OCTCoinDesk MonthlyReviewOctober 2020

A far cry fromsuddenly

The phrase “gradually then suddenly” has been overused

in our industry to emphasize the importance of each step

towards regulatory support, institutional interest, insert-

your-preferred-goal-here. We had several such moments

this month: the confirmation from PayPal that it will

support cryptocurrency buying, selling and holding on its

platform; more interest in holding bitcoin as part of

corporate treasuries; JP Morgan issuing a report favorable

to a cryptocurrency its chairman mocked just three years

ago; several significant fund managers breaching AUM

milestones; improving clarity on the definitions of crypto

assets and regulated services; and much more.

But it’s not yet a case of “suddenly,” as we are still in the

“gradual” phase. Each month brings progress that seems

momentous at the time. But in the grand scheme of market

evolution, we are still at the beginning. We have left the

starting block, for sure. But we are not even a quarter of

the way around the track.

Momentum is gathering, though. The spread of interest

from professional investors is buoyed by growing inflation

concerns that are likely to intensify as the pandemic rages

on, money printing becomes part of the new normal and

fiscal measures move in to keep economies afloat. Political

tension in many parts of the world naturally builds a use

case for seizure-resistant assets. And the increasingly

obvious business opportunity behind the widening interest

from investors of all types is attracting the attention of

boardrooms and entrepreneurs around the world.

In this report, we’ll take a brief look at the progress bitcoin

(BTC) and ether (ETH), the two largest cryptocurrencies by

market cap, have made in October, as well as some of the

stories their on-chain metrics are telling.

As you will see, we are far from the “suddenly.” And

cryptocurrencies are still a risky investment – prices can

go down as well as up. But the industry is moving forward

in both market infrastructure and technology

development.

Monthly Review: October 2020

Asset Performance

Bitcoin outperformed most macro

assets as well as all the assets in

the CoinDesk 20 in October, with

the best monthly performance

since April, when BTC was

recovering from the March crash.

(We use Bitcoin to refer to the network, bitcoin or

BTC to refer to the asset.)

Returns

Monthly Review: October 2020

Bitcoin had a strong month in terms of returns as its price rose above $13,000, and even briefly broke above $14,000 for the first time since December 2017. Compared to the modest losses of gold, stocks and bonds, which were down 0.3%, 2.8% and 3.5% respectively, BTC outperformed macro assets this month by a wide margin.

Performance of Bitcoin & Macro Assets, October 2020

Bonds = iShares 20+ Year Treasury Bond ETF; Gold = London Bullion Market pm fixing price;Source: CoinDesk Research, St. Louis Fed, Yahoo Finance

Oct3 Oct8 Oct13 Oct18 Oct23 Oct28

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

22.00%

24.00%

26.00%

28.00%

BTC

Gold

Bonds

S&P500

Returns, crypto assets

Monthly Review: October 2020

BTC was the top performing crypto asset in the CoinDesk 20 for the month of October. LTC and BCH, the 2nd and 3rd top-performing assets on the list appreciated by 21.7% and 16% respectively. Several industry developments contributed to the positive investor sentiment in these crypto assets including the confirmation from payments giant PayPal that it will support the buying, selling and holding of all three on its platform, as well as the improving clarity on the definitions of crypto assets and services by U.S. regulators.

CoinDesk 20 Asset Returns (Excluding Stablecoins) in October 2020

Source: CoinDesk Research

Volatility, macro assetsThe sharp volatility spike in BTC seen over the summer corrected in October, at one stage exhibiting levels very close to those of Nasdaq. Curiously, the volatility of gold held steady over the month, while that of BTC had some notable changes, acting more like stocks. This does not mean that BTC is a risk-on asset like the S&P 500 – it does highlight that bitcoin is still a younger market with evolving narratives.

Monthly Review: October 2020Source: Coin Metrics, FactSet; S&P = S&P 500 Index; Nasdaq = Nasdaq Composite; GLD = SPDR Gold Trust

Bitcoin and Macro Assets: 30d Annualized Volatility of Daily Log Returns

Volatility, BTC vs. ETHWhile BTC’s volatility was largely flat throughout October, ETH’s volatility declined. This is likely an adjustment from the jump in September, when ETH 30d volatility increased by a significantly greater amount than that of BTC, as seen by the spike and then the fall in the ETH/BTC volatility ratio (blue line). This underscores that the ETH market is still more immature than that of BTC, and could imply that the pending change in ETH’s technology underpinnings is adding a level of uncertainty into an evolving market.

