crypto_ecosystem_6
Crypto Ecosystem Update #6: January 17, 2022
Jan 21, 2022

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Bitcoin and Ethereum fell back to their January 10 lows this week. This has raised concerns regarding whether the $40,000 and $3,000 bottoms respectively will be able to hold in the coming days.

This likely depends on the outcome of the Fed meetings on January 25 and 26. If markets evaluate the Fed’s post-meeting announcements as hawkish, a downtrend in the cryptocurrency market may follow. This could result in an extended bear market through 2022.

Fed tapering and interest rate hikes have historically threatened crypto and tech. Rising interest rates were enough for cryptos to experience the 2018-19 bear market, where Bitcoin fell by 85% and altcoins fell by more than 90% on average. The composition of the digital asset market is much different today than it was three years ago. Despite the maturation of the crypto market, only time will tell what 2022 has in store for us. 

Today, the total market value of the cryptocurrency market is at around $2 trillion. This level needs to hold if we are to start a new uptrend in the coming months. Seeing how the market reacts to any potential negative messaging from the Fed’s upcoming announcement will be the true test of whether crypto has become more resilient in the past few years.

In this week’s crypto ecosystem update, we examine how things may unfold in terms of on-chain activity and technical analysis, as well as if the downside price action continues in Bitcoin and Ethereum. In addition, we evaluate developments in other major cryptocurrencies, along with the latest news and product developments in the entire cryptocurrency market. 

 

BITCOIN ANALYSIS

Price Overview (January 17)

  • 7-day change: +0.93%
  • 7-day low: $41,574.40
  • 7-day high: $44,811.11
  • 30-day change: -9.9%
  • 30-day low: $39,658.92
  • 30-day high: $52,110.00

 

Network Overview (January 17)

  • Blocks Mined (7-day): 1,137 blocks
  • Average Block Interval (7-day): 534.7 seconds
  • Coins Discovered (7-day): 7,106.25 BTC 
  • TX Count (7-day): 1.8 million
  • TX Volume (7-day): 31.6 million BTC
  • Net Change in Exchange Balance (7-day): + 6,873.4 BTC

 

On-Chain Activity:

The price of Bitcoin remained flat on the week of January 10. Long and short-term Bitcoin holder activity, the current state of Bitcoin futures, and correlations with other capital markets may potentially dictate the next move of BTC.

1. Spent Output Profit Ratio (SOPR)

    SOPR provides insight into the profit and loss of Bitcoin investors over a certain period. It specifically demonstrates the ratio of realized profits for all bitcoins moved on-chain.

    SOPR is measured by taking the bitcoins that are moved on-chain during a certain time frame (hourly, daily, weekly, etc.), and then taking the ratio between the value of those coins at the time of UTXO creation and the value of the same coins at the time of UTXO spending.

    In that sense, Short-Term Holder (STH) SOPR assesses the on-chain spending behavior of UTXOs that are younger than 155 days. A SOPR value larger than 1 suggests that short-term holders are in profit, while a value less than 1 suggests these holders are selling their coins at a loss.

    The SOPR for short-term holders has been below 1 since November 25, which means that short-term holders have consistently been spending their coins at a loss during the last two months. 

    Spent_Output_Profit_Ratio

    Conversely, long-term holders (UTXOs older than 155 days) have been spending their coins profitably throughout Bitcoin’s downtrend that started on November 10. The last time long-term holders had to spend their coins unprofitably was during the Coronavirus crash of March 2020, when the price of Bitcoin crashed to $3,800. 

    long_term_sopr

    Besides SOPR, on-chain cost metrics provide additional insight into the profitability of short and long-term holders. These cost metrics indicate the thresholds at which STHs and LTHs are in profit or at a loss, which have historically served as reference points for the fair market value of Bitcoin.

    Short-term holders have been hodling their bitcoins at a loss since December 3, which is approximately one week after holders began spending their bitcoins unprofitably in terms of the SOPR. December 3 was a series of liquidation events, which dragged the Bitcoin price down by 25% in a matter of only 48 hours. 

