Data & Insights Recap - December 18, 2023

Fueled by fees

Source: The Block

• If there's one narrative that shaped Bitcoin this year, it's the stunning breakout of Ordinals. The protocol emerged as a means to support NFTs and token issuance on the blockchain by inscribing particular satoshis with metadata, distinguished by the order in which they were minted.
  • These inscriptions could be text, images, audio, or these new BRC-20 tokens. The ideas behind Ordinals opened up new avenues of use for the Bitcoin blockchain, which used to only be used for bitcoin transfers. 
  • And while the Ordinals protocol came about at the very start of this year, it didn't really take off until memecoin mania hit in May and interest came pouring in for both the NFTs and the new tokens that existed on Bitcoin. 
  • But the hype was not sustained, partially due to how high network fees became high in the wake of the heightened demand for blockspace. The 7-day moving average of the average transaction fee climbed to over $16 for the first time since May 2021. And when the memecoin excitement went down this spring, things were still much more bearish than they are now; fees that high in a slower market were very unlikely to be put up with.
• But BRC-20 tokens and Ordinals are having a resurgence. The original BRC-20 token, ORDI, has seen a lot of success, especially after being listed on Binance. And many other blockchains have been trying to get in on the inscriptions action as of late. 
  • Ordinals have also been at the forefront of a philosophical debate about the use of Bitcoin, whether the new use case is actually spam on the network or just a novel way to use a permissionless technology. 
  • Sotheby's had their first Bitcoin Ordinals auction this month, as well, showing how popular the protocol has become. 
  • And the fact that sentiment is a bit better and more network demand is to be expected, fees have continued to stay quite elevated and people are willing to continue paying to partake in trading these assets. Since December 6th the 7-day moving average of the average transaction fee on Bitcoin has been above $10. The average was $1.52 at the start of November. 
• This recent, sustained action on the Bitcoin network has shifted how miners have been gaining their profits. If a miner mines a block on the Bitcoin network, they receive both the block reward (which right now is 6.25 BTC) as well as the fees for the transactions included in the block. Users can pay higher fees to have their transactions prioritized for inclusion in a block. 
  • Back in May, the portion of miner revenue coming from transaction fees shot up to 13.7% after sitting at 2.93% the month prior. The share then dropped back to 4.89% in June and stayed below 3.5% for July through October. 
  • But November saw the percentage jump again to 12.3% as the Ordinals renaissance emerged, and this month transaction fees are on pace to account for 20.11% of miner revenue, the highest its been since December 2017.

Blast off

Source: The Block

• A new optimistic rollup has recently arrived on the scene, well…kind of. 
  • The new project from the founder of Blur is an Ethereum layer 2 called Blast, which went live in early access in November. It had completed a $20 million raise beforehand, with Paradigm as one of its backers. 
  • Blast aims to be the first layer 2 to offer native yield and was also very upfront that an airdrop would be coming to community members and developers. 
  • On Blast, users' native balances will compound automatically, earning 4% on ether and 5% with stablecoins, along with the additional "Blast Points" awarded. Blast will participate in staking ether and will pass the yield onto users and protocols using the optimistic rollup. 
  • Pacman, the founder of Blur, was inspired to create Blast because of the $100 million sitting in Blur's bidding pool that was not earning any interest. 
• While users can deposit into this early access version of Blast, they cannot withdraw. Also the layer 2 itself is not actually launched yet, so essentially, all you can do is deposit to the bridge and wait.
  • The early access is also invite-only, and points (which translate to eventual airdrop rewards) are awarded based on the amount you bridge and also how many people you invite. People have also likened the points to a Pyramid scheme since members get more rewards than those they invite in an ongoing chain. There's a popular image explaining how the points system worked that circulated the rounds of X for its Pyramid-like messaging. 
  • And the project was under fire for attracting deposits, while withdrawals are not expected until February of next year. And the bridge currently sends funds to a multisig wallet controlled by 5 people.  
  • The Blast founder addressed some of these concerns, saying the invite system was done to recognize contributions that users had made to expand the ecosystem. To address the multisig worries, Blast said the signers were "deeply technical engineers who have experience with high stakes apps ranging from financial applications to smart contracts."
  • Despite all this, Paradigm's head of research Dan Robinson said that the venture capital firm did not support some of the decisions made by the Blast team. 
• Of course, regardless of security or ponzi-style economics, people love an airdrop. 
  • Blast's TVL can only really decrease due to price fluctuations at this point, but even then, it's shown impressive growth for a project already deep in controversy. 
  • Blast's deposit contract has about $790 million worth of funds, making it one of the most liquid L2s despite not having anything to show for it yet. Its TVL has already surpassed that of Coinbase's Base, which launched this summer and was home to SoFi's darling protocol, friend.tech. 
  • But Base famously launched with no plans for a token, begging the question of whether a functional network is as important as an airdrop.

