 

But the smaller-cap assets noticeably outperformed this past week. Ripple (XRP), Litecoin (LTC), and Bitcoin Cash (BCH) all grew more week-over-week than BTC and ETH in most usage, valuation, and economics metrics. XRP led the way in many categories, including a 14.8% growth in active addresses and 11.8% growth in market cap.

Is this a sign of an altseason? We explore in this week’s Network Highlights and Market Data Insights sections.  

Network Highlights

In addition to Ripple, Litecoin, and Bitcoin Cash, many other mid to small cap cryptoassets saw increased activity over the last week. Often described as a “meme coin,” Dogecoin (DOGE) had a large increase in market capitalization on July 7th and 8th. This corresponds with a viral TikTok video that promoted DOGE. 

DOGE two-year revived supply also spiked on July 8th. Over 1B units of supply that had not moved on-chain for at least two years were suddenly transferred. This suggests that some longer term holders sold off amidst the frenzy. 

DOGE active addresses have been surging in July but are still below 2020 highs. Network usage is not increasing as fast as valuation, a potential signal of a price bubble.  

Cardano (ADA) has also been growing recently. In anticipation of the Shelley mainnet release, ADA’s market cap reached new 2020 highs on July 8th. Cardano’s market cap has passed LTC’s, despite having about 7x less daily active addresses. 

Market Data Insights

This week marked a roughly $13.9B, or nearly 38%, uplift in spot volume. This is a remarkable number when considering the historically low volatility range that BTC and ETH have been trading in. Low volatility generally coincides with low volume but in the past week, the speculation on a few key altcoins pushed trading volumes upward.  In this analysis, we will focus on three in particular: Doge, Cardano and ChainLink. Together they made up 20% of this week’s increase.

Let’s take a look at some exchanges that benefited the most, beginning with the more well known exchanges that support a long tail of altcoins. Binance, Bittrex, Kraken and Poloniex all benefited from these assets.  Binance, Bittrex and Kraken saw a fairly equal distribution between all three assets, similar to the overall uplift contributed by these assets to the total spot volume for all exchanges.

Poloniex saw 57% of its weekly increase in volume from Doge trading.  The exchange has one of the longest standing Doge markets and was the primary trading venue for the Doge spike in the summer of 2019. Regardless of a historically liberal listing policy, Poloniex does not currently support Cardano and missed a large opportunity this past week. Given that they have prioritized the listing of lesser known assets recently such as BitCherry and Flexacoin, it brings into question the exchange’s listing strategy.

Coinbase also saw a large portion (39.5%) of this week’s gain in volume attributed to ChainLink. Often considered to have a fairly liberal listing strategy and primarily U.S. retail trading base, this large portion of trading attributed to ChainLink may signal that we are still in the midst of an altseason and that even small traders are embracing a risk-on investing strategy.

CM Bletchley Indexes (CMBI) Insights

For the first time in 5 weeks, all of the CMBI and Bletchley Indexes experienced positive returns week on week. The CMBI Bitcoin Index Continued to demonstrate a low level of volatility, returning 1.8% for the week, marking the 6ths consecutive week of less than |±3%| performance. The CMBI Ethereum Index had a better week, returning 5.6%. But it was the multi-asset indexes that had the best performances, returning between 6.0% (Bletchley 10, Large Cap)  and 16.5% (Bletchley 20, Mid Cap) during the week. 

Despite the low volatility of Bitcoin, it was the Bletchley 10 Even Index that was the best performer, returning 18.7%, largely due to the strong performances of Chainlink and Tezos. In an even weighted index, all constituents are weighted evenly at the time of rebalance, thus applying a higher weighting to the lower market cap assets than a market cap weighted index (which for the Bletchley 10 weights Bitcoin 71%).

For further detail on the performance of the CMBI Bitcoin Index and CMBI Ethereum Index, please check out the  CMBI Single Asset Index Factsheet.

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • Coin Metrics is hiring! Please check out our Careers page to view the openings.

As always, if you have any feedback or requests, don’t hesitate to reach out at info@coinmetrics.io.

Subscribe and Past Issues

Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.

If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.

Check out the Coin Metrics Blog for more in depth research and analysis.

The post Coin Metrics’ State of the Network: Issue 59 – The Rise of Stablecoins appeared first on Coin Metrics.

Coin Metrics’ State of the Network: Issue 50 – Stablecoin Heatmaps Show Tether is Mostly Used During Asian and European Market Hours

https://coinmetrics.io/coin-metrics-state-of-the-network-issue-50-stablecoin-heatmaps-show-tether-is-mostly-used-during-asian-and-european-market-hours/

Stablecoin Heatmaps Show Tether is Mostly Used During Asian and European Market Hours

by Nate Maddrey and the Coin Metrics Team

Key Takeaways 

  • Stablecoin market capitalization has almost doubled since the Black Thursday crash. But the exact cause of the surge is still unknown. 
  • To help elucidate how different stablecoins are being used, we analyzed the times of day that stablecoins are being transferred and created heatmaps to show daily usage patterns.
  • USDT-ETH has a clear pattern of heavy usage from about 2:00 to 16:00 UTC which corresponds with the hours that Asian and European stock markets are open.
  • Prior to March 12th PAX transfers appear to also mostly be clustered between 2:00 and 16:00 UTC (although not as dense as USDT-ETH). But as of April, PAX transfers have gotten noticeably more dispersed throughout the day. 
  • Prior to March 12th USDC was slightly denser during U.S. hours. But after March 12th there has been a large uptick in usage between 1:00 and 8:00 UTC, which corresponds with Asian market hours. 
  • DAI transfers have mostly been concentrated during U.S. working hours (14:00 – 22:00). 

