3CoinDesk Quarterly ReviewThird Quarter 2020

Setting thetone

The third quarter of 2020 felt in many ways like a

watershed in crypto asset markets, as the maturity of

existing markets deepened and innovation in some of

the newer areas practically exploded.

The growth in stablecoin market cap and transaction volumes, combined with supportive statements from

both U.S. and European regulators, reveal what is

likely to be a lasting shift towards developing new use

cases for fiat-based tokens, which should continue to

attract more liquidity into the ecosystem.

An expansion in crypto derivatives is also fundamental for market health, as these instruments boost market

liquidity by offering investors a broader opportunity

set. Both bitcoin (BTC) and ether (ETH) futures set

new all-time highs in both trading volumes and open

interest (O.I.), and there are signs that ether’s

derivatives market is starting to catch up in terms of depth.

The spurt of liquidity in decentralized finance (DeFi)

took many by surprise, as the innovative ways to

capture yield in a yield-starved investment landscape

attracted substantial inflows to smart contract

platforms. The novelty of the financial functionsoffered by some of these platforms is reflected in the

wacky food-based names of the tokens as well as

their astonishing returns – and in the risk, as some

platforms folded just days after launching.

In terms of performance, bitcoin had an erratic

quarter, underperforming most traditional macro assets for most of the period. A strong rally of over

20% in the latter part of July, however, allowed it to

maintain its typical quarterly outperformance over

stocks and gold. Spot exchange volumes fell towards

the end of the quarter, indicating that some investors

are choosing to sit on the sidelines while they wait for the confusing correlations and erratic volatility to

evolve into a clearer narrative.

Quarterly Review: Q3 2020

Note: We use Bitcoin with uppercasewhen referring to the network, and lowercase (or BTC) when referring tothe coin.

Return, volume, volatility and correlations

In spite of a relatively lackluster

performance for most of the

quarter, BTC still ended up with

strong outperformance compared

to most macro assets, largely due

to a sharp rally in July. BTC’s

correlation with both gold and

stocks remained higher than the

historical average for the quarter.

Returns

Quarterly Review: Q3 2020

Bitcoin had a weak start to the quarter, lagging behind the surge in stocks and bonds. The sharp rally in the final week of July, however, allowed it to regain and hold on to its typical outperformance, in spite of a lackluster August and a September in which it fell more than stocks and gold.

Performance of BTC and Macro Assets, Q3 2020

VolatilityAfter a somewhat turbulent year, bitcoin’s volatility seems to have settled back to its pre-March levels, with some erratic behavior that hints at persistent uncertainty. BTC’s volatility remains notably higher than most macro assets, a situation that is unlikely to change any time soon. Gold’s volatility briefly rose above that of the S&P 500 during the quarter, but slipped back below toward the end of September as the gold price corrected.

30d Annualized Volatilities: BTC, S&P 500, Nasdaq and Gold

Quarterly Review: Q3 2020Source: CoinDesk API, FactSet; Bitcoin price at 4pm Eastern; Stocks = S&P 500 Index; Nasdaq = NDAQ-US; Gold = SPDR Gold Trust.

Correlations

Quarterly Review: Q3 2020

As usual, the narrative told by the correlations between bitcoin and other macro assets such as stocks and gold swing between “safe haven” and “risk off.” The BTC-gold 60d correlation rose throughout the quarter, from about 0.3 to about 0.5, while BTC-S&P 500 correlation remained steady until the collective market jitters in September kicked it up a notch.

BTC: 60d Correlations With Gold, S&P 500, Nasdaq and Bonds

Source: CoinDesk API, FactSet; Bitcoin price at 4pm Eastern; Stocks = S&P 500 Index; Nasdaq = NDAQ-US; Gold = SPDR Gold Trust.

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DollarVolume(USD,Billions)

VolumeQ3 daily dollar volumes on “transparent” spot exchanges were 45% higher than in Q2, with August figures surpassing the previous highs from June 2019. This reflects increasing interest from traders and investors, perhaps as a reaction to late July’s price spike, as well as to deepening concerns about inflation. Volumes declined towards the end of the quarter, however, as the BTC price corrected from highs above $11,000 to $10,000. This chart 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

Quarterly Review: Q3 2020

Source: Nomics ‘transparent’ volume.

Returns, crypto assets

Quarterly Review: Q3 2020

The top two best performers on the CoinDesk 20 list of crypto assets in Q3 2020 were Chainlink (LINK) and Orchid (OXT), which rose 116% and 86% respectively. Both assets are issued exclusively on the Ethereum blockchain and give users access to specific decentralized applications on the network. Bitcoin rose 17% over the quarter and outperformed eight other crypto assets.