    STH cost-basis currently sits at $50,160, 15.83% below the current market value, while LTH cost-basis sits at $17,636, 139.38% above the current market value.

    on-chain_cost_basis

    2. Futures

    Futures’ open interest (OI) dominance has been floating at around its all-time high value of 1.36%. Whenever the open interest dominance of Bitcoin futures has reached such levels, it was followed by a huge wipeout of leveraged trade positions, which means a violent price action in the spot price of Bitcoin. This has not been the case so far in January. 

    Checking the funding rates may indicate the possible direction of an OI wipeout. Positive funding (means speculators are more bullish) suggests that long liquidations are more likely, while negative funding (speculators are more bearish) suggests that short liquidations are more likely. The current funding rate is positive at 0.01%, which is significantly higher than the 30-day average of 0.004%.

    Open interest dominance being at all-time highs accompanied with positive funding can be indicative of two possibilities: (1) There is sufficient demand for spot BTC to absorb the open interest and positive funding. (2) The long positions currently open are not aggressive enough to trigger additional long liquidations given the recently flat price action. If either of these possibilities is true, it can open the opportunity window for a short squeeze and thus a climb in price. 

    open_interest_dominance

    Bitcoin Technical Analysis:

    Following its low of $39,500 on January 10, Bitcoin was rejected at $44,000 on January 13 and is currently trying to find support at $41,000. Volumes in the spot BTC market are declining to levels not seen in 2021, which means that retail interest has quite vanished after the crashes since Bitcoin’s all-time high of $69,000 on November 10. 

    1. $40K Support

    Although volumes are declining, which could suggest that the bottom for BTC may be in, Bitcoin keeps dangerously flirting with the $39,000-$40,000 support level and fails to receive significant buying volume at these levels. 

    Testing a price level multiple times does not always strengthen that level’s support. Occasionally, and especially when the volume is decreasing, testing a level many times can instead weaken the support. 

    Buyers need to step in soon before Bitcoin falls another step-down, which is at $37,000. And if $37,000 does not hold, the volume profile on the price chart is pretty empty down to $30K, which would make a double bottom with the summer 2021 lows.

    40k-level_support

     Bitcoin/U.S. Dollar price chart. Each candle in the chart represents 4 hours. Source: Tradingview

     

    2. Weekly RSI: a Make or Break for Bitcoin

    The Relative Strength Index (RSI) value of 40 on a weekly timeframe has been a critical threshold that dictated Bitcoin trends. Whenever Bitcoin’s weekly RSI managed to stay above the 40 level, it triggered a new and strong uptrend. On the contrary, breaking down the 40 level on a weekly close generally resulted in capitulation events for Bitcoin, as you can observe in the below chart.

    weekly_rsi

    Bitcoin/U.S. Dollar price chart & RSI chart on a weekly basis

    For example, when the weekly RSI closed below 40 on the week of November 12, 2018, it was followed by a capitulation in Bitcoin price, where it dropped by 50% from $6,000 to $3,000 per coin. 

    Then in December 2019, the RSI bounced off the 40 level, which was followed by a rally from $6,000 to $10,500 in January 2020. 

    However, the Coronavirus sell-off across all capital markets in March 2020 once again pushed Bitcoin’s weekly RSI below the 40 level and this time the price of Bitcoin crashed by over 50% from $8,000 to sub $4,000 in only 48 hours.

    Back in the summer of 2021, what saved Bitcoin from dropping below $30,000 was its closing the week of July 12 with an RSI value above 40. Following that close, Bitcoin was able to start a new uptrend and realize a new all-time high of $69,000 as of November 10. 

    The weekly RSI of Bitcoin is at 40 now once again (see the above chart). A close below 40 in the upcoming weeks may open the gates for a new sell-off in Bitcoin, which could drag its price back to summer 2021 lows.    

    Therefore, closing the upcoming weeks above an RSI level of 40 will be very crucial in terms of determining Bitcoin’s next major move.

     

    3. Weekly Stochastic Almost Bottomed Out

    Although the RSI looks shaky, the stochastic RSI, which measures the strength of the RSI, almost zeroed out on the weekly chart (see the below chart). This suggests that the RSI is getting exhausted in terms of its downtrend. 

