Data & Insights Recap - October 9, 2023

Trading ETFs in the ether

Source: Yahoo Finance

• Ether futures ETFs are here! This is not a super surprising development, given the influx of applications we saw for these ETFs in August and a report from Bloomberg that indicated the Securities and Exchange Commission was all set to approve them.
  • Between the report and the actual approval, the SEC was put in a tough position surrounding crypto futures ETFs after a ruling in a lawsuit with Grayscale said that market manipulation fears were not a good enough justification for blocking spot bitcoin ETFs given that the regulator had approved bitcoin futures ETFs, which also track the price of bitcoin spot.
  • Spot ether ETFs are on the regulator’s mind, given we’ve already seen applications start to come in. Grayscale has moved to try and convert their Ethereum Trust (ETHE) into a spot ETF (much like they had for GBTC, which was what kicked off the legal battle) and Ark Invest and 21Shares have also filed for one. 
  • There have been no formal decisions on any of the spot ether ETF applications, but it would be unlikely that the SEC would reject them on the same basis for which they tried to deny spot bitcoin ETFs, given how it panned out with Grayscale. With ether’s status as a commodity versus a security much more in flux than bitcoin’s, it’s possible they take the stance that ether itself is an unregistered security as a reason for why there should be no spot ETF (whereas ether futures, which trade on the Chicago Mercantile Exchange, are derivatives regulated by the Commodity Futures Trading Commission). But again, this is all yet to play out. 
• While much of the crypto community was excited about the launch of these ETFs, helping grant investors exposure to ether without needing to actually custody the asset, volumes have so far been very low. 
  • Many of the typical players have launched ether futures ETFs, like ProShares (which manages the most successful bitcoin futures ETF, BITO), VanEck, and Bitwise. VanEck will be donating 10% of their profits from their EFUT ETF to The Protocol Guild, a group of Ethereum core protocol contributors. 
  • EETH, which is ProShare’s ETF, seems to be dominating so far in the few days of trading that have transpired, but daily volumes peaked on launch day under $1 million. Comparatively, BITO tends to trade at least $50 million a day. BITO’s volume also exceeded $1 billion on its launch day back in October 2021. 
• There are a lot of reasons why ether ETFs might not be taking off like bitcoin’s did. For one, BITO launched when bitcoin was hurtling to all time highs, EETH is launching amidst a bear market not just for crypto but for the broader financial sector. It’s a very risk-off market due to macroeconomic headwinds surrounding inflation and, lately, political partisanship risks in the U.S.

I'm in the Stars Arena, trying stuff

Source: Block Explorers

• Imitation is the sincerest form of flattery, or so it goes. If so, then Base’s darling protocol friend.tech has no shortage of admirers. 
  • It has amassed a strong group of competitor projects on different chains, like Post.Tech on Arbitrum, Friendzy on Solana, and Stars Arena on Avalanche. Post.Tech, in particular, saw its daily volumes surpass $1.8 million, indicating that even these duplicates are capable of getting traction despite not being the first mover. 
  • Friend.tech did serve a kind of new niche of what some are calling “Social Finance,” or SoFi. It makes sense that we’d see other protocols trying to capitalize on the hype and bring the new trend to their network of choice. Seeing protocol copies is also not a new idea, with Uniswap serving as the poster child for many other DEXs that have launched since.  
• The latest protocol to get its day in the sun is Stars Arena, which has seen many of its metrics really take off in October. Daily active users surpassed 10,000 and daily volumes reached almost $4 million on October 4th. 
  • Notably, this has positively impacted Avalanche in terms of number of transactions.
  • The 7-day moving average of transactions on Avalanche has surpassed Celo, reaching over 390,000 on October 7th, and placing it only behind BNB Chain, Polygon, and Ethereum in terms of dominance. The average was sitting below 200,000 at the start of October. 
  • There was a slight hiccup when it was reported that there was a vulnerability in the project’s smart contract that allowed people to drain Avax coins, but the high network fees at the time of the report served as a deterrent since the attack looked unprofitable given how much it would cost to execute. The team was quick to resolve the issue and get the protocol running again.
  • This, unfortunately, wasn’t the only issue facing Stars Arena this week, as its smart contract was drained of about $3 million this weekend due to a reentrancy bug. Its TVL sank down to just $0.05, according to DefiLlama, making it now the dimmest star in the SoFi arena. The team has said they will re-open the contract after a full security audit. 
• Friend.tech faced its own security issues this week after users were getting SIM swapped and having funds from their accounts drained. The platform now allows for email login instead of just a phone number. 