Intro

Stablecoin market capitalization has almost doubled since the Black Thursday crash, despite a drop-off for most non-stablecoin assets. As of May 7th, the aggregate stablecoin market cap has grown to over $10B.

Source: Coin Metrics Community Data

There have been many theories about what has been causing this dramatic increase. 

Some have speculated that the growth is caused by an increase in the amount of investors holding stablecoins as “dry powder” in anticipation of a new bull run. Others have proposed that it’s a reaction to a shortage of U.S. dollars, or a general rush to safety. Another theory is that Asian OTC traders are pouring money into stablecoins as an onramp to crypto markets. 

While the exact cause of the market cap increase is still unknown, on-chain data can help point us in the right direction. In this week’s State of the Network we dive into on-chain transfer data to analyze the usage patterns of different stablecoins in order to shed light on some of the different theories about why market cap is growing.

Stablecoin Transfer Heatmaps

To help elucidate stablecoin usage patterns, we broke down stablecoin transfers by time of day. 

The following heatmaps show the amount of stablecoin transfers by hour of day for different Ethereum-based stablecoins. The x-axis is the date, starting from the beginning of February. The y-axis is the hour of day ranging from 0 – 23 (UTC time zone). And the coloring represents the amount of transfers that occurred during that one hour block. So for example, the cross-section of March 1st on the x-axis and 0 on the y-axis represents the amount of transfers that occurred from 12:00 – 1:00 AM on March 1st.

Tether

We start by investigating the transfer patterns of Tether issued on Ethereum (USDT-ETH). 

USDT-ETH has a clear pattern of heavy usage from about 2:00 to 16:00 UTC which corresponds with the hours that Asian and European stock markets are open. Transfers go dark towards the end of the day – there are very few transfers after 20:00, which is when the New York Stock Exchange closes.

The amount of transfers has also grown significantly since the middle of March. There are clusters of red (i.e. high transfer counts) towards the end of April, which appears to correspond with the hours that Asian markets are open. 

While the above heatmap shows the total number of transfers per hour, the following heatmap shows the percentage of the total daily transfers that happened within that hour.

For example, if there were 100,000 daily USDT_ETH transfers and 6,000 happened between 8:00 and 9:00 UTC that hour would account for 6% of the daily total and would be colored yellow/orange. This gives a slightly clearer picture of daily usage patterns, regardless of the total number of transfers.

The following heatmap also shows that USDT-ETH is mostly transferred during Asian and European hours, with a flurry of activity towards the close of Asian markets. This bolsters the theory that USDT-ETH is being used by Asian traders.

Paxos

Paxos (PAX) usage has also increased dramatically since March 12th. In fact, PAX daily transfers have tripled since March 12th, and reached a new all-time high of 24.4K on May 5th.

As a result, PAX has passed both USDC and DAI in terms of daily transfer count.

Prior to March 12th PAX transfers appear to also mostly be clustered between 2:00 and 16:00 UTC (although not as dense as USDT-ETH). 

But as of April, PAX transfers have gotten noticeably more dispersed throughout the day. The on-chain transfer data potentially shows that PAX is increasingly getting non-institutional, global usage.

USD Coin

USD Coin (USDC) had a huge amount of activity on March 12th and the following week, but has dropped off since then. Notably, MakerDAO added USDC as a collateral option on March 17th, which likely contributed to the flurry of transfers.

Prior to March 12th USDC activity was slightly denser during U.S. hours.  But after March 12th there has been a huge uptick in usage between 1:00 and 8:00 UTC, which corresponds with Asian market hours. 

Interestingly, USDC had a string of days in April where close to 20% of daily transfers occurred in a single hour. The other stablecoins in our study did not have over 12% of daily transfers in a single hour.

DAI

Similar to USDC, DAI had a large increase in transfers on March 12th and the days immediately following, but has dropped off since then.

DAI transfers have mostly been concentrated during U.S. working hours (14:00 – 22:00). However DAI transfers are relatively spread out, and not nearly as concentrated as USDT-ETH.

Conclusion

Stablecoin transfer patterns show that different stablecoins are potentially being used for different purposes, and are favored in different parts of the world.

USDT-ETH transfers are concentrated during Asian and European market hours. USDC transfers are also clustered during Asian market hours, but not as densely packed as USDT-ETH. PAX transfers are more dispersed, which could signal that it is being used for non-institutional purposes. And DAI transfers mostly occur during U.S. hours.

