25th November 2021
After adding a cool $ 1 Trillion in total market cap between late September and the all-time high reached on 10th November, the last week has been characterised by uncertainty. With the market down some 13 % from the high, and only the metaverse and gaming sectors continuing their upward trajectory, one must ask if we are poised for a trend reversal or if this is simply much needed consolidation following over-exuberance?
On-Chain Data
Supply and Demand
The supply of BTC on exchanges continues to decline in a the trend has continued largely unbroken since July. While this is a low-sensitivity indicator due to the relative size of the BTC market, there is significant divergence building between the constrained supply and downward price action.
A similar trend can be observed for Ethereum exchange balances, although the early part of the week saw an uptick in movements to exchanges. This follows a rise in anti-ETH sentiment which has not yet translated into any significant price declines.
Who is Selling and Who is Buying?
A brief look at spent output profit ratio data for short-term holders indicates these holders have been selling at a loss in the last 7 days. This is generally a “buy-the-dip” opportunity as indicated by the similar shaded areas from this cycle.
Another interesting visualisation to determine the behaviour of different market participants is the proportion of total supply held by wallets of a certain size. For ease of consumption, consider the chart below of balances in large wallets (10-10k BTC) vs small wallets (<1 BTC).
Both groups have been net accumulators since the middle of last week, so it is more instructive to examine periods when their behaviour diverges. Interim and cycle tops are characterised by whales gradually selling their bags to small participants, and trend reversals are often instigated by sharp changes in large holder balances.
Current on-chain data can be construed as bullish, and we are likely in for a green weekend.
Key Narratives for the Week
Ethereum is bad, Avalanche is the new Solana
As mentioned in the prior section, crypto twitter has been awash with anti-ETH sentiment. While I am an unapologetic Ethereum bull, many of the arguments have merit:
- High gas prices are a recurring issue during periods of increased activity. This in
turn prices many participants out of using the network and hampers
adoption. - The success of L2s and rollups as a solution to Ethereum’s scalability issues
is not guaranteed. This is a multifaceted topic worthy of it’s own
article, but the crux of the argument is:- Rollups provide cheaper transactions, but they may still be too expensive (see L2 Fees)
- Current L2s like Arbitrum and Optimism require a challenge period of 1 week
before funds can be removed. I’m sure market makers will step up and
resolve this issue in future, but it won’t be without added cost. - While the L2s are EVM (Ethereum Virtual Machine) compatible they use their own
subtly different virtual machines. That means you can’t just copy your
dApp or smart contract over without a high probability of redevelopment
being required.
The problem with much of this discourse is Ethereum is a soft target. As the only L1 that has achieved real scale, we have data points to legitemise the bear case. It’s quite easy to argue how much better your “ETH killer” is when the internet hasn’t had 6 years to try and break it yet.
One might also consider how easily sentiment is influenced when the two teams are a decentralised group of ideological ETH intellegentsia versus a bunch of VCs (and their marketing departments) with one foot on Wall Street shilling their investments.
Gaming and Metaverse continue to go parabolic
This shows little sign of slowing down as projects like Sandbox grow to eyewatering valuations. I would advise caution here as although the future of this sector will no doubt be stellar, these kinds of projects will need to attract substantial user numbers to justify said valuations. Alarm bells start to ring when I see $ 6 Billion attached to blockchain Minecraft that isn’t out of Alpha yet.
Ask any gamer for a measure of their dissapointment after buying a much-hyped game on pre-order, and you will recieve the sweatiest confirmation that just because a game looks cool, doesn’t mean it’s any fun to play.