The big short

Source: CFTC COT

• While we just talked about the excitement (or lack thereof) around ether futures ETFs, it seems asset managers are even more pessimistic about where ether is heading. 
  • From April 2021 to mid-August of this year, short ether open interest of CME ether futures coming from asset managers peaked at $57.37 million, and it has been as low as $0, according to Commodities Futures Trading Commission filings. 
  • As a reminder, every Friday, the CFTC publishes a Commitment of Traders Report (COT), giving a breakdown of open interest for a particular market on a particular exchange from Tuesday of that week. The reports give us a glimpse into how BTC and ETH futures are faring on the Chicago Mercantile Exchange, where most crypto derivatives trade in the U.S.
• From the week of July 11th to the week of August 18th, these fillings indicated no short open interest from asset managers on ether futures, but then it quickly shot up in the following weeks. The $96.28 million in short open interest reported the week of September 26th is the largest short open interest position asset managers have ever held. 
  • Asset managers held a net position (taking into account their long open interest) of -$74.34 million that week, the most negative their net positions have ever been. 
  • It also put asset managers in a deeper short position than hedge funds, an inversion of the trend from January to August of this year. From January to August, asset managers were actually net long on ether. 
  • Asset managers have also gained a lot more short bitcoin exposure compared to the start of 2023, but compared to broader history, the short open interest is not out of the ordinary. 
  • It’s difficult to say what has caused this recent frenzy of short activity from the managers. The short open interest is a bet that the price of ether will go down, and in recent months, there are many reasons to believe that could happen. In particular, the broader sell-off across many macro assets (stocks, bonds, etc.) as uncertainty looms in many facets of financial policy is something that could be weighing on these asset managers’ ether bets. 
  • That being said, in the filing for the week of October 3rd, the short open interest did drop down to $62.81 million, but it still remains historically elevated. 

Drop it down

Source: The Block

• Two weeks ago, we talked about the Bitcoin network surging to a new all time high of daily transactions after it had already reached a new high in May.
  • Despite the recency in which we’ve brought up this chart, it feels like it's worth a mention again, as the number of transactions has plummeted back down, reaching levels not seen since before the hype around Ordinals began. 
  • The 7-day moving average of transactions on Bitcoin fell to just 292,470 on October 8th, the lowest it's been since the end of February.
• Back in May, both Bitcoin and Ethereum were experiencing a bit of memecoin mania, with the excitement on Bitcoin being centered on the new Ordinals protocol, which allowed NFT issuance on the blockchain by attaching metadata to a specific numbered satoshi and the BRC-20 token standard, which harnessed similar ideas to Ordinals to bring the issuance of new tokens. 
  • These were pretty novel ideas to be brought to Bitcoin, which was previously thought of as a relatively stagnant blockchain, with bitcoin transfers being the main attraction of the chain. 
  • Ordinals came about at the start of 2023 but didn’t start garnering much attention until their meteoric rise in the spring. The number of daily Ordinals inscriptions did not surpass 50,000 until the end of April and then reached over 400,000 by early May. 
  • And while the hype died down, Ordinals were still seeing some action, keeping transactions on Bitcoin higher than they were prior to the start of spring. Between the peak in May and the peak two weeks ago, the lowest the 7-day moving average of transactions got was 364,000, which was still higher than the average had been from December 2017 to April 2023. 
  • And there was a clear correlation between Ordinals inscriptions and the transactions on Bitcoin, as the unaveraged data revealed the highest day of network transactions was September 15th, the same day over 440,000 Ordinals were inscribed (and this makes sense, you need to execute a transaction to attach the metadata to a satoshi).
• But suddenly, the number of inscriptions seems to have just fallen off. Since September 25th, the number of Ordinals inscriptions per day has only exceeded 100,000 once, an unusual and sustained drop-off. This, in turn, has pushed Bitcoin transactions down to more normal levels, not seen since before the Ordinals popularity surge.
  • It’s not exactly clear why the sudden fall happened, but the creator of the Ordinals protocol did come up with a new protocol to replace BRC-20 called Runes, which are designed to have a smaller on-chain footprint.
  • There’s also been a lot of discourse around “unstable” Ordinals, with a proposal for a “re-indexing” of the original Ordinals since there are a handful of properly inscribed but improperly indexed NFTs. This has raised red flags in the community, though, as it would impact existing Ordinals collections. People might be holding off on inscribing until this is resolved to be more confident in the inscription number they get.

Wrapped Up

Source: The Block

• The number of wrapped bitcoin assets on Ethereum has surpassed 175,000 for the first time since February.
  • At the end of February, the amount of wrapped bitcoin on the network fell from over 187,000 to just 164,450 after Celsius burned over 22,000 WBTC (1, 2). The burns were coming from an address linked to the institutional trading platform FalconX, but Celsius had been the supplier of the funds. A filing from the bankrupt crypto lender confirmed that they did indeed convert the almost 23,000 WBTC into BTC but did not give a specific reason as to why. 
  • The large burn dented the supply of wrapped bitcoin assets on Ethereum, which serve as a tool for providing exposure to the largest crypto asset on the Ethereum blockchain. 
  • The overall supply has been dropping since mid-2022, with WBTC being the main driver as it is the largest wrapped bitcoin provider. 
• We have been seeing a slow but steady turnaround in the supply, though. After the sharp drop off in February, the wrapped bitcoin supply continued to slide to just over 161,000 in March. After reaching the relative low, the lowest it had been since April 2021, more wrapped bitcoin began being minted on Ethereum again.
  • There have not really been any cataclysmic mints that helped drive the supply back up. 
  • The wallet provider imToken has done a lot of small mints, maxing out at around 300 WBTC a day since the Celsius burn that has been helping with the rebound. 
  • We have also seen an uptick in the number of WBTC sales on DEXs, with about 14,450 WBTC being sold the week of October 1st, the highest weekly volume since June 18th. 
• The rise has been slow but does mark a turnaround from the downward trend seen for much of the past year. While it’s not indicative of a super large shift in demand, it does show that there is more interest in the wrapped bitcoin market.