Quarterly Performance of Assets in the CoinDesk 20 (Excluding Stablecoins)

Source: Coin Metrics, Nomics

Asset

LINK

OXT

XMR

TRX

ETH

XRP

ZEC

ZRX

BTC

LTC

XLM

EOS

BSV

BCH

DASH

ETC

XTZ

115.78%

86.38%

59.48%

24.06%

59.52%

70.63%

37.85%

-6.85%

22.14%

12.24%

-4.14%

11.64%

17.81%

8.89%

8.95%

2.38%

1.13%

Calculation1

False

True

The CoinDesk 20 is a quarterly adjusted list of assets with the highest verifiable volume over two consecutive quarters (see our methodology here).

Stablecoinengines are revving

While growth in programmatic

stablecoins such as DAI has

exploded due to the surge in

interest in decentralized finance

(DeFi) applications, the market is

still dominated by fiat-backed

stablecoins, which account for

over 96% of the stablecoin

market cap.

Stablecoinsupply

Quarterly Review: Q3 2020

The total supply of fiat-backed stablecoinshas increased by almost 240% since the beginning of the year, with most of that growth coming in the third quarter.

Fiat-Backed Stablecoin Supply (Units)

Source: Coin Metrics*USDT’s supply includes tether on Omni, Ethereum and Tron.

USDT market capitalization

Quarterly Review: Q3 2020

Supply of market leader tether (USDT) has ballooned to $15.8 billion from $10.3 billion at the beginning of the quarter, a 54% increase. While impressive, thatgrowth is dwarfed by the increase in supply of USDC, the second-largeststablecoin in terms of market cap, whichgrew by over 150% from the start of thequarter, to reach $2.5 billion.Strong growth in stablecoins other thanUSDT have, for the first time, pushed theleader’s market share below 80%.

Fiat-Backed Stablecoin Supply Growth Q3

Source: Coin Metrics

*USDT’s supply includes tether on Omni, Ethereum and Tron.

Transactions and transaction sizeWhile transaction counts trended up over the quarter for all the major fiat-backed stablecoins, a look at the average on-chain transaction size of the two largest stablecoins, USDT and USDC, can point to the evolving use case preferences for each. The increase in the average size of USDC on-chain transactions hints at growing use as a settlement token by large investors. USDT’s average transaction size has remained steady in the face of a growing number of transactions, which could indicate a strong growth in the number of users.

Quarterly Review: Q3 2020

Percentage Growth in Number of Transactions and Average On-Chain Transaction Size

Source: Coin Metrics*USDT’s supply includes tether on Omni, Ethereum and Tron.

Price volatility

Quarterly Review: Q3 2020

One common misconception about dollar-backed stablecoins is that they are always priced at $1.00. This is not so: stablecoins are minted at $1.00, but usually trade at a price above or below that level. Of the two largest stablecoinsin terms of market cap, USDT varies more widely in price than does USDC. This implies fewer opportunities for arbitrage (minting and then selling in the market), which makes USDC’s recent growth even more remarkable.

Standard Deviation of USDT and USDC Price

Source: Coin Metrics

*USDT’s supply includes tether on Omni, Ethereum and Tron.

DeFi pushes Ethereum to its limits

Transaction activity on Ethereum

reached new highs in Q3 2020 as

a result of the ongoing DeFi

craze. In response, Ethereum

miners are stretching the network

to its limits by increasing block

capacity.

Network fees soarUsers of the Ethereum network are having to pay more for their on-chain transactions than ever before. In Q3 2020, transaction fees increased 150% on average from less than 0.003 ETH, which at time of writing is worth around $1.05, to above 0.008 ETH, which at time of writing is worth around $2.80. Fees reached their all-time high on Ethereum in early September shortly after the launch of decentralized finance protocol, SushiSwap, which gained over $1 billion in value over the course of three days.

Quarterly Review: Q3 2020

Average Transaction Fee on Ethereum

Source: Coin Metrics

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0.030

DailyAverageTransactionFee(ETH)

All-TimeHigh

Reachedon

9/2/2020.

Average

TransactionFee:

0.03214ETH

Exchange activity

Quarterly Review: Q3 2020

In mid-June, the number of on-chain transaction moving funds to and from exchange-labelled addresses on Ethereum surpassed that of Bitcoin. In Q3 2020, that differential between exchange transaction count on Ethereum and Bitcoin grew even wider. ETH transactions involving exchange-labelled addresses at the end of Q3 were roughly 25% higher than BTC transactions involving known exchange accounts. This suggests a rising level of liquidity for ETH as the gateway crypto asset for engaging with DeFi applications and tokens.