Monthly Review: October 2020Source: Coin Metrics

BTC vs. ETH 30d Volatility

Correlations

Monthly Review: October 2020

The correlation between BTC and gold held steady for most of the month while correlations with stocks climbed, highlighting BTC’s dual narrative of “store of value” and “risk asset.” These trends were disrupted in the latter part of the month as BTC broke its pattern of tumbling as other asset groups tumble. In the last two weeks alone, BTC provided a return of over 20% while the S&P and Nasdaq fell 3% and 6% respectively.

Bitcoin & Macro Assets 60d Correlations of Daily Log Returns

Source: Coin Metrics, FactSet; SPX = S&P 500 Index; Nasdaq = Nasdaq Composite; GLD =

SPDR Gold Trust.

VolumeMonthly dollar volume on “transparent” spot exchanges has been on the decline since August 2020, when it reached a two-year peak of $275 billion. This despite rising prices, which technical analysts say signals a “false breakout.” Price indicators aside, the lower volumes could be a result of the stable and lower-than-usual levels of volatility that we saw in a previous chart. The chart below features data from cryptocurrency exchanges with a high granularity of trade data and full trade history, according to Nomics’ exchange transparency rating criteria (read more).

Verifiable Monthly Dollar Volume on Crypto Spot Exchanges

Monthly Review: October 2020Source: Nomics ‘transparent’ volume

Jan-19

Feb-19

Mar-19

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$0B

$50B

$100B

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$250B

TransparentVolume

Bitcoin Gets Congested

While BTC price climbed, the

Bitcoin network struggled with

soaring fees and growing

congestion as hashrate – a

measure of miners’ collective

computing power – fell sharply.

BTC addressesThe increase in the number of addresses with > $1 worth of BTC (red line) accelerated, indicating a spurt of interest in the cryptocurrency. Meanwhile, the number of active addresses (blue line), which represents addresses that were either a sender or a receiver of bitcoin on a given day, slumped towards the end of the month, which hints at less trading churn and more investment activity. These two trends taken together point to a broadening pool of investors, who are more interested in holding than trading.

Number of Active and Non-Zero Addresses on Bitcoin

Monthly Review: October 2020Source: Coin Metrics

Network congestion

Monthly Review: October 2020

Looking at the average block weight (dark blue line), we can see that Bitcoin blocks have been at near full capacity for the longest stretch since May. This can also be seen in the spike in average time between blocks (green line). Network congestion is a common feature of price rallies, and usually results in an increase in transaction fees. This more recent congestion, however, has produced a much higher fee spike than in May, even when the USD price increase is taken out of the equation, hinting at greater demand for transaction processing.

Signs of Network Strain

Source: Coin Metrics

Bitcoin mining

Monthly Review: October 2020

Bitcoin’s hashrate fell sharply in the second half of the month. This could largely be due to miners in China switching off machines as the end of the rainy season started to push up electricity costs to levels not compensated by the higher revenue.

Source: Coin Metrics

Bitcoin Hashrate and Transaction Count

If the BTC price continues to climb, we could see the hashrate drop stabilize. If hashrate continues to drop, blocks, and therefore transactions, will be processed slower on the Bitcoin network and exasperate its congestion problems. Further, Bitcoin’s mining difficulty adjustment cycle kick in soon after the end of the month with the largest drop in nine years, which will make it easier for miners to process blocks with reduced computing power.

Jan1 Feb1 Mar1 Apr1 May1 Jun1 Jul1 Aug1 Sep1 Oct1 Nov1

50M

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Hashrate,7-dayM

ovingAverage(TH/s)

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TransactionCount,7-dayM

ovingAverage

Hashrate

TransactionCount

Ethereum Calms Down

The rapid growth in transactions

on the Ethereum blockchain

which led to congestion issues in

September has cooled off.