Searching for something

Source: Google Trends

• We talked last week about how it seems like there hasn't really been much more casual retail interest throughout this most recent rally, highlighting that there has not been much action in terms of App Store movement for crypto exchanges, which usually climb the ranks as more people want to trade crypto.
  • But another retail proxy also comes in the form of Google search volumes. Searching for a token or a crypto company online is a pretty non-committal thing to do, but it does show that people are thinking about crypto more often.
  • Google does not actually show raw search numbers on Google Trends. Instead, it shows normalized data where each point on the graph is divided by the highest point, which is the 100 peak. The numbers presented are meant to represent how many searches have been done relative to the total amount of searches on Google. So, a decline in the number presented on Google Trends does not necessarily mean a drop in the number of searches for a term, but it does represent a drop in popularity relative to other searches. 
• Searches for the terms "bitcoin" and "ethereum" are still pretty low. 
  • The popularity of "bitcoin" peaked in December 2017, and while there have been some gains, the growth has not been too significant. December is on pace to have a rating of 26, which is the highest it has been since July 2022, but is still slightly higher than a lot of the rankings in the teens we saw through the year. 
  • For "ethereum," searches peaked in May 2021 and December is only on track to have a 17 rating, which is only the highest its relative ranking has been since April 2023. 
• One token does seem to be having a real resurgence in interest and that is, perhaps unsurprisingly, "solana."
  • The relative popularity of the term climbed to 100 in September 2021 and reached 49 the week of December 3rd, up significantly from 14 in October.
  • Part of the reason "solana" has been able to recover so fast is due to the fact that its share of searches in the previous bull market was much less than that of "bitcoin" or "ethereum," so it might be easier in raw numbers for "solana" to achieve that status again.
• But it has once again been a crazy week on the Solana network.
  • The Solana Saga phone sold in the U.S. and had limited supply left in Europe, primarily due to the incredible performance of the memecoin BONK. 30 million BONK come on each Solana phone, and with the token's price up 600% from the start of the month, people started to see an arbitrage opportunity between how much the phone costs compared to the value of the BONK that comes with it. 
  • And on-chain activity has been thriving. Over the weekend, we saw daily Solana DEX volume surpass that of Ethereum for the first time ever. The 7-day moving average of active addresses has reached the highest level since October 2022. 
  • While "Solana Winter" does not quite roll off the tongue like "Solana Summer," which went down in 2021, it certainly feels like a similar trend is in play.

We like the spot

Source: The Block

• Probably just over a month ago, we discussed the chart above as we began to see a shift in how ether was being traded. 
  • It marked quite a reversal, as the 30-day moving average of the spot to futures volume ratio for the asset had been trending downward for a while and had been basically strictly decreasing from April 2022 through to July 2023. 
  • The ratio got as low as 0.13 at its lowest, indicating a strong tendency for futures trading over spot. 
• But coming out of the summer the ratio had begun to rise and has since climbed to 0.22, the highest the ratio has been since July 2022. 
  • The ascent really began to accelerate in Q4 of this year, corresponding to the recent rally in many crypto assets we've seen. Price increases do tend to drive spot volumes higher as more interest flows into the space, but they also tend to have a similar impact on futures volumes. 
  • While the major trendline for the ratio has been on the decline since 2020, we can see periods of the ratio rising in early 2020, from November 2020 to February 2021, from July to September 2021, and from March to April 2022. For the most part, these all coincide with periods of strong price growth for ether. For example, from November 2020 to February 2021, the ratio rose from 0.25 to 0.38, as ether climbed from around $385 to almost $2,000. While ether continued to rise to over $4,000 in May, the ratio did not increase much beyond February but did hold steady at the elevated level until early June. The ratio then began falling into July 2021, which is coincidentally when ether's valuation hit a relative bottom.
• So, it seems there is some correlation between positive price action and an increase in the spot to futures volume ratio. In a certain sense, this makes sense. 
  • Derivatives offer leverage, giving traders the ability to gain much more exposure relative to their posted collateral, which could be good for traders looking to make heavy bets on future price increases. But futures also offer the ability to short an asset and bet on its price going down. In spot trading, you essentially can only really take a long position by buying an asset and then selling it when you are ready, hopefully at a profit. There is not really a clear way to bet against the success of a token in the spot world. 
  • So when valuations drop, it makes sense more activity moves into futures as shorting becomes more popular. But once a rally starts, buying assets directly becomes more attractive, pushing the ratio up. 
  • Bitcoin's spot to future ratio has also been on the climb recently, jumping from 0.18 in May to 0.27 this month, also coinciding with a run-up in price. 
  • It is quite the change of pace, though, to see ether's ratio shifting so fast in the positive direction after it had previously dropped so low as the derivatives ecosystem became more robust for the asset.

Highs and lows

Source: Coinglass

• While the recent crypto rally has everyone riding that "up only" hype, prices weren't strictly rising last week. 
  • There was actually quite some drop-off in bitcoin last week, as it fell from almost $44,000 on December 10th to around $40,750 the next day. Bitcoin sat below $42,000 for the majority of the time until December 13th, then it climbed above $43,000 again on the 14th after the Federal Reserve held rates steady as expected.
  • But then came the 15th and bitcoin fell back below the $42,000 mark, where it has held relatively steady since. 
• While all of this price action has been playing out in the $40,000 to $44,000 price range, it's still some pretty significant whiplash, especially as many people piled into leveraged long futures positions due to the positive outlook for bitcoin with a looming spot ETF approval and an expectation of interest rate cuts in 2024. 
  • And it wasn't just bitcoin that experienced these price swings; many other crypto assets also faced some volatility over the past few days. Some argue the downturn was part of a price correction that was necessary after the rapid Q4 turnaround as some traders took profits and sold, but analysts across the board are pretty optimistic that 2024 will bring good fortune regardless of the slight drop.  
• As a result of all the moves in valuation, we've seen volatility measurements and liquidations surge. 
  • Long liquidations across all crypto assets surged to over $440 million on December 11th, the largest amount in over 3 months; around $126.75 million worth of those liquidations came from bitcoin positions. The recovery on the 13th in the wake of the Fed decision caused another bout of $63 million in liquidations across both longs and shorts.  
  • The 30-day annualized volatility of bitcoin climbed to 51.97% on December 13th, up over 10% in 10 days. Volatility was 39.79% on December 3rd. The annualized volatility dropped a bit this weekend to around 45% as bitcoin has found some steady footing in the $41,000 to $42,000 range.