Diving into the divergence between Bitcoin and L1 tokens
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This week we dive into the divergence between Bitcoin and L1 tokens. Smart contract platforms have been among the assets with the highest returns in 2021 and continue to outperform despite the recent drop. Today we discuss some potential reasons for this pattern and how this space is likely to continue to evolve.
We also jump into the metaverse as related tokens record triple-digit returns driven by a spike in interest around the subject. Here we uncover on-chain insights pointing to increasingly frothy activity.
Weekly Fees — Sum of total fees spent to use a particular blockchain in a week. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Network demand for both Bitcoin and Ethereum slowed down as price recovered but transactions remained slightly lower
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges over the past seven days. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
- Bitcoin recorded a second consecutive week with over $1B leaving exchanges, suggesting large players are accumulating and sending to their private addresses
- $300M worth of Ether left exchanges, painting a similar picture
Smart Contract Platforms Outperforming
Base layer (L1) platforms for decentralized applications (dapps) have recorded outstanding growth in 2021 both in terms of usage of their blockchains and price appreciation of their native tokens. These tokens have vastly outperformed Bitcoin and continue to do so in the current correction.
Winners and losers — the momentum surrounding smart contract platforms continues, although the market is starting to differentiate and treat them differently.
- L1s with high usage (hundreds of dapps deployed, billions in value locked) such as Ethereum, Solana and Avalanche have achieved positive returns in the last 30 days despite Bitcoin slumping
- Polkadot, which just recently finished its first auction for an application-specific chain (“parachains”), and Cardano, which does not yet have applications live on mainnet, dropped further than the broader market
The break-down — smart contract platforms support a myriad of use-cases, making them one of the fastest-growing assets in the World.
- From DeFi to NFTs to the metaverse, platforms such as Ethereum and Solana continue to be at the center of new technology waves
- Growing usage of these applications have significantly expanded economic activity taking place on Ethereum, with the total generated from fees increasing over 500x in the past two years
- The increasing potential of these platforms have led to investors treating them more like a risk-on asset than Bitcoin
Access more indicators like these through IntoTheBlock’s Capital Markets Insights
Macro comparison — Bitcoin is struggling to consolidate as an inflation hedge and has also diverged from stocks while Ethereum remains more closely correlated to major indices.
- ETH’s positive correlation with stock indices point to investors treating these closer to one another than to Bitcoin
- High-growth stocks such as Tesla and Netflix have also consistently held higher correlations to Ether than to Bitcoin
- BTC has also recorded a stronger negative correlation to the American dollar, being more impacted by the dollar’s rally to yearly highs
What’s next? Smart-contract platforms are not just competing with each other, they are also increasingly contending Bitcoin’s status as the store of value of crypto. A perfect example of this is the supply-side implications of EIP-1559 on Ethereum.
Access more indicators like these through IntoTheBlock’s Ethereum supply indicators
Aligning supply and demand — Major players like Ethereum, Solana and Avalanche have already implemented burn mechanisms, where a portion of transaction fees paid by users is removed from supply
- Because of burning mechanisms like EIP-1559, an increase in network usage leads to a drop in the net issuance of native tokens
- This limits the inflation rate of native tokens, making them more appealing as store of value assets
- Over 1 million ETH ($4.7B) has already been burned, showcasing the scale of the impact of EIP-1559
The bottom line — the smart contract platform space is bound to get interesting as they compete not only on onboarding more users and applications, but also on becoming store of value assets for growing economic hubs.
Metaverse Tokens Running Hot
Since Facebook’s rebranding to Meta, the market has become increasingly bullish on the metaverse. The main beneficiaries of this trend have been projects building digital worlds and in-game economies. This has led to triple-digit gains within a month for four out of the five largest crypto protocols fitting this description.
Behind the hype — aside from Facebook’s rebranding, metaverse-related tokens have been gaining momentum wth a few major events.
- $2.4 million — a piece of digital land (“parcel”) in Decentraland sold for this record amount
- Adidas partnership — the german brand teased the “adiVerse” concept on top of Sandbox
Though metaverse projects are showing promising signs, many of them are showing signs of it still being too early relative to the level of speculation taking place.
Bubble or new paradigm? Looking at the triple-digit gains these metaverse tokens have recorded, it is worth taking a step back to analyze their traction (beyond price).
- 1,390 monthly active users — Decentraland saw less than 2,000 users access its metaverse as per DappRadar, implying a valuation of $5M/user
- Not live yet — Sandbox plans to release its alpha version this month, but is stilll worth multiple billions pre-launch
On-chain data also shows signs of metaverse tokens getting frothy.
Learn more with IntoTheBlock’s MANA ownership stats
“Traders” reach new high — The number of addresses that have been holding MANA for less than 30 days set a new record of nearly 50k addresses.
- 33% of MANA holders bought the token this month; this percentage is even larger for Sandbox (56%) and Gala (43%)
- Spikes in the number of traders point to excessive speculative activity and can often be seen prior to a correction as was the case recently with SHIB
- The 24 hour volume traded for several of these tokens surpassed their market cap, further validating the high amount of speculation
Overall, metaverse tokens are showing several warning signs. While these projects have large ambitious likely to shape the digital world, it is worth proceeding with caution given the level of speculation and recent price spikes recorded.