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Institutions have been buying Ethereum while bitcoin on exchanges becomes scarce

12 March 2021
SUMMARY SUMMARY
    • The bitcoin price reached a new all time high as inflows to exchanges declined and trade intensity data suggests that some exchanges are starting to receive much less actual supply of the underlying asset than historically despite high demand.
    • Ethereum whales own 37 million Ethereum, 32% of the total supply. This has increased by 3.5 million overall in the last three months. New large investors acquired 4 million Ethereum while large investors holding for 1-2 years halved their holdings, by disposing of 4.4 million Ethereum.
    • The average cost of acquisition for new large Ethereum investors has climbed from $464 to $1,338. These recent, large purchases of Ethereum at high prices by new whales suggests there have been institutional purchases of Ethereum, and the market now has a much higher cost basis than it did.

The bitcoin price reached a new all time high of $58,143 on Thursday 11 March, with a slight fall to around $57.5k on Friday 12 March to give an 18% return over the week. The Ethereum price remained around $200 below its all time high but has offered a similar return to bitcoin, gaining 16% over the week, reaching around $1,780 on Friday 12 March.

So price volatility continues, taking prices higher this week. My favourite short term indicators provide an explanation of this for bitcoin. Inflows to exchanges have been very low this week at 57.4k bitcoin per day on average in the last 7 days. As the chart below shows, this is 29% below the 180 day average and the regular pattern of inflows through the week is being disrupted. This suggests that the sources of bitcoin that supply exchanges are changing, with a shortage of assets from the usual market makers.

Trade intensity also indicates a potential change in the structure of the market. Trade intensity is the number of bitcoin traded for every bitcoin received by exchanges. We calculate the trade intensity for the 15 exchanges that receive the most bitcoin and provide the median and first and third quartiles of the trade intensity of this group. In the chart below the median trade intensity is the orange line and the first and third quartiles give the shaded range, with the first quartile at the bottom and third at the top.

Median trade intensity jumped higher in mid-December, as the price climbed, and has remained elevated since. At the same time, the range in trade intensity between the first and third quartiles has increased in the last 30 days. So within that group of the 15 top exchanges, some are receiving far fewer actual bitcoin than normal relative to trading volume, the third quartile, while some are receiving similar amounts to the past – the first quartile remains at historical levels. This suggests that while trading volumes are growing across exchanges, some are starting to receive much less actual supply of the underlying asset than normal.

To understand the Ethereum price, I’m turning to the data I shared last week for bitcoin: the amount of Ethereum owned by different types of holders and their cost of acquiring Ethereum. Like last week, I focus on whales, large holders of the asset. For Ethereum this is self-hosted wallets that hold at least 5k Ethereum. This data describes the fundamental support for different price levels, as these holders have demonstrated their willingness to buy and hold at least at their cost of acquisition. They may buy more if the price were to approach that level again.

As of 1 March 2021, Ethereum whales own 37 million Ethereum, 32% of the total supply. The largest group of whales are investor whales who have held for more than 2 years, as shown in the chart below. They own 15.3 million Ethereum and acquired it at an average cost of $158, an 11x return given the current price. The next largest group of whales are investor whales who have held for less than 3 months. They own 9.8 million Ethereum and acquired it at an average cost of $1,338. So at times in March they have been close to making a loss, although the price has not fallen below this floor.

Similar to bitcoin, the Ethereum market has changed radically over the last three months. Since the end of November, whales overall acquired 3.5 million Ethereum. <3 month investor whales increased their holdings from 5.8 million to 9.8 million, while 1-2 year investor whales halved their holdings from 8.9 million to 4.5 million. Furthermore, the cost of acquisition for the newest investor whales has climbed from $464 to $1,338. This suggests there have been institutional purchases of Ethereum, and the market now has a much higher cost basis than it did. So the current Ethereum price is likely to be supported, although, given the current hype in the market, I could be very wrong and as always this is not investment advice!

If you are in the business of investing in cryptocurrency, I’ll be joining a Bitwise Investments webinar on 22 March at 1 pm Eastern Time to discuss: Advanced Crypto For Financial Advisors: What Blockchain Data Tells Us About Bitcoin And Crypto. You can sign up here. As always, please email me at marketintel@chainalysis.com if you have any questions.

Philip Gradwell, Chief Economist

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