Data & Insights Recap - October 2, 2023

Spotting spot volumes

Source: The Block

• Spot volumes for September came around $312 billion, marking the lowest they’ve been since October 2020. 
  • This isn’t necessarily a shocking development; spot volumes have been on the decline through the summer. 
  • Regulatory scrutiny in the wake of FTX has hit all exchanges, and the collapse left many investors, both retail and institutional, skeptical of the future of the industry. 
  • Exchanges have been delisting assets and exiting certain markets (oftentimes the U.S.) as a means to combat some of the pressures inflicted by regulators, which drive volumes lower.
• But it’s not all just legislation that has been pushing volumes down. While Binance is facing some regulatory battles, its decision to reinstate its fees on Bitcoin pairs seems to be the main driver of its decline.
  • One fact that points to Binance’s fee change as a big driver of the decline is the fact that spot volumes actually rose from December 2022 to March 2023. The end of March is when Binance moved to put fees back on bitcoin pairs, and since then, its volumes have fallen over 75% from March to September. 
  • Binance started the promotion in July 2022, and while it did not actually push the raw volumes of the exchange up that much, it did help the exchange gain market share. This is because even small gains were good compared to the declines that other exchanges were seeing after the fallout from the Terra ecosystem in May. 
  • Binance still remains the largest exchange in terms of spot volumes, so any hit to its volumes will impact the broader market drastically. 
  • Binance’s volumes did take a relatively drastic hit from August into September, its largest drop since March into April, as the exchange has made some additional adjustments to its fee plans as it has been navigating which stablecoin to take over in BUSD’s place. In particular, Binance seems to be shifting from TUSD to FSUSD as the favored stable. Volumes for BTC/TUSD have dropped off since the exchange added taker fees back to the pair, and volumes for BTC/FDUSD have grown on the heels of the pair being listed fee-free but have not quite reached the levels that the TUSD pair was trading at. BTC/TUSD daily trading volumes peaked at almost $3.5 billion, whereas BTC/FDUSD volume has only exceeded $1 billion one time so far. 

I gotta FEEling

Source: The Block

• We are once again at a time where the 7-day moving average of the average transaction fee on Bitcoin looks poised to flip that of Ethereum. 
  • Since July 2021, Ethereum has held the higher fee title, although there have been some moments where it’s been close, like this past May when both networks experienced a bout of memecoin mania and fees surged on both networks, pushing them to both break $15.  
  • The gap between the two was as narrow as $0.05 on September 28th but has since started to grow again to $0.22. 
• As we talked about last week, the Bitcoin network saw an uptick in transaction activity. 
  • The 7-day moving average of transactions on the network rose to a new high of over 595,000 on September 20th. This, in turn, did push the average transaction fee upwards as block space became more competitive.
  • The 7-day moving average of the average transaction fee on Bitcoin rose to $2.58 on September 25th, the highest it's been since June of this year when fees were still calming down from the memecoins excitement. 
• Ethereum, on the other hand, has seen more stagnant activity as of late. The number of transactions on the networks has remained between 950,000 and 1.1 million since the summer. The average transaction fee has essentially been on a straight decline coming out of May, dropping from over $22 to under $2.50 last week. 
  • The fact that Ethereum’s fees have continued to drop while Bitcoin’s began to rebound is what has caused the two to converge. 
• From the summer of 2021 into the summer of 2022, fees on Ethereum were way higher than on Bitcoin. These two summers surrounded the peak bull market when crypto asset values were at their all-time highs. Back then, Ethereum was where a lot of the action was happening as new DeFi protocols launched and new tokens became tradeable on the network, whereas Bitcoin was more stagnant in terms of fees despite the market since transactions on the network were mostly just BTC transfers. 
  • But now that bull market hype is dying down and Ethereum fees have dropped off. Still, Bitcoin has only recently gotten an expansion of what the network is capable of, with Ordinals helping to drive up the recent activity. 
  • The fact that Ordinals, a protocol allowing for NFTs on Bitcoin, is still relatively new and exciting is a shift from the previous hype cycle when Ethereum was home to a lot of the newer things. The new dynamic has pushed the two to be quite close in fees many times in recent months. 