ETH transaction fees

Monthly Review: October 2020

Average transaction fees on Ethereum fell over 80% in October, retracing September’s sharp increase. The percentage of miner revenue from fees also declined sharply from a high of 75% in September to 30% by the end of October. Both metrics suggest lower user and dapp activity on Ethereum as the hype around decentralized finance (DeFi) applications starts to normalize. This is a positive sign for the network, which in recent months has been pushed to its limits by the splashy debuts of new DeFi assets such as COMP, SUSHI and others.

Daily Average Transaction Fees and Daily Miner Revenue From Fees on Ethereum

Source: Coin Metrics

Jan1 Feb1 Mar1 Apr1 May1 Jun1 Jul1 Aug1 Sep1 Oct1

0.000

0.002

0.004

0.006

0.008

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AverageD

ailyTransactionFee(ETH)

0

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DailyM

inerRevenueFromFees(%)

MinerRevenueFromFees

TransactionFee

DeFi impactThe amount of ETH locked in decentralized finance (DeFi) applications has almost tripled over the last 10 months as ETH value in U.S. dollar terms has also soared. This suggests that DeFi apps are growing in user adoption and potentially reaching a wider market of users beyond strictly long-term holders of ETH. The price of ETH, the gateway asset to most DeFi apps, looks to be buoyed by the growing value of finance-focussed tokens and services on the network. (More information about the relationship between ETH price and DeFi apps here.)

Monthly Review: October 2020Source: DeFi Pulse, Coin Metrics

Total ETH Locked in DeFi and ETH Price

Jan1 Feb1 Mar1 Apr1 May1 Jun1 Jul1 Aug1 Sep1 Oct1 Nov1

0M

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TotalETHLocked

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ETHPrice(USD)

ETHPrice

TotalValueLocked

Aug13 Aug23 Sep2 Sep12 Sep22 Oct2 Oct12 Oct22 Nov1

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DailyTradeVolume(USD)

CoinbasePro

Uniswap

Are DEXs here to stay? Trade volume on decentralized exchange (DEX) Uniswap has been surpassing that of centralized exchange Coinbase Pro, one of the top 10 largest exchanges in the crypto market by volume, on-and-off since September. While trade volume on DEXs overall has dropped 25% in October, Uniswap still managed to exceed Coinbase Pro in volume at various points throughout the month. This suggests that despite the reduced trade activity overall on DEXs, the most popular decentralized trading platform Uniswap is still out-performing some of the industry’s largest centralized platforms like Coinbase Pro by daily dollar volume. Other centralized exchanges such as Binance are beginning to experiment with DEX technology. Binance CEO Changpeng Zhao said in an interview with CoinDesk that he expects DeFi apps to one day overtake centralized platforms like his own.

Monthly Review: October 2020Source: Nomics

Daily Volume (USD) of Coinbase Pro and Uniswap

Ethereum 2.0 Launch Looms

Monthly Review: October 2020

32 ETH (worth $12,452 at time of writing) is the minimum account balance needed to participate and earn rewards in the upcoming Ethereum 2.0 network. The percentage of accounts with a minimum of 32 ETH has been steadily declining over the last 10 months, dropping from 0.32% of all non-zero accounts to around 0.26%. Accounts with a minimum of 0.001 ETH are the growing majority. These trends suggest that institutional interest and interest among investors for Eth 2.0 is not growing as quickly as that of retail interest in Ethereum.

Percentage of Ethereum Accounts with a Minimum Balance of 0.001 ETH and 32 ETH, Year-to-Date

Source: Coin Metrics*Accounts with zero balance of ETH excluded from calculations.. Data as of October 28, 2020.

(Join us for a free webinar on Nov. 11 discussing the fundamentals of Ethereum’s account-based transaction model.)

Jan1 Feb1 Mar1 Apr1 May1 Jun1 Jul1 Aug1 Sep1 Oct1 Nov1

40%

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68%

%ofAccountsW

ithaM

in.Balanceof0.001ETH

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0.12%

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0.16%

0.18%

0.20%

0.22%

0.24%

0.26%

0.28%

0.30%

0.32%

%ofAccountsW

ithaM

in.Balanceof32ETH

%ofAccountsWith>0.001ETH

%ofAccountsWith>32ETH

Monthly Review: Month 2020

Thank you for reading!CoinDesk Research is an investor-focused team of analysts, engineers and writers. Our aim is to build productsand create content for all types of crypto asset investors.

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