If the first quarter of 2020 was the quarter of market turmoil, the second quarter the halving of Bitcoin, and the third quarter the explosion of stable coins and decentralized financial applications, the fourth quarter was the quarter of the institutional FOMO for Bitcoin and Ethereum, which is the first phase started its ambitious migration to a proof. of-Stake (PoS) blockchain.
The latest CoinDesk Quarterly Review takes a look at the dates and timelines behind these two powerful narratives and their implications for asset prices.
While the 2017 bitcoin rally was largely driven by the retail hype, the 2020 rally was mostly institutional driven. The accelerating rhythm of large institutional investors publicly speaking about Bitcoin as a portfolio asset and investing in Bitcoin has not only confirmed Bitcoin’s role in portfolios, but has also drawn the attention of other investors. This self-reinforcing loop is likely to continue through 2021, especially given the mounting uncertainty surrounding currencies and inflation.
Bitcoin’s strong rally in the last days of December crowned an already strong year, posting an annual performance of 300%, well ahead of most macro-assets, although behind the spectacular 470% of ETH.
One metric that indicates growing institutional engagement is the number of addresses that have high credit. The number of addresses above 1000 BTC known as “whales” is over 30% higher than in late 2017, the climax of the last crypto bull run, indicating the growing presence of deeper pockets in the market.
Another indicator that institutional exposure to Bitcoin markets is increasing is the volumes on the Chicago Mercantile Exchange (CME), an institutional futures exchange that offers Bitcoin futures and options. The CME’s open interest in US dollar bitcoin futures surged nearly 300% in the quarter and became 30th in the industry (as of Dec 30th) after starting the quarter in fifth place.
The Ethereum ecosystem saw strong strides in the growth of market infrastructure in the fourth quarter, and the long-awaited launch of Ethereum 2.0 on December 1 was a major step in migrating the ecosystem to a proof-of-stake blockchain.
Now that the start has been successfully out of the way, the developers of Ethereum 2.0 are concentrating on the task of integrating tens of thousands more validators into the network. The goal is to have a minimum of 262,144 validators securing Eth 2.0 before the next development phase, phase 1, is reached. By Wednesday, January 6th, 20% of this number will be on board.
Historically, the peaks in the number of active accounts on Ethereum coincided with the market peaks, but the recent price spike, which brought ETH above $ 1,100 for the first time since January 2018, was not reflected in an increase in the number of active accounts. The number of active accounts is on the up but is still around 33% below the high of 714,225 reached in 2018 when the ETH price approached $ 1,400. This suggests that ETH’s recent bull run might be fueled more by market speculation and less by an increase in real-world user activity and acceptance.
Not all Ethereum transactions involve transfers from ETH. This may include the transfer of ERC-20 and ERC-721 tokens, which are crypto assets created for unique uses and use cases in addition to Ethereum. In addition, not all Ethereum transactions are initiated by users. Some are automatically initiated through a smart contract. This code determines the functionality of all decentralized applications (dapps). This year, the total amount of ETH transferred through smart contracts, unlike users, has doubled from the previous all-time high of 2016. This is a bullish indicator of Ethereum’s growing use case as a Dapp platform rather than a network for transfers of value.