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Analyzing 3 key trends for crypto in 2021
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As 2021 comes to an end, we’ve prepared a brief recap of the major trends in crypto that have developed throughout the year. Using blockchain and market data, we identify three key developments for 2021:
- Bitcoin’s institutionalization
- Ethereum becomes an engine of economic activity
- The emergence of sectors within crypto
This is the last IntoTheBlock newsletter for the year, so I hope you guys enjoy reading it and have fantastic end of the year!
Bitcoin’s Institutionalization
For years the crypto crowd echoed “institutions are coming”. During this bull market it has become evident that they have arrived.
Not only did public companies like Tesla, MicroStrategy and Square invest in Bitcoin, but even a nation-state acquired BTC and made it legal tender. Square went as far as rebranding to Block and is currently working on a decentralized exchange on top of Bitcoin.
Interest in Bitcoin has grown within Wall Street with renown figures like George Soros and Paul Tudor Jones investing and publicly backing the asset. Many more legacy institutions have indirectly gained exposure to Bitcoin by owning stocks that have BTC in their balance sheet. This is the case with Blackrock and JPMorgan owning a substantial share of MicroStrategy and Coinbase respectively.
The growth in Bitcoin’s institutional interest is also evident in on-chain data.
As of December 16, 2021 through IntoTheBlock’s BTC large transactions volume
Large transactions volume 4x — the aggregate volume transferred in transactions of over $100k increased by a factor of 4 from an average of $ 450B per week in January to $1.9T in November.
- Large transactions volume acts as a proxy to institutional and “whales” activity given that $100,000 minimum transactions filter out retail traders
- The growth in large transactions volume outpaced Bitcoin’s price, suggesting that these institutions have been both large buyers and sellers
Put into context of the total volume processed by the Bitcoin blockchain, the institutionalization of Bitcoin becomes even more apparent.
Calculated by dividing Bitcoin’s Large Transaction Volume over Total Volume
99% large transaction volume share — The percentage of total volume being managed by institutions and whales reached record levels of 99.3% in the fourth quarter of 2021. This is up from 97.5% in the first quarter of the year and 58% the first quarter of 2017, arguably when Bitcoin’s institutionalization started.
Bottom-line — Bitcoin has matured as an asset, now routinely processing hundreds of billions per week. This transition did not happen overnight, but it is likely to last. As a wide range of institutions and a few nation-states continue to look into the space, institutions have indeed arrived for Bitcoin in 2021.
Ethereum Becomes an Engine of Economic Activity
Bitcoin is certainly not the only crypto-asset that has peaked the interest of institutions. Ethereum, along with other smart contract platforms, have attracted investment and usage through its diverse set of use-cases.
Ethereum’s ICO days are long gone, with much more than fundraising now taking place on top of its blockchain. Stablecoins, financial applications and collectibles (through NFTs) are just some of the use-cases that have blossomed in the Ethereum ecosystem.
While some of the usage of these applications can still be speculative, the magnitude of the total activity happening on top of Ethereum shows how it has successfully grown into an engine of economic activity.
Based on the transaction volume of ETH, USDT, USDC and DAI
Processing $2T+ four quarters straight — The total volume processed just between ETH and stablecoins has been consistently high in 2021.
- Without the quarter being done yet, the total amount of value settled on Ethereum has tripled relative to Q4 2020, and increased five-fold versus Q4 2017
- The total amount settled is likely to be as much as double the figures shown above with thousands of ERC-20 tokens and NFTs trading on Ethereum on a daily basis
As of December 17 through IntoTheBlock’s ETH fees indicators
Paying billions to use Ethereum — For better or worse, the amount paid to use Ethereum has skyrocketed in 2021.
- The total amount of ETH paid in fees has grown by over 10x from $430M in Q4 2020 to $4.8B so far in Q4 2021
- On the bright-side, such fees highlight the high demand and willingness to pay to use the Ethereum blockchain
- However, with average transaction fees at $50 or higher at times, the Ethereum blockchain is pricing out users intending to make smaller transactions
Supply-burning engine — Ether holders have regardless benefited from the economic activity taking place on Ethereum.
- Since the implementation of EIP-1559, a high percentage of the ETH paid in fees (85% on average) is burnt, effectively removing this supply from inflation
- Over 1.2 million ETH (> 1% of circulating supply) has been burnt thus far
- This has reduced Ethereum’s net issuance (inflation) from 4% to just 1%
Overall, Ethereum is acting as the backbone to a myriad of applications. This activity has led Ethereum to a digital economy of its own, similar to a nation-state as discussed in the most recent IntoTheBlock webinar on staking. Ultimately, although this growth is resulting in higher costs short-term, scaling solutions are coming to improve the infrastructure of the economic engine that Ethereum has become.
The Emergence of Sectors Within Crypto
It used to be the case where the word “altcoin” would describe all of the crypto market excluding Bitcoin. Nowadays, with Bitcoin’s share of crypto at 40% and use-cases stemming well beyond currencies, crypto has evolved into a multi-sector space.
Although there were concepts outside money discussed within the crypto community since the early days, few materialized until 2021. As smart contract platform infrastructure consolidated, this led to a rise of decentralized protocols on top of them. This expanded the space from being simply tokens to countless types of applications encompassed under the umbrella term web 3.0.
The differentiation of these sectors has led to certain group of tokens having their own rallies. This may have started with DeFi Summer in 2020, but the pattern became more clear in 2021. Investors spotting sectors are evident both in price and daily active addresses of leading tokens.
DeFi shines then goes into bear market — Decentralized finance tokens surged strongly early in 2021. This again became the standout sector as daily active addresses in leading tokens such as UNI grew. However since then, both active addresses and prices have declined, even if usage of the protocols themselves continues to rise.
NFT markets break-out in Q1 and hit mania in Q3 — Non-fungible tokens suddenly became the hottest thing of 2021. After Beeple’s $69M sale, thousands of people flooded to buy NFTs. However, it was not until late Summer, early fall that NFTs really took off, hitting billions worth of sales in OpenSea.
Meme tokens double bubble — Exemplified by the Shiba Inu mania, people rushed into meme-themed, and particularly dog-themed, tokens. The spike in daily active addresses mirrored prices, with massive surges taking place in May and then in October.
Facebook propels metaverse speculation — Following Facebook’s rebrand to Meta in late October, early November in crypto was marked by the rampant activity surrounding metaverse tokens. Decentraland’s MANA token grew 6x within the month following the announcement and along with it its daily active addresses.
Gaming brings the crowd into crypto — Led by Axie Infinity’s success with play-to-earn, hundreds of games using tokens brought in new users to the crypto space. This also led to growing interest from investors with AXS being one of the year’s best performers and several crypto-gaming dedicated funds popping up.
To conclude, crypto markets are showing signs of maturation. Although token prices still often decline in tandem, the emergence of sectors in the crypto space has led to uncorrelated surges in groups of tokens and points to the potential of crypto moving beyond simply an asset class, but rather the next generation for several assets and applications.
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Analyzing the Growth & Opportunities in Crypto Derivatives
Derivatives markets in crypto continue to grow in popularity, outpacing trading volumes in spot exchanges. This has created opportunities for traders and investors alike along with a new set of tools to assess the state of crypto markets.
In this webinar we will dive into the numbers behind derivatives markets in crypto both in centralized and decentralized venues. Similarly, we will uncover opportunities in each of these markets that can benefit traders and builders alike.
2021 On-Chain was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.