- Cryptocurrency prices increased this week and data on short term market conditions supports further price gains, with inflows to exchanges declining slightly for bitcoin and Ethereum, although not XRP, and profit taking declining from a January peak.
- Bitcoin free float, the assets that are likely to be available for public trading, historically declines prior to price gains, and has been declining since March 2020 to just 13% of supply, the lowest since 2014. This suggests that bitcoin available to buy remains scarce despite record prices.
- DeFi is a technology that changes the economics of finance, much like the internet changed the economics of producing and consuming text. So minimising consumer harm from financial innovation may require regulation to work more like content moderation than gatekeeper.
Cryptocurrency prices increased this week. The bitcoin price rose to $37,503 as of 3 pm Eastern Time on Thursday 4 February, a 9.5% gain on the close price of Friday 29 January. Ethereum gained 20% in the week and continues to set new all time high prices. DeFi assets also saw large price increases. Elon Musk’s tweets led to large gains in the price of Doge. It is good to know that you can have unlimited money, an interesting job, and still have a Twitter addiction.
Thank you to all the people who gave feedback on last week’s Market Intel Report on how Gamestop demonstrated the blurring lines between cryptocurrency and traditional finance. It seems it was good to deviate from the data and provide a longer-term perspective, although this week I am back to the numbers.
But before I get into the data, I was picked up for not talking about the consumer harm that results from Gamestop, ICOs, and most financial innovation. As Chief Economist at Chainalysis I have a unique perspective on this. I see the challenges of regulators and law enforcement, and I also see the opportunities that cryptocurrency businesses and financial institutions are developing.
The challenges are real, as our upcoming 2021 Crypto Crime Report describes. It is truly awful when criminal proceeds are laundered and people lose their life savings. The opportunities are real as well. But technological innovation does not let us weigh pros and cons, then make a choice to turn new technology on or off. Instead technology happens and we adapt to the consequences.
Gamestop demonstrated that anyone can act like a hedge fund from their phone: technology has dramatically increased the ability to consume financial products. With DeFi, people are starting to be able to produce financial instruments in the same way that anyone can now be their own newspaper, radio or TV channel.
There have been good and bad consequences from anyone being able to be their own newspaper and anyone being able to read that newspaper. But my point is that we’ve had to fundamentally change how we deal with those consequences. Although I don’t think we’ve yet succeeded in adapting, given how I often feel when I read the internet.
But my point is that finance is heading the same way. It is not possible to make a taxonomy of DeFi products, then rule some of them in and some of them out. Instead we need the equivalent of a content moderation policy for financial instruments. You may respond that we moderate speech much more lightly than we regulate finance for good reasons and I agree. That does not change the fact that the technology, to make financial products as easy to produce, distribute and consume as text on the internet, is coming.
If we fail to understand how technology changes the economics of finance, then we will fail to minimise consumer harm and maximise the opportunities. I also believe technology – and data – can help us do this, that is why I work at Chainalysis.
Back to the data! Data on short term market conditions supports further price gains. Bitcoin and Ethereum inflows to exchanges have declined slightly, with 7 day average inflows below the 30 day average, reducing sell pressure. Trade intensity has also declined slightly, which typically suggests buy pressure is reducing. However, for bitcoin at least, it is still high relative to the past. People cashing out after making a 25% or more USD gain has also declined since the large increase in the first week of January, suggesting people continue to hold despite their potential gains, now that some profit was taken following the price gains over the holiday period.
The XRP price rallied again this week. This was met by very large XRP inflows to exchanges, as the chart below shows. This did lead to a fall in price, but demand for XRP appears to keep on coming as the price has risen since.
To understand longer term market conditions, this week I’m turning to free float. In traditional finance, the free float of a company are the shares that can be publicly traded. In cryptocurrency, I think of the free float as the assets that are likely to be available for public trading. There is not an equivalent definition because, while some cryptocurrency is formally restricted, for example founders’ assets held in escrow, most cryptocurrency could be publicly traded but owners prefer to hold rather than trade.
So, I calculate cryptocurrency free float as the assets held by entities that send at least 25% of the assets they receive and that have held the assets for less than a year. That is to say: the free float is cryptocurrency held by those who tend not to keep hold of it. This applies to all entities, whether they are exchanges or self-hosted wallets.
By this definition, the free float of bitcoin is currently 2.4 million bitcoin, just 13% of the 18.6 million bitcoin mined to date. This is actually the lowest share of supply in bitcoin’s free float since 2014. As the chart below shows, the share of bitcoin in the free float tends to decline before periods of price gain. It declined in the 3rd quarter of 2017, in the first half of 2019, and since March of 2020.
The continued decline since March, despite the record price increase, shows that bitcoin available to buy is currently scarcer than ever, at least since bitcoin has had a mature market. Current holders are not selling their bitcoin in response to price increases. If this behaviour continues then price should continue to rise if demand continues.
At Chainalysis, our metrics can be calculated consistently across the 100+ cryptocurrencies that we cover. The chart below shows the current free float as a percentage of supply versus market cap for 28 cryptocurrencies, covering the traditional core assets, stablecoins, privacy coins, utility tokens, and DeFi & Payments assets.
There is an intuitive pattern. Stablecoins and DeFi & Payments have the greatest share of supply in the free float, although some, such as OmiseGo and Nexo have relatively smaller free floats. Utility tokens have relatively low shares in the free float. This shows that these tokens are yet to be used for their intended purpose. Instead they appear to currently be held for speculation rather than use. The traditional core assets have relatively low free floats, reflecting their use as investment assets, although Ethereum has a relatively high free float, driven by its increasing use in DeFi.
Let me know if you would like me to dive deeper into our metrics across a broader range of cryptocurrencies than the usual focus on bitcoin and Ethereum! Please email me at email@example.com.
Also, I will be talking to Ambre, CEO of Kaiko, and Tara, CEO of Lantern Ventures about “What the data tells us about Bitcoin’s 2020 rally” on 24 February at 12 pm Eastern Time. It will be a unique event as between the three of us we cover on-chain data, trade data, and the execution of trading strategies. You can register here.
Philip Gradwell, Chief Economist