Number of ETH Vs. BTC Transactions Involving Exchange-Labelled Addresses

Source: Coin Metrics

12/31/2019

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TransactionCount,30-DayMovingAverage

ETH

BTC

DeFi market capitalization

Quarterly Review: Q3 2020

Ethereum’s market capitalizationincreased 60% in Q3 2020, growing from$25 billion to $40.5 billion by the end of September. The market capitalization of the top 10 DeFi coins by total value lockedsaw an even greater increase over thequarter, growing over 345% from $1.2 billion to $5.3 billion. Aggregated as one, the market capitalization of DeFi nowsmakes up roughly 12% of total marketvalue on the blockchain.

Market Capitalization of ETH and Top 10 DeFi Coins By Total Value Locked, Q3 2020

Source: CoinGecko, DeFi Pulse

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Gas limit increasesOn Ethereum, the total amount of transaction fees that can be collected in a block is capped by what is called the “gas limit.” This is to ensure that block sizes never get too large on the network and thereby delay miner communications. However, during times of network congestion, miners have voted to increase the gas limit to allow for more transactions in a block. This has happened five times since Ethereum’s creation in 2015 as a result of various trends such as the ICO boom of 2017. The most recent increase, which boosted network transaction speeds from around 35 transactions per second (TPS) to 44 TPS, happened this past quarter as a result of DeFi’s sustained popularity on Ethereum.

Quarterly Review: Q3 2020Source: Etherscan

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GasLimit,Millions

FirstGasLimit

Increase:3/5/2016

SecondGasLimit

Increase:

6/30/2017

ThirdGasLimit

Increase:

12/12/2017

FourthGasLimit

Increase:

9/23/2019

FifthGasLimit

Increase:

7/25/2020

Ethereum Gas Limit, All-Time

Crypto derivatives reach new highs

The third quarter of 2020 marked

a watershed moment for futures

and options markets ex-bitcoin,

with ether derivatives reaching

new highs and settling at a new

normal for both size and activity.

ETH futures

Quarterly Review: Q3 2020

Aggregated open interest (O.I.) in ether futures set a dramatic new record, reaching $1.7 billion on Aug. 15. In September, O.I. has fallen back to an elevated new normal. This time, there was no panic like the March 12 crash to shrink the size of these markets back down to 2019 levels. In addition to their significant size, the ether futures markets have more than doubled in their level of activity.

ETH Futures – Aggregated Open Interest

Source: Skew

Ether Futures Aggregate Daily Dollar Volume (USD Billion)

Ether Futures Aggregated Open Interest vs. Time (USD Billion)

Source: skew

BTC futures

Quarterly Review: Q3 2020

Bitcoin futures also set new all-time highs in both volume and open interest, but unlike ether futures, these did not usher in a new normal. Market size remained elevated throughout the month, before falling back to where it was at the first half of the year. Volume showed a modest increase over the $175 billion traded on March 9, as traders got into position for a macro decline. Volumes have also fallen back to about where they were in the first half of 2020.

Source: Skew

Bitcoin Futures Aggregated Daily Dollar Volume (USD Billion)

Source: skew

Bitcoin Futures Aggregated Open Interest vs. Time (USD Billion)

ETH options volume

Quarterly Review: Q3 2020

It took time for bitcoin options to reach a scale where they could be used as signals. Ether options may not be there, yet, but they grew by a multiple of four, crossed $500 million for the first time and stayed in the neighborhood, even as ETH spot prices retreated. Activity on ether options markets, as measured by volume, lags the size of those markets in proportional growth, indicating traders setting up positions and not yet trading as actively as they might be in bitcoin options.

Ether Options Aggregated Daily Dollar Volume (USD Million)

Source: skew

Ether Options Aggregated Open Interest vs. Time (USD Million)

BTC options

Quarterly Review: Q3 2020

Bitcoin options hit a new milestone in the third quarter, crossing $2 billion in open interest for the first time – and $2 billion days have since become a regular occurrence, in what is possibly the strongest signal of growing maturity in bitcoin markets. New money in bitcoin options has proven more active than the equivalent increases in ether options, with BTC options volume hitting a high more than double its previous all-time high.

Bitcoin Options Aggregated Daily Dollar Volume (USD Million)

Source: skew

Bitcoin Options Aggregated Open Interest vs. Time (USD Million)

CME bitcoin futures

Quarterly Review: Q3 2020

The CME provides the largest U.S.-regulated crypto derivative in its bitcoin futures product. The size of the market for that product hit an all-time high in August, nearly reaching $1 billion in open interest. Activity fell far short of highs set in the 2019 Q2 run-up, when furious trading pushed volume briefly up to $1.7 billion.

CME Bitcoin Futures Daily Dollar Volume (USD Million)

Source: skew

CME Bitcoin Futures Daily Open Interest vs. Time (USD Million)

Monthly Review: Month 2020

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