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On-chain holders disregard price fall, while 338k Litecoin users face fake news

17 September 2021
SUMMARY SUMMARY
    • Cryptocurrency prices dropped rapidly on 7 September due to cascading long liquidations in crypto derivatives. Some holders panicked, with a spike in exchange inflows that day, but the market rapidly returned to normal and prices started to recover. Large on-chain holders continued to hold and price floors have been rising since July, suggesting fundamentals are steady.
    • The Litecoin price spiked 30% then closed near its open price on 13 September on a fake announcement of a Walmart partnership. Despite this fake news, it is unclear whether a large amount of Litecoin was intentionally moved to exchanges prior to the event.
    • Litecoin is a venerable and widely used cryptocurrency, with 338k active weekly users, higher than Doge, USDC, and even – recently – more users than Tether (USDT) on bitcoin and Ethereum. However, despite this large user base, its use is still primarily speculation, with 80% of the supply held by investors.

Cryptocurrency prices are down over the two weeks since I last wrote a Market Intel Report. Prices were rising until 7 September, when the market dropped rapidly with bitcoin falling 11% over the day and Ethereum down 13%. This was the 9th and 14th largest one day fall for bitcoin and Ethereum respectively since the start of 2019. Prices have recovered somewhat since then, with bitcoin above $47k today, Friday 17 September, compared to $50k at the close of Friday 3 September, and Ethereum at $3.4k compared to $3.9k.

Tuesday 7 September was the day bitcoin became legal tender in El Salvador. While the announcement drew negative news, the price crash was primarily due to cascading long liquidations in crypto derivatives, as nicely summarised by Kaiko Research. Litecoin also had a day of volatile prices on Monday 13 September, when a fake announcement of a Walmart partnership was released, leading to a 30% intra-day rise then fall. And Solana, which initially gained on 7 September as other assets fell, to reach a peak of $191 on 8 September, is now declining, to $131 today, after network outages.

These events show that the crypto market can still be a rollercoaster despite its increasing professionalism. However, the fact that prices have recovered suggests the market, for bitcoin and Ethereum at least, has fundamentals. News and the structure of the market – such as the high use of leverage – can cause sudden changes in price. But in the past this might have led to a prolonged period of lower prices, as occurred in September 2020.

This time around, on-chain data suggests that most market participants didn’t take the price fall as a longer-term signal. As the first chart in the Report shows, there was an initial panic, with 91k bitcoin flowing into exchanges on 7 September, 69% above the 90 day average. However, flows into exchanges decreased rapidly in the following days, unlike in the mid-May and late June price drops, when selling continued.

Other on-chain metrics, such as total flows and whale activity, were also subdued, suggesting that OTC activity was relatively limited. In fact whales, on both bitcoin and Ethereum, appear to be settling in for a long period of holding, with many of the whales that entered in Q1 of 2021 continuing to hold. Furthermore, price floors have been rising since July, as recent investors continue to buy as price has increased. For bitcoin the price floor is currently $40,131 and $2,084 for Ethereum.

Litecoin’s price floor is $179, which is where the price has been since mid-August, and where it returned to once the Walmart partnership was identified as fake news. This story makes me feel sorry for Litecoin. It is a venerable cryptocurrency, starting in October 2011, and it is also an actively used cryptocurrency. As the second chart in the Report shows, Litecoin currently has 338k weekly active on-chain users, on a 12 week average basis, and this has been growing steadily since September 2020. This is more users than Doge, USDC, and even – recently – more users than Tether (USDT) on bitcoin and Ethereum.

Now these active user numbers are an upper bound estimate. They measure the number of on-chain entities that send or receive each week and that hold assets for more than a day. This is an upper bound estimate because a single real-world entity can control many on-chain entities.

Even with these caveats, Litecoin has a wider user base than other cryptocurrencies that normally get the limelight. Litecoin users are still mainly using the asset speculatively, with 80% of the supply held by investors and the majority of Litecoin transfers sending the asset between exchanges. But at least there is a large community of speculators!

Some of these speculators may have done well if they sold on the Walmart fake news, and of course there is speculation as to why this fake news was planted. It is possible that someone planned to profit from the inevitable price spike following positive news. While Litecoin has a reasonably large user base, it does not have as regular activity as bitcoin and Ethereum. This makes it harder to identify unusual behaviour, but, as the third chart in the Report shows, there have been reasonably large inflows of Litecoin to exchanges in August and September. However, these inflows were likely motivated by prices climbing back to their highest level since mid-May. The spike in inflows on 13 September are not necessarily suspicious, as many holders will have rushed to sell as price climbed.

To really understand what was going on in the Litecoin market in the lead up to the 13 September fake news, you’d need to dive deeper into the data. For that, I’d either need to write a much longer Report, or you’d need a subscription to our Market Intel data!

In not-fake news, I’ll be at Money20/20 Europe next week! I’m very excited for my first in-person conference in 18 months and our team has been busy preparing. I’ll be on-stage in a debate on ‘How do we manage the risks of DeFi to absorb the advantages it offers?’. If you are attending and would like to meet, please reach out here and please come by the Chainalysis booth B164 in the main hall to say hello. And as always, please feel free to reach me at marketintel@chainalysis.com

Philip Gradwell, Chief Economist

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