Etherbridge Updates Q3

Weekly market recap 

Overview of core fundamental data. Sources: Glassnodes and Coinmetrics

*for a description of each metric above click here.

Weekly changes

Digital assets finished the week strong on the back of more public companies adding bitcoin to their balance sheet, a weaker dollar and rumours of a revived stimulus package for the US.

Digital asset market Q3 review

Price-performance July to September

On-chain Metrics

Understanding the health of the bitcoin and ethereum network requires us to explore a variety of on-chain information. On-chain data allows us to answer important questions. Is the network growing and being adopted? How is the network performing as a payment mechanism? Is the network becoming more secure and less susceptible to attack? 

Active Addresses:

Source: Glassnodes

This is the number of unique addresses that were active in the network either as a sender or receiver. Only addresses that were active in successful transactions are counted.

The third quarter saw active addresses increase 7,1% on Bitcoin and decrease by -9,56% on Ethereum. Active addresses are a direct measure of utility. It goes without saying that as the network becomes more usable, we should see a rise in its users. 

New Addresses:

Source: Glassnodes

New addresses are the number of unique addresses that appeared for the first time in a transaction using the native coin of the network. It is a reflection of new addresses on a daily basis.

This goes even further than active addresses. For assets like bitcoin, the users aren't necessarily active on a daily basis, for many, bitcoin serves as a store of value outside of the control of any single entity, rather than purely a medium of exchange. 

New daily Bitcoin addresses grew by 6,25% whilst Ethereum experienced a sharp drop of -19,93%. 

Transaction Volume:

Source: Glassnodes

Above is the $ value of transactions executed on both networks. It’s important to remember that all of these transactions were processed without the need of a third-party. These transactions all reached final settlement in less than an hour and represent both local and international transfers.

Transaction volumes rose on both networks by 195% on Bitcoin and 95% on Ethereum.

Transaction Count:

Source: Glassnodes

The above chart represents the total number of transactions executed, processed and settled daily. It's important to distinguish between networks that are good for low-value transactions vs high-value transactions. 

Remember, public blockchains core value proposition is the high degree of assurances they provide in the accounting of value flows. However, not all transactions are made equal, some require greater degrees of assurances than others. 

Networks will naturally gravitate to either low value and high volume or high value and low volume transactions. Is there a specific quadrant that a network should strive for? It all depends on the use case the network wants to support.

In the third quarter, we saw almost no change to daily transaction count, an increase of 0,58% on Bitcoin and a decrease of -1,15% on Ethereum.

Network Security

Miner Revenues

Source: Glassnodes

Miner revenue is the sum of protocol subsidy (newly minted coins) and transaction fees collected by miners. In Proof of Work networks like Bitcoin and Ethereum, miners are paid to provide proof that resources were spent and work was done in order to have the privilege of adding another block to the chain of blocks.

Miner Revenue = Protocol subsidy + Transaction fees

These rewards compound and increase the costliness of attempting to reorganise previous transactions. Miner revenue aims to operate at equilibrium where the marginal cost of production is equal to the market value of a coin. Therefore, representing the total cost that a potential attacker would have to pay in order to prove that work had been done.

The deeper a transaction gets in the chain, the more expensive it would be to perform the required work and reorganise that particular transaction.

Miner revenues rose 19,24% on bitcoins network and 102,67% on the Ethereum network in the third quarter of 2020. Ethereum’s miner revenue growth can be attributed to large growth of yield farming activities.

Etherbridge Crypto Market Cycle Indicator

Source: Chris Burniske of Placeholder

The Bitcoin network has multiple stakeholders (miners, businesses, developers, investors and users). Miners, investors and users are the core drivers of changes in price direction at the moment.

At Etherbridge we believe that history may not necessarily repeat itself, but it certainly does often rhyme. We have witnessed common patterns of behaviour across our core stakeholders at key turning points in bitcoins price. 

We present to you, our market cycle indicator. 

Our indicator oscillates on a scale between 3–15. 15 representing the most favourable conditions and 3 the least favourable.

Based on the limited history we have (11 years of data), we have established that it is most favourable to deploy capital into bitcoin and the broader digital asset market when:

Ø Investor sentiment is low. Can be seen in net unrealised profits and losses of each and every bitcoin holder.

Ø Confidence is high at low prices. This can be seen by examining the behaviour of coin holders greater than 1 year and “whales” (accounts greater than 1k bitcoin). The relationship between whether they are accumulating or distributing with rising or falling prices gives us an idea of how confident they are at any given moment in time.

Ø A change to general mining profitability. Shifts from unprofitable mining to profitable have a cyclical effect on bitcoin prices and support upside moves. We wrote about this in a previous article that you can find here.

Ø The number of users, active and new, are increasing. 

Currently, we have a market cycle rating of 12. Conditions are still favourable for accumulation of digital assets for long term investments. We will be sharing our market cycle indicator on our website and our quarterly reviews going forward. 

Notable articles and news stories this week:

MetaMask exceeds 1 Million Monthly Active Users

MetaMask, a well-known Ethereum wallet, recently broke past the million users mark. As we discussed in Ethereum, a new financial network, MetaMask is one of the tools that we can use to directly interact with this new financial network of the internet. 

MetaMask enables users to purchase ETH, store it safely, browse DeFi protocols and exchanges, and connect their wallets directly to these sites to trade easily and securely.

You can download MetaMask here.

Read more here.

Are Central Bank Coins the End of Financial Privacy?

Every central bank in the world right now is looking at creating their own central bank digital currency (CBDC). Would you believe they will be built on blockchain and distributed ledger technologies? 

This move away from paper money would be a huge step for central banks. It would remove our public payment mechanism of the bearer instrument that is cash. What does this mean for our privacy as citizens?

Nathaniel Whittemore unpacks this in his podcast.

Read more here.

Square Puts 1% of Total Assets in Bitcoin in Surprise $50M Investment

Yet another listed public company allocates balance sheet capital to bitcoin. Every day, CFO’s globally are becoming more aware of the risks of monetary manipulation and debasement. As we continue to struggle with the effects of government lockdowns, the probability of monetary debasement and eventual failure continue to increase.

Square bought $50 million worth of bitcoin, which comes to 4 709 bitcoins. There will only ever be 21 million.

Read more here.

Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge we aim to lower the barriers of understanding this fast-growing digital economy.

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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.