Bitcoin’s Macro Boost & Ethereum’s Optimism : A Data Perspective by IntoTheBlock

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Every week, IntoTheBlock brings you on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry. 

It has been a positive week for crypto both in terms of price action and news. Bitcoin is up approximately 7% over the last seven days while Ether has appreciated over 10%. Regarding news, both Bitcoin and Ethereum are likely to benefit from recent developments. 

Bitcoin’s Macro Boost

Following the trend of corporate acquisitions of Bitcoin such as Square’s, Fidelity Digital Assets’ recent report has recommended investors to consider allocating 5% of their portfolios into Bitcoin. The subsidiary of the renown asset management company with over $3 trillion under management states in the report, “Bitcoin is a drop in the bucket compared with markets bitcoin could disrupt (e.g. stores of value, alternative investments, settlement networks).” 

The report further emphasizes the potential of Bitcoin as investors with a traditional 60% stock 40% bond portfolio look into opportunities for yield now that bonds return near-zero levels. Given the current interest rate environment, where some countries are even considering going negative, it is likely that investors look to rebalance out of bonds into opportunities with potential asymmetric upside such as Bitcoin’s. 

Further strengthening Bitcoin’s macro proposition is the imminent multi-trillion dollar stimulus. Recently, Trump reversed his stance on a stimulus bill, with Bloomberg reporting that the White House administration is open to “going for something bigger” in regards to a stimulus package. With both political parties eager to offer a large stimulus package, Bitcoin stands to benefit. 

One of the main reasons for this is that the growing government deficit has depreciated the U.S. dollar. The U.S. dollar currency index (DXY) has decreased by approximately 10% since the first stimulus package was announced. With Bitcoin increasingly being traded in dollar-denominated stablecoins, the two currencies have displayed a strong negative 30-day correlation.

The negative correlation of -0.57 between the U.S. dollar currency index and the price of Bitcoin is indicative of the strong inverse relationship between both. Therefore, with the incoming stimulus package and potential inflation down the road, it is likely that more traditional investors follow Fidelity’s recommendation of diversifying into Bitcoin. At the same time, the recent high correlation with major stock indices is worth considering. 

Along with Bitcoin’s growing macro proposition, one of its key fundamental metrics is at record levels. The total number of addresses holding Bitcoin hit a new all-time high, reaching 32 million for the first time in its history.

With an increasing number of holders, on-chain data suggests Bitcoiners are bullish on the top crypto-asset. Before proceeding “to the moon,” Bitcoin does have a few key resistance levels to surpass. 

Using machine learning to identify the most relevant clusters of addresses’ positions, IntoTheBlock is able to determine the number of addresses and volume of tokens profiting (in the money) or losing money (out of the money) at a given price. Based on the aggregate of these positions, we can then determine support and resistance levels and determine the strength of these using on-chain data.

As can be seen in the graph above, the In/Out of the Money Around Price (IOMAP) indicator detects that 1.1 million addresses previously bought nearly 800K BTC between $11,450 and $11,780. This price range has unsurprisingly acted as strong resistance for Bitcoin, as some existing holders will look to break even their positions at this range. Following this resistance, there is moderate sell-side pressure expected between $11,800 and $12,100 where 200K Bitcoin was previously bought. If Bitcoin does manage to break-out from this level, the small clusters of previous buyers point to low resistance all the way up to $14,000. 

On the other hand, there are several levels of relatively strong support near Bitcoin’s current price. The immediate support between $11,100 and $11,400 has 1.06 million addresses holding 528K BTC who may look to buy near this price range to sustain their positions in profit. Beyond this level, there are two other key price ranges where buying activity is likely to increase as represented by the large clusters between $10,400 and $11,100.

Ethereum’s Optimism

Ethereum also recently obtained positive news in the macro perspective. Grayscale, which manages the largest publicly traded Bitcoin fund (GBTC) has announced that its Ethereum trust (ETHE) has become the second digital currency investment vehicle to become an official SEC reporting company. This is a milestone for Grayscale, which will bring greater transparency and legitimacy to its Ether fund. 

Along with this lies the opportunity for an increase in the fund’s liquidity, as demand is expected to pick up following its regulatory stamp of approval. This would theoretically increase the ETH holdings by the fund, as it is backed by underlying tokens. Grayscale has already purchased billions worth of Bitcoin in 2020; the legitimization of ETHE may lead to a similar impact in Ethereum. 

While the ETHE Grayscale fund is expected to attract more institutional investors into Ethereum, on-chain data suggests that this trend has already begun. IntoTheBlock’s Large Transactions Volume indicator aggregates all the transactions with a value of over $100,000 USD. This provides a valuable approximation of whales’ and institutional players’ trading activity.

As can be seen in the graph above, large transactions volume for Ethereum has increased dramatically year-to-date. In fact, it has grown by nearly 10x from a weekly average of $155 million in January to $1.42 billion in October. This suggests large players have been increasingly involved in Ethereum, a signal of the asset maturing and becoming more liquid.

Meanwhile, Ethereum’s scalability concerns are diminishing little by little. Recently, the layer 2 (L2) scalability solution Optimism announced that it will be testing its Optimistic Rollups in a partnership with Coinbase wallet. Adoption of layer 2 scalability solutions is deemed to be a critical component of Ethereum’s vision towards mass adoption. According to Vitalik Buterin, wallets are the first step:

“In the migration to rollups, the biggest challenge is User Experience. Making sure users only do secure things by default and don’t accidentally do insecure things…the biggest part of the answer is a comprehensive ecosystem level push [and] the first push is wallets.”

While Ethereum’s gas fees had gotten worryingly high during August and September, they have actually decreased significantly in October. During peak days in August and September, ETH transactions reached as high as 500 Gwei, or the equivalent of over $5 for a simple transaction and over $50 for more complex smart contracts such as staking.

Average gas costs have since dropped nearly 90% from its highs, reaching under 50 Gwei for the first time in two months. This decrease is likely due to DeFi protocols and their tokens seeing a decrease in usage and prices respectively. Even at the moment, deploying complex smart contracts such as claiming staking rewards on Synthetix still costs approximately $10 in gas costs. 

Decreasing gas costs are certainly welcome by Ethereum users, but layer 2 scalability solutions such as Optimism are expected to have a much stronger reduction in the costs and increase in the transaction throughput. For instance, Synthetix — which is also testing optimistic rollups — managed to reduce its cost of claiming staking rewards to near-zero along with near-instant verification. 

Finally, Ethereum’s final testnet prior to Ethereum 2.0successfully launched two days ago. This brings expectations of phase zero of the multi-phase protocol upgrade to begin soon. Along with Optimism’s layer 2 scalability, this sets a very positive tone for Ethereum in the mid-term.

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This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice. 

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