ETC Group Crypto Minutes Week #34

Crypto markets recapture $2 trillion

There is nothing more powerful than an idea whose time has come. These words are often attributed to the great French Romantic novelist Victor Hugo, who was also one of the most highly-esteemed poets of the 19th century. However, it is more likely that the words came from a lesser-known writer of the same era, Gustave Aimard, who died in relative obscurity.

Il y a quelque chose de plus puissant que la force brutale des baionnettes: c'est l'id?e dont le temps est venu et l'heure est sonnee. Gustave Aimard, Les Francs-Tireurs, 1861

In translation, we can read this as:

There is something more powerful than the brutal force of bayonets. It is the idea whose time has come and hour struck.

That quotations of such influence - that ripple through time - are attributed to the better-known author is society's way of telling us that history is written by the victors (in this case, Victor Hugo). The same has been true for Oscar Wilde, Winston Churchill and Albert Einstein, who tend to scoop up all the finest axioms for themselves, in retrospect.

In the case of cryptocurrency, despite the forces that would seek to strike it down, the idea of an open source, transparent, digital representation of value has persisted, precisely because it is an idea whose time has come, in an era of central bank profligacy and the dearth of voices saying that nations cannot or should not use desperate measures to print themselves out of desperate times.

And here we have another age-old lesson that traders and investors must learn yet again: markets never rise in a straight line. That's the takeaway from the latest confidence boost that has swung sentiment back to positive and seen Bitcoin break $50,000 for the first time in three months.

Crypto markets peaked on 12 May 2021 with a total market capitalization of $2.5 trillion, before dropping to a low of $1.2 trillion on 20 July. The boundary was broken on 14 August, but markets could not sustain the $2 trillion+ level for more than 24 hours. The first consecutive days of $2 trillion+ total market cap were 21 and 22 August 2021.

In retrospect, the recent fall in the latter half of last month looks to be a breather and a consolidation, not a secular downtrend. The turning point appears to have been catalysed by Ethereum's successful network-wide upgrade, the London hard fork. London introduced deflationary mechanics to the blockchain for the first time through EIP 1559, a blockchain rule change which 'burns' (removes) a small amount of ETH from circulation whenever transactions take place.

Because Ethereum is such a high volume market, we have seen stories of single NFT sales, like CyberKongz, burning millions of dollars-worth of ETH in a matter of hours.

ETH-based NFTs explode as Visa invests

Earlier this year, DeFi largely had the hegemony when it came to conversations about groundbreaking Ethereum-based financial applications, but NFTs have now taken that crown. (Incidentally, DeFi markets are fast approaching their highest ever total value locked in smart contracts at ~$85bn, albeit with much less media attention than in summer 2020.)

As digital representations of unique value, NFTs largely exist as ERC-721 tokens on the Ethereum blockchain. This software upgrade was first introduced in EIP721 in 2018, and as described in that update:

This type of Token is perfect to be used on platforms that offer collectible items, access keys, lottery tickets, numbered seats for concerts and sports matches, etc. Ethereum Improvement Proposal 721

Unless you have been living under a rock for the past six months, you'll know that worldwide attention in NFTs has exploded. But the crypto subsector got another intense boost this week after crypto-friendly payments giant Visa (NYSE:V), decided to get in on the action.

As reported by CNBC, Visa made its first purchase of a CryptoPunk digital avatar, for $150,000. CryptoPunks live on the Ethereum blockchain, and so the transaction was made in ETH.

And as noted above, whenever transactions now take place on the ETH blockchain, a small amount of the internal currency is destroyed forever.

Data from Dune Analytics show that decentralised exchange aggregator 1inch is the fastest ETH burner, Coinbase is second, but new entrants NFT marketplaces Axie Infinity and OpenSea are now not far behind.

Additionally, there are a slew of interesting insights to be had from scouring free blockchain explorers like Etherscan. These are data trackers which look into the operations of a particular blockchain and figure out which entities are sending or receiving value where. This is a very useful way of spotting trends in real time. One in particular is to look at the top wallets receiving Ethereum over a given timeframe.