    However, you should note that on such high time frames like the weekly, the stochastic RSI can stay oversold for extended periods of time. Due to that, it is still possible to have a flush out to $30,000 price levels if the RSI drops below 40, before Bitcoin can finally reverse its downtrend.

    weekly_stochastic

    Weekly Stochastic RSI chart for Bitcoin/U.S. Dollar

     

    ETHEREUM ANALYSIS

    Price Overview (January 17)

    • Last 7-day change: 4.05%
    • 7-day low: $3,052.03
    • 7-day high: $3,413.45
    • Last 30-day change: -18.93%
    • 30-day low: $2,928.02
    • 30-day high: $4,155,16

    Network Overview (January 17)

    • ETH Burned (7-day): 86,024.11 ETH
    • TX Count (7-day): 8.3 million
    • TX Volume (7-day): 10.6 million
    • ETH Moved in/out of Smart Contracts (7-day): 105,572.11 ETH
    • Net Change in Exchange Balance (7-day): – 131,484.7 ETH

    On-Chain Activity:

    Ethereum is showing positive signs from an on-chain perspective. ETH is being burned at a record pace, as coins flood into smart contracts. Each of these forces can put positive pressure on the fiat denominated values of the cryptocurrency as supply liquidity dampens. 

    1. ETH Supply Burned

    ETH is being burned at its fastest pace since its burning mechanism was initiated via EIP-1559 in early August. Over 130,000 ETH was burned between January 2 and January 11 at an average of ~13,250 ETH per day. This is nearly 50% higher than the average of ~9,100 ETH that has been burned per day since EIP-1559 was activated.

    The uptick in ETH burned comes as gas prices are back on the rise and as ETH is moving into smart contracts at a record pace. The mean gas price is up nearly 77% since December 27.

     

    burned_eth

    2. Smart Contract Velocity Ratio

    Ethereum supply has been moving into smart contracts at an accelerated rate. ETH being locked in smart contracts is outpacing supply issuance by a factor of 60 to 1, the highest it has ever been. This contributes to general supply illiquidity as coins are vacuumed off exchanges and into smart contracts, where it is unlikely for them to be sold back into fiat. Increasing amounts of ETH in smart contracts can generate sell-side liquidity inefficiencies that can put upward pressure on its fiat denominated market value over sustained periods.

    The chart below tracks the historical smart contract velocity ratio against 2022’s ratio to date, which is the ratio of ETH moving into smart contracts against issuance.

     

    smart_contract_velocity

    Ethereum Technical Analysis:

    Ethereum’s price action has historically been correlated to that of Bitcoin. Throughout the history of cryptocurrencies, Bitcoin managed to drag Ethereum and other altcoins along with itself, either to the upside or to the downside. The reason for this synchronized price action was that funds entering and exiting the cryptocurrency market initially flowed into Bitcoin, which then moved in and out of Ethereum and other altcoins. In that sense, Bitcoin should not be on a downtrend for the Ethereum price to climb higher, and history tells us that Bitcoin should not be having a mega bull run either for the big money to enter into Ethereum.

    Ethereum was less affected by Bitcoin’s downfall in early December. In other words, the Ethereum/Bitcoin price parity was increasing although the U.S. Dollar value of Ethereum was decreasing. However, Ethereum lost its edge over Bitcoin in the second half of the month and nowadays it drops at least as much as Bitcoin when the price of the alpha cryptocurrency drops.

     

    1. Bitcoin’s $40,000 is Ethereum’s $3,000

    After breaking down from the rising channel that it had been following since July 2021, Ethereum lost its support at $3,650. Since that day, Ethereum’s price action started to correlate back with that of Bitcoin and now it is trying to make $3,000 as the new support. In that sense, Ethereum’s $3,000 now acts like Bitcoin’s $40,000 support. 

     

    eth_usd_price_chart

    Ethereum/U.S. Dollar price chart. Each candle in the chart represents a 4-hour timeframe.

    2. Ethereum vs. Bitcoin

    The monthly relative strength index (RSI) of the Ethereum/Bitcoin parity failed to close above 70 in December 2021. Above 70 corresponds to the black overbought area above the purple zone in the below monthly RSI chart. 

    In strong uptrends, the largest price moves are often realized when the RSI closes above 70 in higher time frames like the weekly or monthly. 

