Chainalysis Archive

New Ethereum investor whales dive into DeFi

12 May 2021
    • The market is hot right now, with the Ethereum price rocketing above $4k. People are making big bets, and doing so with limited information and uncertain cash out strategies. Whether you are in crypto to invest in the technological vision and fundamental uses or trading sentiment, rocketing prices are raising the stakes for either strategy.
    • The buying pressure for Ethereum is coming from DeFi, with 10 million Ethereum entering DeFi since May 2020, and new investor whales, who have acquired 6.3 million Ethereum since November 2020.
    • New investor whales are deeply involved in DeFi, with DeFi the source and destination of much of the Ethereum that these whales receive and send. It feels like Fear Of Missing Out is taking hold of the market but these new investor whales may bring enough investment and interest to advance technology and adoption before the hype wanes.

The Ethereum price rocketed above $4k this week, rising from $3,529 at the close of Wednesday 5 May. Today, Wednesday 12 May, it is at an all time high of over $4.2k. The prices of many other cryptocurrencies have increased as the Ethereum price has climbed. They also fell during this volatile week as the Ethereum price experienced swings of several hundred dollars in a day. The bitcoin price has been between $54k and $60k over the last seven days. This counts as a relatively quiet week for the asset, especially when compared to the price performance of other cryptocurrencies.

The market is hot right now. I see that in the data and I hear that in my conversations. It is as if everyone has played a few rounds of Poker and are now getting comfortable. They think they have the feel of the room and a sense of the odds. There are more chips on the table, the bets are getting bigger, and people are quicker to go all in.

Poker is not so much an analogy for the current crypto market as a literal description. Except we don’t know whether the deck we are playing with has four aces, one ace, or fifty two. Is that altcoin an Ethereum killer or a busted flush? How many Dogecoin jokers are there?

The stakes are getting high enough now, and the game is so novel and fast-moving, that playing crypto on luck and skill alone is getting riskier. You also need information on whether the cryptocurrencies you hold, or the venture investments you make, are aces or deuces. That is why I analyse on-chain data to understand how assets are used and how they flow between crypto businesses.

You also need a strategy to cash out as, especially in DeFi, your chips are likely just another token that can only be redeemed at yet another gaming table. Price volatility this week clearly demonstrates there is not enough liquidity for people to cash out at current prices. To turn the market cap of many altcoins into liquid value, either the world needs to come to the casino, or the casino needs to become the world.

Currently, a lot of people are entering the casino and that could be sustained for a long time. The other endgame, that assets become increasingly digitised and so crypto has more applications in the world, is more realistic now with DeFi than it was in 2017 with ICOs. I believe it is now a question of when, not if, this happens.

But widespread digitisation of assets will occur sometime after the current hype has waned. So if you are not playing a very long game in crypto, you probably should be playing a very short game. The market has always been driven by a mix of longer-term technological vision and fundamental use versus short-term sentiment. Rocketing prices are raising the stakes for trading on either driver. 

This leads to the question: is the Ethereum price being driven above $4k by those playing a longer game of technology and adoption, or a shorter game of trading on sentiment? To answer this, in this Report I’m taking a look at who is holding Ethereum. I’m starting with how the entire Ethereum supply is held, shown in the first chart of the Report. Then I’ll zoom in to understand more about the biggest recent accumulators.

The first chart shows that 53.3 million Ethereum, 46% of the total supply, is currently held in self-hosted wallets that hold more than 10k Ethereum each. These entities have increased their holdings by 7 million Ethereum since November 2020, making this group one of the main recent accumulators. The other large recent gainer is DeFi. 13 million Ethereum is currently held in DeFi, up from 3 million Ethereum in May 2020. This has largely come at the expense of Ethereum held on exchanges, which has declined and now matches the amount of Ethereum held in DeFi.

Given the recent increase in Ethereum held by self-hosted entities that hold more than 10k Ethereum each, I’m zooming in on the holdings of Ethereum whales. These are self-hosted entities that have held at least 5k Ethereum at some point in their lifetime.

It is important to separate whales into different types. Some whales tend to retain the assets they receive, these are illiquid or ‘investor’ whales, while others tend to send on the assets they receive, these are liquid or ‘trader’ whales. Illiquid and liquid whales are further classified depending on when they first achieved a balance of at least 5k Ethereum. We split them into entities that first became whales before 2017, the innovators in the language of technology adoption, and entities that became whales from 2017, who are still early adopters. Finally, some whale wallets are ‘quick spent’, meaning they hold assets for less than two weeks. This categorisation helps us reason about the motivations of different whales. It also removes noise from the data, for example quick spent whales are likely wallets controlled by other whales.

The second chart shows the holdings of Ethereum whales by type. Ethereum investor whales holding from 2017 own the most Ethereum, 45.7 million Ethereum, or 77% of all the Ethereum held by whales and 39% of the entire supply. They are not just the largest group of whales but they have also increased their Ethereum holdings the most since November 2020, adding 5.5 million Ethereum to their wealth.

So Ethereum investor whales have been buying up supply. We can go deeper into this group by splitting them up by age. In the third chart in the Report I show the holdings of post-2017 investor whales by the average age of their holding. Whales in this group that have held their Ethereum for less than six months have been accumulating, acquiring 6.3 million Ethereum since November 2020. Longer-term whales on the other hand have actually reduced their holdings by 800k Ethereum.

We can go even further with Chainalysis data to understand where these investor whales acquire their supply. The fourth chart shows the Ethereum received by post-2017 investor whales each week from November 2020 by the type of service the Ethereum was last sent from. At least 45% of these inflows have been from DeFi and decentralized exchanges, showing that investor whales are deep in these new markets. This is confirmed when looking at the destination of outflows from investor whales, with 71% of inflows to DeFi and decentralized exchanges.

I say at least 45% because a large proportion of the inflows are from unnamed services. These are entities on the blockchain that have the characteristics of services, such as an exchange or a DeFi contract, but which we have not yet named and classified. So these inflows could be from DeFi or from centralised exchanges, which otherwise send very little Ethereum to post-2017 investor whales.

All this suggests the buying pressure for Ethereum is coming from DeFi, with 10 million Ethereum entering DeFi since May 2020, and new investor whales, who have acquired 6.3 million Ethereum since November 2020. Furthermore, DeFi is the source and destination of much of the Ethereum that these whales receive and send.

So is the Ethereum price being driven above $4k by those playing a longer game of technology and adoption, or a shorter game of trading on sentiment? The price is certainly being driven by big, new players who have brought a lot of assets to the casino. To me it feels like Fear Of Missing Out is taking hold and sentiment is going to drive the market for awhile. But will the scale of investment and interest advance technology and adoption enough to sustain prices, before hype wanes and Fear Of Missing Out turns into Fear Uncertainty and Doubt? As ever in crypto, that is the question! Let me know what you think as

Philip Gradwell, Chief Economist

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