1. Bitcoin blasts higher while long bonds and gold plunge; US dollar stays steady
The crypto bull market powered on in February with bitcoin (BTC) setting another new all-time high at ~$58k on the 21st of February, and finishing the month up 36%. Ethereum (ETH) lagged bitcoin but still turned in an impressive +8% monthly performance. Both are up around 1,000% over the last two years with Bitcoin back to outperforming Ethereum over that time period.
Asset markets in general were mixed in February, with stocks up (S&P500 +2.6%). The US dollar turned in a second consecutive positive month and was up 0.3% for the month, slightly less than January’s +0.7%.
Two big losers in February were long-dated US treasuries (-5.8%) and gold (-6.2%).
Table 1: Price Comparison: Bitcoin, Ethereum, Gold, US Equities, Long-dated US Treasuries, US Dollar (% Change)
The sharp sell-off in gold may be in part related to a firmer dollar and increase in bond yields, which traditionally draw investors away from the yellow metal. However, we also continue to see evidence of more investors coming around to accept bitcoin as an alternative to gold, albeit one with more functionality and potential upside.
We draw medium-term confidence in bitcoin’s valuation outlook based on the following three market statistics:
- all above-ground gold estimated to be worth approximately $10 trillion
- gold available for investment is estimated to be in the ~$2.5 trillion range
- bitcoin’s total market value is currently less than $1 trillion
And as we watch a very broad range of use cases for crypto continue to blossom, including non-monetary use cases such as the Microsoft digital identity system anchored to bitcoin, we also continue to caution against viewing bitcoin’s market potential as bound by gold’s valuation levels.
2. On-Chain Analysis
February brought another string of bitcoin price and network activity all-time highs, which not surprisingly impacted the cost of using the bitcoin network.
Table 2: February vs January bitcoin network activity
On the surface, with BTC volatility we might expect on-chain activity to increase in response. However, the average daily number of transactions in February decreased.
Two likely causes of this are mempool delays — which we’ll discuss later in the report — and increased fees. The average bitcoin transaction fee nearly doubled in February to $21 per transaction. Spikes in fees disproportionately affect the crypto “retail” market (smaller holders), as institutional investors are likely to weather fee increases more easily as they are typically transacting much larger sums.
Efficiency of bitcoin
As discussed in last month’s Market Outlook, “payments” have become a more accurate metric than “transactions” to measure on-chain economic activity.
In 2020, some crypto entities began batching transactions. This batching allows multiple payments to be completed within a single transaction, setting off a more efficient trend for the bitcoin network. Figure 1 illustrates this continued trend of bitcoin efficiency.
This is an important fact to reiterate, as it’s often lost in the energy consumption conversation seen in media coverage. Media interest in bitcoin’s energy consumption is not a new phenomena. However coverage does not accurately reflect or even discuss at all the increasing efficiency of the bitcoin network from batching implementation.
Figure 1: Bitcoin transactional efficiency continues to increase, a fact often lost in energy consumption media coverage
As the price of bitcoin rises, the size of the mempool tends to increase with it (see our definition of the mempool and live chart here).
We see that currently, as shown in Figure 2. The inflated mempool size led to increased waiting times for transaction confirmations. Roughly 25% of transactions have been waiting in the mempool for at least 6 days.
Transactions with higher BTC volumes can afford the high fees in these conditions, as miners give priority to transactions paying higher ‘priority’ fees.
Figure 2: Mempool size has inflated with bitcoin’s price; 25% of transactions have been waiting for at least 6 days
In conditions like this when the mempool levels are congested, it’s important to understand the cyclical nature of the mempool.
Mempool levels are at their lowest on Sundays and in the early morning hours (UTC). While there are many contributing factors to a transaction’s confirmation, you’ll have better luck when placing an on-chain transaction during these ‘low peak’ times.
Figure 3: Mempool trend by day of week — bitcoin network “traffic jams” are at their lowest on Sundays
Figure 4: Mempool trend by time of day — bitcoin network “traffic jams” are at their lowest in the early morning London hours (UTC)
3. Kaiko’s February Market Report — Guest Post by Kaiko
February encapsulated both the promise and pitfalls that exist today in the cryptocurrency industry. Throughout the month, markets reached multiple new all time highs, the first North American Bitcoin ETF started trading, Tesla announced a $1.5 billion BTC purchase, and Coinbase’s S-1 filing revealed surging institutional demand. Yet, the compounding cycle of good news eventually proved unsustainable for prices, resulting in a double-digit crash across crypto markets, which triggered the highest volume of forced liquidations ever recorded.
The vulnerability of crypto exchange infrastructure was on display during the market mayhem, with downtime, lagging interfaces, and a brief flash crash on Kraken. While a lot has changed over the past year, markets are still highly-leveraged, which makes the magnitude of price crashes extreme and unpredictable. The good news, though, is that there is increasing evidence that overall market liquidity has improved, with spreads and market depth recovering more quickly following extreme volatility compared with one year ago.
Highlights from the report:
1. The Anatomy of a price change
An exploration of the crash on February 22nd looking at order book liquidity and trade volume.
2. Institutional Demand for Crypto Products Continues to Soar
Ethereum had its CME futures debut, the first North American crypto ETF started trading on the Toronto Stock Exchange, several new crypto trusts began accepting investors, and a range of investment product applications were filed with regulatory agencies.
3. Exchange Competition is Heating Up
A look at how exchanges differentiate by the pairs they list and market share of volume.
4. Coinbase vs Binance: Liquidity Analysis
Analyzing the two biggest exchange competitors.
5. Exploring Uniswap: The Biggest Decentralized Exchange
DEX volume has soared over the past year.
6. Markets Have Become More Robust
Spreads and depth are less volatile following a crash.
Download the full PDF monthly report here and subscribe to our weekly market analysis here.
4. What we’re reading, hearing and watching.
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