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Tom Rodgers
Tom Rodgers Head of Research
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ETC Group Crypto Minutes Week #36

Ethereum issuance turns negative for the first time in history, producing another date for the cryptoasset history books. Twitter follows Substack, trialling Bitcoin tipping in a bid to overhaul its commercial prospects. And India has a new plan to regulate, define and tax cryptocurrencies — much to the joy of certainty-seeking crypto businesses.

EIP 1559 sees ETH soar, issuance turns negative for first time

It is one thing — in crypto and in business more broadly — to make bold promises, and quite another to deliver.

Now crypto market watchers have a new date for the history books: Friday 3 September 2021. On this day, the 24-hour issuance of ETH dipped below zero for the first time.

The number of new ETH issued dived from an average 10,000 per day to less than 5,000 in late August, the charts show. On 3 September, the net ETH issued was negative 333.85, according to date sourced from IntoTheBlock, via Etherchain, Coinmetrics and Coinmarketcap.

ETH issuance post EIP-1559 vs Price

This is the result of the introduction of deflationary tokenomics to the programmable money blockchain, established by EIP-1559 in the London hard fork. Since that code upgrade went live on 5 August 2021 the market price of Ethereum has soared by 40% from $2,827 to its current level, now just 5.1% short of its all time high of $4,168.70.

This fee burn mechanism was intended to act as a counterpoint to Ethereum inflation, destroying the base fees paid for transactions to be included in the Ethereum ledger. So we see network effects writ large: the more Ethereum is used, the more useful it becomes.

And despite a more than 10x return for ETH investors in the past 12 months; from $357.33 per coin to $3,980 today, there appear to be few roadblocks to even greater price appreciation for the world’s second-largest cryptoasset.

Data from ltrasound.money shows that NFT market OpenSea is responsible for the largest proportion of ETH burn — around 15% of the total — but ETH transfers between wallets now burn a small portion of ether, too. Standard ETH transfers have burned over 18,000 ETH to date.

Today a total of 222,432 ETH worth $866m have been burned — removed from circulation permanently — since the London hard fork. This is spooling up at an exponential rate, and the burn rate now sits at around 4.71 ETH per minute.

It is difficult to understate the importance of the success of EIP-1559, or Ethereum Improvement Proposal.

The fee market alteration idea was first proposed by Ethereum de facto head Vitalik Buterin and a five-strong team of developers back in April 2019. There followed over two years of intense trials on Ethereum’s various testnet blockchains — effectively sandboxes for testing code changes in the wild — to ensure EIP-1559 would not have any unintended or unforeseen consequences.

The relative smoothness with which this has been introduced has lit a fire under Ethereum at a time when it is facing very strong challenges from smart contract platforms like Solana and Cardano.

On 6 September the aggregated open interest in Ethereum futures surged to a fresh all-time high, according to TheBlock data.

Vitalik’s theories to date have been sound: giving the market much greater confidence in the future direction of scheduled updates. The next major step in Ethereum’s switch away from proof of work to proof of stake is the planned merger between the Beacon chain and the Ethereum main chain. No date has been finalised, but best guesses put this happening in Q1 2022.

Currently around 5.4 million ETH are scheduled to be issued each year, giving ether an inflation rate or supply growth rate of around 2.4%. Tracking data aggregator Ultrasound.money statistics, we can see that in a post-merge simulator, supply should fall to negative 1.8% annually once the Beacon chain and ETH 2 chain merge. Issuance at that point — in theory — falls from 5.4 million ETH per year to just 0.4 million ETH per year.

ETH issuance post EIP-1559 vs Price

There’s an idiom much beloved by the startup chiefs of Silicon Valley: ‘building the plane while it is already flying’. That’s effectively what Ethereum has done here. And so successfully that instead of crashing to the ground, it has left the blockchain soaring into newly rareified air.

Twitter adds Bitcoin tipping: contrary to ‘digital gold’ tag

While gold is an important component in conductive electronics, no-one uses the precious metal as actual currency. So it is with some interest that we watch the world’s largest companies switch up Bitcoin’s ‘digital gold’ tag by trialling it as a means of exchange for tipjar service online. On 23 August the popular newsletter service Substack added the option to tip creators and writers in bitcoin, with payments using the Layer 2 Lightning Network.

Substack has around 500,000 paying subscribers and while it is relatively simple to add tipping services to an individual newsletter, with merchants like PayGo, these are third-party workarounds rather than internally-resourced and compliant functions.

