Every week, IntoTheBlock brings you on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry.
This week, we analyze Ethereum’s remarkable performance and its current state between long-term growth drivers and short-term forces weighing down.
Ethereum’s Catalysts & Contrasting Forces
After underperforming Bitcoin in Q4, Ether’s price has managed to grow by over 45% in the first week of January, compared to Bitcoin’s 16% increase. Having officially launched phase zero of ETH 2.0 in December, Ethereum has seen a wave of positive events unfold. While these are driving a confluence of improvements for Ethereum’s long-term potential, short-term metrics point to the recent rally being over-extended.
On the institutional front, the CME announced in mid-December the launch of Ether futures set for February 2021. This would make it the only the second crypto-asset to be traded in regulated American futures exchanges, roughly four years after the first Bitcoin futures in CME. Along with this and Ether’s price growth, institutional activity in Ethereum has increased tremendously.
IntoTheBlock’s Large Transactions Volume aggregates the volume transferred in transactions of over $100k, acting as a proxy to institutional activity. This metric surpassed $10 billion in daily volume for the first time since January 2018.
Spikes in large transactions volume tends to coincide with periods of high volatility such as the one Ether is currently experiencing, potentially due to profit-taking. Even though the recent increase in large transactions volume may be attributed to Ether’s recent price performance, the CME Ether futures are expected to continue to drive institutional adoption for Ethereum.
More recently, the Office of the Comptroller of the Currency (OCC) announced that banks can facilitate and issue their own stablecoins. Contrary to many of the points proposed in the Stable Act, this encourages the usage of public blockchains where stablecoins are settled, such as Ethereum. Furthermore, through the Ethereum Improvement Proposal (EIP) 1559, Ether would be burned as a result from increased usage in stablecoins, effectively reducing its supply as transaction volume grows.
These improvements are expected to act as catalysts for Ethereum’s long-term growth. In light of Ether’s recent outstanding price performance, though, derivatives and on-chain metrics have been flashing warning signs.
Perpetual swaps — a type of derivatives contract that does not expire — use a mechanism known as the funding rate to artificially peg contract prices to those seen in spot markets. Whenever perpetual swaps’ prices are above spot prices, long holders of the contract pay the funding rate to short holders, typically every eight hours.
With the recent run-up in Ether prices, funding rates hit an all-time high for exchanges such as Binance and FTX. This points to a significant premium between derivatives and spot markets, highlighting the disproportionate allocation towards Ether long positions.
On-chain, we also observe potential signs of profit-taking. Particularly, inflows into centralized exchanges can often indicate holders looking to sell their positions. The reasoning behind this is that holders may have their assets in cold storage or in non-custodial wallets, where they are either unable to sell or would incur higher fees if they decide to do so there versus in centralized exchanges.
Exchanges’ netflows monitor the total amount of deposits into exchanges minus withdrawals. When netflows are positive, more money is entering than leaving exchanges. Aggregate netflows for Ether reached their highest level since February 2018.
While certainly not all deposits into centralized exchanges are due to holders looking to sell, the sudden spike coinciding with Ether’s 40% appreciation within a week does suggest at least some level of profit-taking.
Overall, Ethereum is currently in a very interesting position: on the cusp of catalysts accelerating its long-term growth, but at the mercy of short-term market forces. While Ethereum’s increasing institutional adoption and approval for stablecoin usage point to positive developments, over-extended funding rates and high netflows urge caution.