    However, ETH/BTC closed December below 70 as indicated by the red circle in the below chart. Now the monthly RSI is crawling downwards towards the 60 region, which was the July 2021 low (circled in green). It needs to stay above this previous bottom level for Ethereum not to start a decisive downtrend against Bitcoin. 

     

    ethereum_vs_bitcoin

    Ethereum vs. Bitcoin monthly price & RSI charts 

    3. Major Support Levels If $3,000 Fails

    Should the $3,000 support fail for Ethereum due to Bitcoin’s failing the $40,000 support, the next major support levels for Ethereum are illustrated in the chart below.  

     

    ethereum_daily_price_chart

    Daily price chart for Ethereum/U.S. Dollar

     

    OTHER MAJOR CRYPTOCURRENCIES

    Layer-1 blockchains that launched as alternatives to Ethereum were the star of the show throughout 2021. Due to that, most of the top 10 cryptocurrencies in terms of market capitalization are now comprised of layer-1 blockchain projects.

    Specifically: Binance Coin, Solana, Cardano, Polkadot, Terra, and Avalanche.

    Cardano (ADA) managed to reach its all-time high the earliest among this group during the Fall 2021 rallies. While other coins topped out in November or December, Cardano made its high by the end of August. Following its top, Cardano made a ferocious correction, way larger than its peers and stopped at around 65% lower than its August top.

    However, being early in the game may also mean being the first to start a new uptrend. Despite weak price action across the board in January, Cardano was able to have a strong rally following its bottom on January 10. As you can see in the chart below, the price of Cardano has increased by over 50% since last week.

     

    cardano_price_chart

    Price chart for Cardano. Each candle in the chart represents 6 hours.

    Cardano’s price action was motivated by the news that its network managed to incur fees of only $75,400 for a daily transaction volume of $5.31 billion, while Ethereum users had to pay a whopping $44 million for a daily total transaction volume of $5.59 billion. 

    This in return fueled expectations that the NFT market could benefit from Cardano’s network to make transactions, which has become an over $10 billion worth market as of today. 

    Cardano’s launching its first metaverse, Pavia, was also a contributing factor to ADA’s price surge. Pavia currently attracts a lot of demand for virtual land sales on the ADA platform.

    The current price action of other major cryptocurrencies looks pretty correlated to that of Bitcoin and Ethereum as you can observe in the below chart, with the only exception that Avalanche (AVAX) and Terra (Luna) have made higher lows so far compared to their early December lows.

     

    crypto_price_charts

    Daily price charts for Solana, Polkadot, Avax, and Luna

     

    CRYPTOCURRENCY PRODUCT UPDATES

    Layer 1 Blockchains

    Dogecoin To Be Used In Tesla Stores

    According to The Block, Tesla is currently testing a payment option for Dogecoin (DOGE) holders. The move comes as no surprise since the Tesla CEO Elon Musk tweeted a few days ago, “Tesla merch buyable with Dogecoin.”

    The DOGE payment option is reported to have started testing this week. According to a software engineer working on the project, most of the necessary code is already present in the Javascript files that Tesla uses to process payments, which means the DOGE payment option should be ready sooner or later.

     

    NFT & Metaverse

    • OpenSea Hit Monthly Record Volume

    The largest non-fungible token (NFT) marketplace, OpenSea realized an Ethereum trading volume of $3.5 billion in the first two weeks of January, according to data from Dune Analytics. The record monthly trading volume so far was at $3.4 billion in August 2021. That figure was surpassed in a matter of only 15 days this month. 

    Bored Ape Yacht Club (BAYC) is the most popular NFT collection traded on OpenSea. Nearly 15,000 Ethereum worth of BAYC NFTs were traded on OpenSea during the last 24 hours. 

    At the beginning of this year, OpenSea raised $300 million in a Series C funding round led by venture capital firms, Paradigm and Coatue. The total equity of the company was valued at $13.3 billion in this transaction. 

    • Walmart Is Entering The Metaverse

    Retail giant Walmart has filed for several patents to create a cryptocurrency and nonfungible token (NFT) collection. The purpose of this move is to get ready to enter the metaverse. 

