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DeFi drives Ethereum and memes drive Doge to new price highs

05 May 2021
    • Ethereum’s price rise to above $3,400 comes from its growing use in DeFi. 40% of Ethereum moved on-chain in the last 12 months is to, from, or between DeFi, compared to 7% in the prior 12 months.
    • As the average % USD gains of Ethereum holders approach that of bitcoin holders, the differing value propositions of Ethereum and bitcoin are ever clearer in the data. The price of Ethereum is rising because Ethereum is being used, while the price of bitcoin is rising because it is scarce.
    • Dogecoin’s price rise demonstrates that cryptocurrencies are experiments in branding for financial assets, plugged directly into the craziness and creativity of the internet. While this may seem counter to traditional financial brand values, it may be that traditional financial brand values are out of step with consumers.

The bitcoin price has been relatively flat over the last seven days, rising from $55k to $57.5k today, Wednesday 5 May, with a range of $52k to $59k. The prices of other cryptocurrencies have risen much more. The Ethereum price reached a new all time high of $3,531 on Tuesday 4 May, before receding slightly to around $3,400 today, giving a 24% gain in the week. 

But the Ethereum price record is being overshadowed by Dogecoin, which has had a similar percentage price gain in just the last 24 hours, reaching a price of more than $0.66 at times. This has made Dogecoin the third largest cryptocurrency by market cap, for the moment at least. To be absolutely clear: Dogecoin is a self-aware meme. Its price is a function of how much attention Dogecoin gets, which is currently a lot. There is a positive feedback loop: the higher the price, the more attention, the higher the price, and so on.

At some point people will take profits. This is likely happening now, as Dogecoin trading volume is currently greater than either bitcoin or Ethereum. Profit taking will lower the price, and a negative feedback loop will likely follow. Those profits will be made at the expense of people who bought recently for the hype.

That is about all I can say on the dynamics of the Dogecoin market. But I think Doge illustrates a bigger point. Cryptocurrencies are not just a new financial technology. They are a new experiment in financial branding, and they are plugged directly into the craziness and creativity of the internet. You may think this will prevent cryptocurrencies from mainstream adoption because financial brands should be serious, to reflect the real responsibility of finance to steward hard-earned investments. However, for many of us, finance abdicated that responsibility in the Financial Crisis of 2007-2008, and, for many of us, we’ve spent the last year plugged directly into the internet. Dogecoin may just be a meme, but it is likely driving more awareness than the $19.6 billion that US financial services spent on digital advertising in 2020

While my view on Dogecoin is not data-driven, my view on Ethereum is. In this week’s Market Intel Report, I am comparing Ethereum to bitcoin in a series of charts. The first chart, below, shows how much bitcoin can be bought per Ethereum. Currently, one Ethereum will buy at least 0.05 of a bitcoin, which is the highest exchange rate since August 2018. So Ethereum is now starting to recover its value relative to bitcoin after price declines during the crypto winter of late-2018.

As the Ethereum price has increased faster than the bitcoin price, the average percentage USD gains that Ethereum holders have made are approaching those of bitcoin holders. The second chart, below, shows the percentage USD gain of Ethereum and bitcoin by comparing the USD price with the weighted average USD cost of acquisition across all assets held. The average Ethereum was actually held at a loss for much of the time between August 2018 and May 2020, but now it has an unrealized gain of 150%.

The big question is why the Ethereum price has gained so much in recent months. For me, the answer is the recent demand for using Ethereum in Decentralized Finance (DeFi). The third chart, below, shows that, in the last 12 months, 40% of Ethereum moved on the blockchain has been flowing to, from or between DeFi smart contracts, compared to just 7% in the prior 12 months. Decentralized exchanges are included in the exchanges category, so DeFi’s domination of Ethereum is arguably even greater. In contrast, the majority of bitcoin moved on the blockchain is to, from or between exchanges, and this has not changed over the last 24 months.

Ethereum’s use in DeFi explains the demand, but price is also determined by supply. Around 30% of the Ethereum supply is in the free float, meaning that it is likely to be available for purchase on the market. As shown in the fourth chart below, bitcoin is different, with 13% of the bitcoin supply in the free float, declining from 19% in March 2020. The price of Ethereum is rising because Ethereum is being used, while the price of bitcoin is rising because it is scarce. 

The fifth, and final, chart compares the concentration of wealth on Ethereum versus bitcoin. The chart, below, shows that Ethereum has become more concentrated than bitcoin since August 2019. Indeed, especially from March 2020, the concentration of Ethereum wealth is increasing, while it is decreasing for bitcoin. This is likely to be because more Ethereum is being locked into DeFi contracts, while bitcoin is increasingly held by new investors. They typically own smaller amounts of bitcoin than the longer-term investors who sold bitcoin to the new investors.

Now Ethereum locked in DeFi is owned by many people, so the actual concentration of wealth amongst people is likely lower than shown here, which measures the concentration of wealth amongst entities on the blockchain. Nonetheless, the data shows that Ethereum and bitcoin are undergoing major transitions – in opposite directions.

Back in my Market Intel Report on 15 October 2020, I wrote: “since mid-March, bitcoin, Ethereum and Tether have developed specific use cases. Bitcoin and Tether are increasingly used to store value digitally, with bitcoin offering exposure to price volatility and Tether avoiding this. Ethereum on the other hand is actively being used, primarily in DeFi, rather than being held as a passive investment. These asset-specific use cases show that crypto has moved on from a single use case of pure speculation. As a result, asset performance may become less correlated in the future, which will require investors to more actively manage their portfolio”. My conclusion today is the same as it was nearly six months ago, although the data to support it is better. And the bitcoin price is five times higher and the Ethereum price is nine times higher… As ever, let me know your feedback via

Philip Gradwell, Chief Economist

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