Cryptocurrency exchange wallets tend to dominate this list. As a side note, while addresses themselves are normally just a string of alphanumeric characters and hence pseudonymous, analysis platforms like Etherscan have tracked these largest addresses and identified which belong to Binance, Gemini, FTX, Coinbase etc. For example, Binance 8, the biggest ETH receiving wallet in the world today, has received 600,000ETH (worth $1.98 billion) over the last 24 hours. That represents more than 20% of all the Ether that has moved on-chain.

In recent days, NFT marketplaces have leapt into the top 10 ETH-receiving addresses.CryptoPunks, the digital avatar NFT market, has received 41,122ETH, putting it in sixth place, leapfrogging the likes of crypto futures exchange FTX, while OpenSea, the art NFT market, has received 71,100ETH making it the third-largest in the world today

Coinbase to invest at least $160m per quarter into crypto

In a 20 August shareholder letter, Coinbase (NASDAQ: COIN) said it had updated its investment policy to hold 10% of its net income in a "diverse portfolio" of cryptoassets.

We have committed to invest $500M of our cash and cash equivalents. Going forward, we will also allocate 10% of quarterly net income into a diverse portfolio of crypto assets. This means we will become the first publicly traded company to hold Ethereum, Proof of Stake assets, DeFi tokens, and many other crypto assets supported for trading on our platform, in addition to Bitcoin, on our balance sheet. Coinbase, shareholder letter, 20 August

This single purchase will more than double Coinbase's current crypto holdings.

Coinbase CEO Brian Armstrong told markets via Twitter that he had received board approval to initiate the first purchase to add half a billion dollars-worth in crypto to the exchange's balance sheet.

By 'stacking sats' in this way, in the parlance of long-term Bitcoin holders, Coinbase is indirectly increasing the crypto exposure of large organisations that have invested into Coinbase stock.

The company mentioned it would hold both Ethereum and Bitcoin, and we can rationally assume that the basket of assets it buys it will include Litecoin and Bitcoin Cash, as the best-known and most enduring assets on the market. Interestingly enough, Armstrong noted that the portfolio allocation will depend on the most popular assets on Coinbase's own platform.

Our crypto asset investment allocation will be driven by our aggregate custodial crypto balances - meaning our customers will drive our investment strategy. Coinbase, shareholder letter, 20 August

According to its 10 August Q2 earnings report, in Q1 2021, Coinbase pulled in net revenues of $1.59 billion, with net income of $771 million. Q2 2021 produced revenues just north of $2 billion, with net income of $1.6 billion. On this basis we can estimate that Coinbase will be spending a minimum of $160m every quarter on a basket of cryptoassets for its reserves.

Markets

BTC/USD

Bitcoin's ascent was sharper than eternal rival Ethereum this week, and the taste of fresh air above $50,000 looks to be quite the amuse bouche for what could be a rampant bull market in late summer 2021. Beginning from $45,364.96, BTC lost 3.1% against the US dollar, before starting its ascent all the way back to the magic round number. A peak of $50,552.02 represents a 14.9% gain from this low point. And yet we have still not had a weekly close above $50,000 since mid-May.

ETH/USD

More than anything this week, ETH held steady after its stellar ascent of the past few sessions. Price volatility was relatively low, as from a starting point of $3,113.55, Ether claimed only a 3.5% gain against the US dollar across the week. There appears to be a clear support point of a smidge below $3,000, as bears tried to pull ETH down below that figure, but strong buying volume at the week's low point of $2,946.70 put paid to that campaign.

LTC/USD

It appears that traders will have to wait a little longer for the much-anticipated assault on $200 LTC, with $191.81 proving the most that markets could handle at this point in the investment cycle. Even while volatility from the lowest to highest point extended to a full 18% swing to the positive, a 3.6% gain was all that Litecoin could produce after all was said and done, taking the payments protocol from $173.02 to $179.23.

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