    Walmart is reported to file a total of seven patent applications. Applications include plans to create and sell “virtual goods” including electronics, appliances, apparel, toys, and home decor. Walmart also plans to create a dedicated marketplace to buy and sell NFTs.

    ​​According to Morgan Stanley, the metaverse possesses an $8 trillion opportunity for the retail industry.

    DeFi

    • Anchor Has Its Best Month Ever

    Anchor is targeting to become a household savings vehicle by taking a new approach to stablecoin yield. Its protocol is designed to generate a yield from on-chain revenue, or block rewards, of major Proof-of-Stake blockchains. Doing so eliminates the inconsistencies in stablecoin yields that are a common problem with leading DeFi lending protocols like Compound and Maker. Anchor is built on the Terra blockchain and it currently offers an annual UST (Terra’s native, USD-pegged stablecoin) yield of 19.7%.

    December marked Anchor’s best month to date. The protocol saw $2.6 billion in new UST inflows, and now holds more than $10 billion in total value locked (TVL). The total collateral on the protocol, which is distributed across bonded Ethereum and Luna assets, increased by 83% month-over-month in December to reach $5.67 billion in value. New collateral options, including bonded Solana and bonded Atom, have entered the auditing phase.

     

    • Moonbeam Becomes the First Functional Parachain on Polkadot

    Moonbeam is an Ethereum-compatible layer-1 platform on the Polkadot network, which seeks to build natively interoperable applications. The Ethereum compatibility allows developers to integrate existing Solidity smart contracts and DApp frontends with Moonbeam by making only minimal changes.

    On January 11, Moonbeam became the first fully functional parachain on Polkadot. Parachains are application-specific blockchains that run in tandem with each other on the Polkadot platform. Moonbeam’s launch on Polkadot now allows over 80 projects to be deployed on the Polkadot network. This is likely to provide a huge value for the Polkadot ecosystem.

     

    • Tether (USDT) Freezes Accounts

    Tether froze $150 million of USDT last week, which stirred debates in the crypto community regarding the centralized operation of this cryptocurrency. Three wallet addresses were blacklisted by Tether during the process.

    The majority of the stablecoin market consists of centralized stablecoins like USDT and USDC. DAI has been deemed the only “decentralized” stablecoin in the market so far.

    Stablecoins have also become a major concern for governments, who fear that they will eventually pose serious competition against the sovereignty of their national currencies. And since Tether is the predominant stablecoin in the market, it may become the primary target of regulators in the future.

     

    • USDC Surpasses USDT For The First Time

    The value of the USDC stablecoin on the Ethereum blockchain has surpassed that of Tether (USDT) for the first time.

    According to Etherscan, the total supply of USDC on Ethereum reached 40.4 billion, while USDT’s total supply on the same blockchain is currently at 39.8 billion.

    The main reason behind USDC’s growth is its increased adoption in the decentralized finance (DeFi) world. Stablecoins are commonly used for trading on decentralized exchanges and for making a number of different transactions on DeFi protocols.

    USDT is mainly used in centralized cryptocurrency exchanges. Due to this, demand from institutions has gradually declined. On the other hand, demand from retail investors in Turkey and several countries in Latin America is surging due to ongoing currency crises, according to The Block.

    Overall, USDT’s entire supply across all blockchains is still significantly higher than that of USDC. Tether’s current total supply sits at 82 billion, while USDC’S is at around 45 billion.

    Tradfi

    U.S. December CPI Rises to 40-Year Highs

    The U.S. Consumer Price Index (CPI) escalated to 7% year-over-year in December, which is the highest figure in 40 years. On the other hand, the core CPI, which excludes food and energy costs, increased by 5.5% during the same period. Supply chain crises continue to dominate, which has been the primary driver for inflation.

    To combat persistent inflation, the Fed is expected to increase interest rates and cut back on asset purchasing this year. However, the timeline is quite unclear as of now, although Chairman Jerome Powell and Janet Yellen, the President’s Secretary to the Federal Reserve, have noted that they may come sooner rather than later. Jamie Dimon, the CEO of J.P. Morgan, predicts the Fed will raise rates upwards of four times throughout the year. Actions that the Fed will ultimately take are still to be determined. Any guess at what might be done is purely speculative based on the information provided by the central bank.

     

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