Written by: Yves, Head of Trading at Wirex
The Bitcoin price is still in a consolidation phase, up nearly 10% this week, and trading around the $37,700 levels. It is likely aiming back at the $40,000 levels in the short term. Meanwhile, the Ether cryptocurrency hit another all-time-high (ATH) at $1,698 ahead of the Chicago Mercantile Exchange (CME) futures launch scheduled on February 8th. Alternative cryptocurrencies also outperformed: Ripple (XRP/USD) soared by neary 55% erasing half its December losses. The price of Waves (WAVES/USD) is 24% higher than it was last Friday. Stellar Lumens (XLM/USD) increased by 16.5%, Litecoin (LTC/USD) by 13%. There is clearly a general positive trend in the cryptocurrency markets that is fuelled partly by the investors’ enthusiasm, retail and institution-grade alike. Announcements and steps undertaken by major institutions (including Grayscale and Blackrock) to increase their investment coverage to several cryptocurrencies did help performance, correlating investment returns regardless of the underlying project… at least to some degree.
Looking at the fundamentals, there is no sign of an increasing supply to demand ratio. Cryptoquant recorded negative “Bitcoin net flows from exchanges” this week, and the “BTC all exchange reserve” is still slowly decreasing. Only the “Miners to all exchanges flow” suggests that miners are increasingly supplying the market: the miners flow peaked last Friday to its highest level since March 2020: 2,067 BTCs mined were transferred to exchanges. Regardless, the average miners flow remains below 750 BTCs per day.
Crytoquant: All Miners to Exchanges Flow - Peak at 2,067 on Jan 29th.
Still, the demand for the first cryptocurrency is holding high, largely covering the miners supply. To put these numbers into perspective, the Grayscale Bitcoin trust (GBTC) acquired over 40,000 BTCs in January. In other words, the trust bought an average of 1,290 BTCs bought per day in January.
With such metrics and for as long as they hold, the Bitcoin price should go higher and reach new ATHs.
Mainstream adoption will accelerate again in a few months when Paypal extends its cryptocurrency services internationally, or lets its users shop with cryptocurrencies. It could also grow if VISA deploys its crypto service to retail banks after a successful pilot program. Public awareness of the market size can also grow with Coinbase’s potential IPO.
The Impact of Liquidity Injections
As Guggenheim’s CIO, Scott Minered, mentioned this week, “a 50% correction is possible in the near future”… It is difficult to predict Bitcoin’s behaviour and we have seen the Bitcoin price fall by more than 80% in the past. Far from throwing stones, Scott Minered mentioned in June that the Equity benchmark (the S&P500) might also fall 50%. Although the index is up 25% since then, looking at the US companies’ fundamentals, there is no doubt that the stocks value compared to potential earnings (the P/E ratio) is relatively high, quoting today around 39.5, which is 2.5 to 4 times higher than the long-term average. The quantitative easing and liquidity injections did certainly inflate the stock markets and the cryptocurrency markets alike. But the difference between the Equity and Crypto markets, is that the gain in popularity and adoption clearly favoured the second.
Cryptocurrency Projects Scalability
The impressive increase in activity gave us the opportunity to test the technology’s scalability, to look further into emerging developments and sectors three years after they started: decentralised finance or digital art.
As far as scalability is concerned, the Proof-of-Work (PoW) protocol that currently drives the Bitcoin and Ethereum blockchain is suffering from soaring gas fees. BitInfoCharts reported an average transaction fee on Ethereum at $23.6 yesterday. It is a new ATH. Operations in complex non-optimal DeFi projects (probably involving several Ethereum on-chain transactions) can exceed hundreds of dollars, maybe more as reported by Cointelegraph. The shift of Ethereum towards the Proof-of-Stake (PoS) protocol will definitly palliate this issue.
BitInfoCharts: Average Ethereum transaction fees in USD
In the meantime, alternative scalable platforms are taking advantage of Ethereum’s PoW shortfalls, capturing a significant portion of these transactions. The most ambitious projects that started on a PoW blockchain chose to diversify their operations on more competitive platforms such as Tron or Stellar where fees are near 0. For the largest among these projects, Theter (USDT), the number of transactions on the Tron blockchain is now higher than those recorded on Ethereum.
In general, the number of transactions on the Stellar network soared and widened its gap with the Ethereum’s transactions count as reported by BitInfoCharts. USDC, the second largest stablecoin, is now live on the Stellar network. Certainly the XLM/USD price increase also reflects the network’s growing activity. Stellar is a legitimate substitute to Ethereum, at least for as long as the PoW protocol is ruling the second cryptocurrency.
BitInfoCharts: Number of transaction on Ethereum, Tron and Stellar