A matter of weeks later, Twitter (NYSE:TWTR) joined the fray.

Eagle-eyed market watchers spotted a code update to the social media service’s TipJar system that would add the ability to pay fractions of a bitcoin to those users considered to have shared useful data or information.

Among the uses of TipJar are to be a competitor to fan-driven regular payment services like Patreon, and could provide one solution to the interminable problem of how to effectively monetise exclusive, expensive journalism.

Twitter’s chief executive told investors in July that Bitcoin would be a “big part” of Twitter’s future, and that BTC was best placed to become the currency of the internet.

If the internet has a native currency, a global currency, we are able to move so much faster with products such as Super Follows, Commerce, Subscription, Tip Jar, and we can reach every single person on the planet because of that, instead of going down a market-by-market approach. Jack Dorsey, CEO, Twitter

India has new plan to regulate cryptocurrencies

A new plan to regulate cryptocurrencies in India has market-watchers very excited, and for good reason.

The primary goal of the bill is to define cryptocurrency according to the technology used in it. It is expected to shed light on the tax treatment of these digital assets and how they are classified. It is proposed that in India, crypto tokens should be recognised as digital assets, rather than currency. Times of India editorial, 5 September 2021

Studies show around 15 million cryptocurrency owners and users in India, 10 times more than in the UK and not far behind the 23 million the US can boast.

Certainty has been in short supply. And each update has appeared a false dawn for one of the world’s largest cryptocurrency markets.

In March 2020 the Supreme Court struck down an RBI decision to restrict cryptocurrency trading, finding the move illegal.

It is a paradox that blockchain technology is acceptable to RBI, but cryptocurrency is not. RBI has not applied its mind to the fact that not every cryptocurrency is anonymous. The report of the European Parliament also classified [digital assets] into anonymous and pseudo-anonymous. Therefore, if the problem sought to be addressed is anonymity of transactions, the same could have been achieved by resorting to the least invasive option of prohibiting only anonymous [digital assets]. Supreme Court judgement, Writ Petition (Civil) no 528/2018

Nischal Shetty built India’s largest crypto trading venue — acquired by Binance just two years after launch — but businesses like WazirX have been effectively blacklisted by the Indian banking sector and have faced court time for allegedly violating forex laws.

Retail crypto has seen massive growth in the past 12 months: one of the largest exchanges, CoinSwitch Kuber, claims to have onboarded 8 million customers since June 2020 and raised a $25m Series B funding round in April 2021 for a valuation of $500m.

So news that India could overcome its crippling indecision to date? A distinct regulatory plan could supercharge the industry both domestically and internationally.

Markets

BTC/USD

Current sentiment analysis of Bitcoin markets puts traders in ‘extreme optimism’ mode. The world’s largest cryptoasset recaptured the much-vaunted $50,000 level on around 6 September and across the seven-day trading session swung a total of 13.4% to the positive, before sliding back 3.5% from a peak of $52,949.22 to end the week at $51,061.44.

BTC/USD graph
Data as of 7 Sept 2021 | Source: TradingView.com

ETH/USD

Ethereum is at a tipping point, price wise, hitting its head on the $4,000 price ceiling repeatedly this week. Across the seven-day trading session, ETH added just x% against the US dollar. A breach of the much-vaunted $4,000 level would leave the world’s second largest cryptoasset effectively in price discovery. In May 2021, ETH managed just six days above $4,000 before careening as low as $1,700, before starting the slow ascent back to near its all time highs. Bulls and long-term investors alike now hope that the market recognises ETH fundamentals as stronger than they ever have been, and that $4,000 becomes the price floor, rather than the ceiling.

ETH/USD graph
Data as of 7 Sept 2021 | Source: TradingView.com

LTC/USD

Litecoin went on a tear this trading week, starting at $165.31, blowing through long-term resistance at $200 and careening on to peak some 40.7% higher at $232.72. Bulls could not sustain that kind of price momentum, however, and LTC retraced by 13.2% against the US dollar to finish the trading week at $201.84 The market isn’t quite ready for a near-$240 Litecoin, yet. The technicals suggest that while there is likely much more volatility around the $200-mark, if LTC can sustain a few trading sessions above this round number, a fresh all time high could be within reach.

LTC/USD graph
Data as of 7 Sept 2021 | Source: TradingView.com

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