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The ETF Races & Layer 2 Adoption
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Happy last Friday of September to everyone reading. This week, per usual, we will recap the major stories of the quarter through an on-chain lens. We dive into the Bitcoin and Ether ETF news, their impact and how investors have been positioning. Then we discuss the brewing adoption for Ethereum on layer 2s and its potential short-term side effects.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
- Bitcoin fees declined by 71.9% compared to the past quarter when BRC-20 tokens first emerged as a way to trade meme tokens on Bitcoin. Compared to Q3 2022, though, fees on Bitcoin have more than doubled, showing the sustained demand Ordinals have brought
- Ethereum fees dropped by 10.8% relative to the last quarter as a large portion of transactions shifted to layer 2s (more on this later). Compared to one year ago, fees on Ethereum are up by 72%, suggesting on-chain activity may have bottomed last year
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
- Bitcoin recorded relatively negligible net outflows of $90M throughout the quarter, $1.3B less outflows than last quarter, but $140M more than last year
- Ether’s supply on exchanges decreased by $2.5B this quarter, compared to $5.5B in outflows last quarter, but $1.3B more outflows than a year ago
Q3 2023 On-Chain — The Crypto ETF Races
The third quarter of 2023 in crypto ended how it began: dominated by ETF news. This time, though, the conversation has shifted from Blackrock’s application for the first spot Bitcoin ETF to VanEck’s approval for the first ETH futures ETF.
Via ITB’s Capital Markets Insights
Spot ETF Barometer — Grayscale products have been a proxy to the odds the market is assigning to ETFs being approved
- While BTC and ETH prices dropped just over 10%, GBTC remained flat and ETHE climbed by 9% this quarter
- On August 29, Grayscale won their lawsuit against the SEC, where the courts deemed “arbitrary and capricious” that its GBTC product was not allowed to be transformed into an ETF, which led to a strong rally in GBTC
- Now with the launch of ETH futures ETFs, it appears the SEC is giving up on its case against Ethereum, making a spot ETF likely in the case that one is approved for Bitcoin
- Cathie Wood’s Ark appears to believe this is the case, filing for the first spot Ether ETF in early September
- In both cases, Bitcoin and Ether spot ETFs are expected to drive inflows as they provided a trusted way for institutions and retail alike to access the largest crypto-assets
Unsurprisingly, market participants appear to be bullish with this on the horizon.
Via Bitcoin’s Ownership Indicators
Large Holder Accumulation — Addresses holding at least 0.1% of BTC’s supply have recorded strong net inflows throughout Q3
- As Bitcoin dropped to $25k, large holders saw inflows of $600M within a day
- Since then Bitcoin has seen three other spikes of $400M+ in net inflows to large holders, showing strong interest quietly building up
- These have happened while centralized exchanges have seen outflows, suggesting it is organic buyers receiving these funds and not just CEX addresses
- With the Bitcoin spot ETF application decisions delayed again by the SEC, the patience of these holders may get tested
Q3 2023 On-Chain — Ethereum’s L2 Boom
While the ETF news have been the major crypto story from the investor perspective, layer 2 (L2) adoption has been the dominant narrative from the technology point of view, and for the right reasons.
Coinbase’s recently-launched Base L2 has been leading an expansion in on-chain activity, surpassing Optimism and Arbitrum in terms of active addresses and transactions within months. The result has been a larger percentage of transactions moving to L2s, accounting for 67% of daily transactions in September, compared to just 16% a year ago. While this trend is enabling broader adoption of Ethereum, it is also leading to lower revenues.
Via ITB’s Ethereum Activity Perspectives
Are L2s Bullish or Bearish for Ethereum? The answer probably depends on the timeline under consideration
- It is industry consensus that L2’s scalability and low costs are necessary to bring mainstream adoption of crypto applications
- However, transactions moving to L2s also results in lower revenues for Ethereum as the fees they consume are substantially smaller
- The image above shows the inverse correlation between the two, where L1 fees have steadily declined throughout the summer, while L2 transactions have picked up
- With Arbitrum set to begin an incentive program of 50M ARB ($45M) in mid October, L2 activity appears primed to continue growing through Q4
Overall, Ethereum should benefit over the long-term as Arbitrum, Base and zk rollups attract more users on-chain. However, it is likely that ETH revenues will continue to decline if there is not an uptick on activity on mainnet. The lower revenues are also resulting in Ether being inflationary again as less ETH is being burnt. Ultimately, this should be a short-term pain point necessary for the long-term growth of the network.
Q3 2023 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.