Walmart Bets

Source: The Block

• The Pudgy Penguins NFT collection really tipped the iceberg this week after it was announced that Walmart would be selling their toy line in 2,000 stores. 
  • This was a huge deal, considering Walmart is the world’s largest retailer, especially in such a slow NFT market.
  • There are 26 types of Pudgy toys, with each one granting access to Pudgy World, a zkSynce Era-based multiplayer social network that seems similar to something like Club Penguin or Webkinz. The toys come with birth certificates that allow users to claim traits for their “Forever Pudgy” character. The platform also has mini-games and allows for interactions with other players. 
  • More importantly, the actual holders of the collection will receive licensing royalties for each toy sold. 
• Pudgy Toys have existed since May of this year but were primarily sold through Amazon. There are a few exclusive toys coming just to Walmart. 
  • There is something to be said about the physical store presence of the toys since online shoppers usually go to search for something they had in mind, compared to shopping in a store where people usually see everything there is to offer. More people are more likely to be casually stumbling upon the toy collection in Walmart than on Amazon. 
• The news did not give the collection that much of a boost in terms of trading volumes. Weekly sales for the collection only rose to $3.32 million for the week of September 24th, which is only the highest weekly sales have been since mid-July, although it did mark over a three-fold increase from the week prior.
  • It’s a similar story for the actual number of sales, which only jumped to 425, again only reaching highs not seen since July 16th. 
  • That being said, it was the third most dominant collection on Ethereum last week in terms of volumes, behind Bored Ape and Mutant Ape Yacht Club.
  • The floor price for Pudgy Penguins did climb a little, moving from 4.43 ETH to a peak of 4.92 ETH after the news dropped. It now sits around 4.7 ETH.
• Walmart seems to be wholly embracing the web3 ecosystem, with news earlier this month that they would be expanding their commercial metaverse strategy.

A strike on Lightning

Source: TX Stats

• For most of the Bitcoin Lightning Network’s existence, it seemed as though its capacity could only go up. 
  • From April 2018 to July 2023, the Bitcoin scaling solution continued to grow, with a capacity peaking at 5.64k BTC. 
  • As a reminder, the Lightning Network helps users engage in off-chain payments (mitigating transaction fees) by adding a second layer on top of the Bitcoin blockchain. Two parties can participate in a payment channel in which they lock up funds and transact with each other without publishing transactions on the blockchain. Only when the two parties are settled do they need to push the resulting amounts on-chain. The capacity of the network refers to how much bitcoin is locked in a payment channel at a given time. 
• It is a useful tool that makes transacting on Bitcoin cheaper and easier, and many large parties run Lighting Network nodes. In particular, centralized exchanges have been more frequently adopting Lightning to help lower fees for their users. 
• But since the start of the summer, we have seen some large withdrawals from the network. Of course, withdrawals are to be expected at some point. Transactions need to actually settle, or you might need to do something else with the bitcoin you had locked up. But, the withdrawals from the network are quite large.
  • Back in July, both River Financial and Bitfinex seemed to be doing a lot of the withdrawing, but this time around, according to Lightning Network analytics provider 1ML, it seems LNBiG is the main driver.
  • Over the past 30 days, LNBiG has lowered their node capacity by around 200 BTC across 5 nodes. LNBiG is a Lightning Service Provider, meaning you pay them a small fee for them to generate an incoming channel for you. 
  • It was announced on September 23rd that the number of nodes on the LNBiG network was going to be reduced from 25 to 7, which is likely to be contributing to the outflows we’ve seen. 
  • The network’s capacity has fallen from over 5,000 BTC on September 23rd to just 4.56k on September 27th, marking the lowest it's been since August 2022. 
• After a large withdrawal period from the Lightning Network, you already begin to see the slow and steady growth that marked the earlier years of the network. The capacity has already grown about 500 BTC since hitting the low on September 27th.

Lack of correlation

Source: CryptoCompare

• There are a lot of reasons why investors might be looking to remove risk from their investment portfolios these days.
  • Inflation is high across the globe as people emerge from a post-pandemic world and nations like China are having a particularly hard time stabilizing their economy in the wake. 
  • The United States government just narrowly avoided a shutdown, but not after a rate-setting meeting in September, which was clear on a “higher for longer” policy that will keep borrowing costs elevated further into next year than initially expected, putting more strain on the economy as a means to tame inflation. 
• In a certain sense, pressures in traditional markets are good for bitcoin. Something like a government shutdown puts into perspective the value of an ungovernable money that is not subjected to the whims of politicians. Bitcoin is also deflationary at its core, with issuance slowing down every 4 years and a set maximum supply of 21 million. It is often when people feel the most frustrated with current monetary policy that crypto assets look the most appealing ideologically.
  • But in another sense, these pressures are bad for bitcoin. While ideologically, these times might strengthen bitcoin’s value proposition, bitcoin still exists mostly as a speculative asset. Not many people are actually using bitcoin as their ungovernable currency. When people want to reduce risk in their portfolios, selling bitcoin is akin to selling stocks for them; it’s purely an investment. 
• These two opposing forces have allowed bitcoin to have a near 0 30-day correlation to the S&P 500, the Nasdaq Composite, and gold for the past few weeks.
  • Since September 18th, bitcoin’s correlation to all three has not exceeded 0.2 or -0.2, indicating essentially no correlation between bitcoin and three traditional market assets. 
  • It’s been one of the longest periods that we’ve seen the correlations hover around 0, as usually they will pass through 0 as bitcoin moves from being correlated positively or negatively with more traditional assets depending on the news cycle. 
  • Most traditional assets have been on a pretty strictly downward trend in recent months amidst a lot of turmoil, while bitcoin has had some of its own ups and downs, resulting in the prices looking very uncorrelated.