Stablecoins are a crucial part of the crypto ecosystem, and will only keep growing in prominence. We will continue to keep our eye on stablecoins, and track their usage and growth as they continues to develop. 

Network Data Insights

Summary Metrics

Source: Coin Metrics Network Data Pro

Both Bitcoin (BTC) and Ethereum (ETH) had another mostly strong week in the lead up to BTC’s halving. BTC’s market cap briefly topped $180B as price approached $10,000. The week ended on a volatile note, however, with BTC market cap dropping back down to about $160B. 

BTC and ETH transaction fees were both up over 30% again this week, after ETH fees grew by 31% last week and BTC fees grew by a massive 170%. Fee growth is a positive sign that demand for block space is growing, which generally signals that network usage is increasing.

Network Highlights

BTC hash rate grew to all-time highs in the lead up to the halving. As the halving approached, miners rushed to get the last of the 12.5 BTC reward blocks, causing hash rate to increase and average block time to decrease. 

The following chart shows BTC hash rate smoothed using a seven day rolling average.

Source: Coin Metrics Network Data Pro

The amount of BTC held by BitMEX and Bitfinex has reached new lows following the March 12th crash. Bitfinex now holds 93.8K BTC, down from 193.9k on March 13th. BitMEX’s BTC supply is now down to 216.0K BTC, down from a peak of 315.7K on March 13th.

Source: Coin Metrics Network Data Pro

Meanwhile, the amount of ETH held on Bitfinex continues to climb to new highs. As of March 10th, Bitfinex held over 5M ETH. 

Source: Coin Metrics Network Data Pro

Market Data Insights

The most noteworthy market news this week was the endorsement of Bitcoin by hedge fund manager Paul Tudor Jones. In a note shared to clients, he cites its attractive store of value characteristics in the face of unparalleled monetary stimulus that he has termed the “Great Monetary Inflation”. 

Markets had a rational response to the news with Bitcoin outperforming most other major cryptoassets. This marks the second consecutive week of notable outperformance and deserves continued observation. 

For nearly a year, correlation between Bitcoin and other assets has remained high and dispersions in returns has remained small, but history has shown us that these periods of calm are interspersed with periods of large shifts within crypto markets. In our previous State of the Networks, we have commented on these regime shifts and the difficulty it poses for fund managers. 

The somewhat moderate reaction and the lack of large moves in traditionally high-beta altcoins suggests that we are still far from the irrational investor sentiment that characterizes the late stage of market bubbles. 

Source: Coin Metrics Reference Rates

Paul Tudor Jones’s prediction of unchecked monetary stimulus leading to an increase in inflation is still, surprisingly, a contrarian view that is not yet priced in according to five-year, five-year forward inflation expectations. This measure of inflation is widely cited as a proxy for long-term inflation expectations that is less sensitive to the demand shocks of today or the volatility of food and energy prices. 

So far, despite everything that has happened, inflation expectations are stable and the Fed still has its credibility intact. In short, the market believes that the Fed will do what is necessary to defend its price stability mandate. The issue is that we could face a situation where the Fed’s dual mandate of maximum employment and price stability becomes untenable and it will have to favor one over the other. These fears manifested itself in higher inflation expectations in the years following the 2008 financial crisis leading to a multi-year period where assets that rose from rising inflation expectations benefited. Ultimately, the inflation alarmists were proven incorrect as the Fed was able to thread the needle and provide enough stimulus to heal the economy without stoking undue inflation.

The market is betting that it will do the same this time. But it is clear that if the market is incorrect, we could see much higher prices for Bitcoin in the future. 

CM Bletchley Indexes (CMBI) Insights

All CMBI and Bletchley Indexes gave up most of last week’s returns, except for the Bletchley 40 and Bletchley 40 Even which were the only indexes that finished the week positive, returning 4.6% and 5.1% respectively. Whilst the CMBI Bitcoin Index was down 3.9%, it was the CMBI Ethereum Index that retraced the most during the week, falling 11.1%. 

Even weight indexes are a mechanism of gaining greater exposure to the smaller-cap assets and as such, can often provide different return profiles to market cap weighted indexes. This week’s return profile demonstrates just that, with even weighted indexes, excluding the Bletchley 10, outperforming their market cap weighted counterparts for the week. This type of performance demonstrates that the lower weighted assets within each index were some of the better performers. 

Source: Coin Metrics CMBI

Coin Metrics Updates

This week’s updates from the Coin Metrics team:

  • Coin Metrics is hiring! Please check out our Careers page to view the openings.

As always, if you have any feedback or requests, don’t hesitate to reach out at info@coinmetrics.io.

Subscribe and Past Issues

Coin Metrics’ State of the Network, is an unbiased, weekly view of the crypto market informed by our own network (on-chain) and market data.

If you’d like to get State of the Network in your inbox, please subscribe here. You can see previous issues of State of the Network here.

Check out the Coin Metrics Blog for more in depth research and analysis.

The post Coin Metrics’ State of the Network: Issue 50 – Stablecoin Heatmaps Show Tether is Mostly Used During Asian and European Market Hours appeared first on Coin Metrics.