CoinDesk Crypto

Mobile phone manufacturer HTC has demonstrated a special interest in the blockchain and cryptocurrency space, introducing numerous industry-related features in its flagship Exodus smartphone.

Will bitcoin (BTC) move beyond “digital gold”? Is ether (ETH) viable as money? In 24 charts, CoinDesk Research shows what happened to crypto assets in Q1 2020 and examines what may emerge in the future. Download our Q1 analysis here, and join us on April 15 for a webinar discussing our findings and other relevant cryptocurrency research.

The CoinDesk Quarterly Review provides research-based insights on how the narrative has changed for blue-chips such as bitcoin and ether. We look at which assets outperformed on returns, and how the participants in crypto markets are shifting in the wake of Q1’s defining event, the March 12 plunge.

Bitcoin’s “digital gold” narrative grew up in a “bull market in everything.” Bitcoin as gold 2.0, a hedge against inflation and a safe haven in an eventual crash, was a meme investors readily understood.

Related: This Visa Card Gives Bitcoin Rewards on Dollars Spent

Now, we’ve seen an economic crisis cause dislocation in crypto markets and push bitcoin’s price downward in tandem with stocks. Gold and Treasury bonds appeared to have failed to live up to “safe haven” expectations. If gold’s narrative is being debated, do we still know what “digital gold” means? At the very least, the events of the past month have put to rest the notion that bitcoin today can be a “haven.”

How March 12 shook crypto markets, and how it didn’t

The crash shook participants in crypto markets. Open interest in bitcoin futures and perpetual swaps fell off a cliff in March. These markets are used by traders large and small to speculate on bitcoin’s price, and as a temporary hedge against positions in the spot market. Futures volume spiked and settled at a higher baseline, as it did in spot markets. The increased activity is taking place in a shrunken market. About $1.6 billion of traders’ positions were liquidated over two days in March. The sharks are eating each other in a smaller pool, as it were.

At the very least, the events of the past month have put to rest the notion that bitcoin today can be a “haven.”

Bitcoin’s long-term holdings, however, remained unmoved. “Hodlwaves” use Bitcoin timestamps known as UTXOs to measure how long each bitcoin has been held. Tracking time between transactions is a useful measure of long-term “buy-and-hold” activity. That activity is consistent with bitcoin’s use case as “digital gold,” a putative store-of-value. Note that long-term holdings (180 days or more) did not change perceptibly during the March 12 crash. Balances held between 90 days and 180 days shifted abruptly. Were bitcoin sellers concentrated among three- to six-month holders? Or were exchange balances, which shifted on these dates, concentrated in that band?

Alternative user narratives: Return of payments?

Related: First Mover: Bitcoin Cash’s Halving Was Dull – Bitcoin’s May Be Much the Same

Some of bitcoin’s long-term holders are surely hoping in time it will prove itself as a haven or store of value. But events such as the March crash open the door to new narratives. The flagship crypto asset’s next meme will set the adoption curve for verifiably scarce digital assets. Will payments re-emerge as an avenue to adoption?

Read more: Bitcoin’s Lightning Becomes Latest Protocol to Court Publishers With Micropayments

Since launch, the number of computers running the Lightning Network has increased on average 53 percent every quarter. Lightning is a “layer two” payments system built on top of the Bitcoin network. The value held within Lightning payment channels has also increased.

New importance for bitcoin and ethereum technical road maps

It’s possible a new user adoption narrative will be something quite different from what long-term investors in bitcoin have contemplated to date. Will Bitcoin developers add capabilities — like Schnorr signatures, with their privacy and programmability — that lead to its adoption as digital financial infrastructure?

Read more: Bitcoin’s Bull Case Strengthens After Breaching Price Hurdle at $7.1K

The technical road map emerges from Q1 2020 with increased importance for ethereum, as well. Ether evangelists have spread the meme “ETH is money” in the belief that it has potential as the base currency of a decentralized, digital banking system, dubbed “decentralized finance” or “DeFi.” The failure of flagship DeFi systems during the March 12 crash have raised questions about that narrative. Now more than ever it seems to be dependent on a relatively uncertain road map for “ETH 2.0,” an improvement designed to allow more transaction throughput.

On March 12, total ETH locked in DeFi applications increased as expected, then crashed amid a crisis in DeFi’s programmatic governance. If “ETH is money,” we’d expect to see the amount locked in DeFi and the ETH price grow in tandem, long-term. For the near term, a recovery to previous levels would indicate a restoration of confidence in DeFi systems.

The CoinDesk Quarterly Review lays out a Q1 analysis of what happened to crypto assets in the quarter. It begins to examine what will emerge now that the digital gold story has been shaken. Download it here, and join us April 15 for a webinar discussing our findings.

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They’re definitely not equity, but could “exchange tokens” be bellwethers for one of crypto’s best use cases? (Spoiler: Probably not)

Among thousands of venture-backed startups, tokens, coins, blockchains and open-source technology projects, exchange operators now stand out among the top revenue getters in the crypto asset category. Coinbase, not the largest by trading volume even among exchanges whose trade data is trusted, reported $173 million in 2018 non-U.S. revenue, leading Reuters to estimate Coinbase’s global revenue as north of $500 million. 

If crypto has proven itself in one use case, it is as a volatile asset for investors hungry to speculate. Our estimate of exchange operators’ fee-based revenue shows this to be true. 

Related: Bitcoin Most ‘Overbought’ in 2 Years After Price Rises Back Above $10K

As such, crypto tokens issued by the exchanges themselves could be among the most useful digital assets in circulation. “Exchange tokens,” as they are called, offer holders discounts on trading fees and other benefits. This doesn’t make them anything like equity claims on exchange revenue, which several analysts have pointed out, no matter what buyback mechanisms are employed. It does make them much like the “utility tokens” issued in the initial coin offering boom of 2017 and 2018 – or like air miles – and some investors in these tokens embrace that narrative. 

Unlike air miles, exchange tokens trade freely on a variety of venues. As such it’s surprising that, despite the success of their issuers, the tokens themselves have not been more successful as investments. The table below shows the one-, three-, six-, nine- and 12-month returns of Binance’s BNB, Huobi’s HT, Bitfinex’s LEO and OKEx’s OKB, the four exchange tokens that make up the exchange token index provided by FTX, a derivatives exchange operator, as of Jan. 28 (data via Nomics).

Table of exchange token returnsSource: Nomics

The benefits to traders, however, can be significant. According to Binance’s fee schedule, the top tier of BNB token holders must today hold about $176,000 worth of the token and trade about $1.2 billion per month on the exchange (with BNB and BTC at current prices of about $16 and $8,000 respectively). For users trading in these volumes,top-tier BNB holdings provide fee discounts that would save them about $720,000 each month, off the standard trading fees – more, if these traders pay the fees themselves in the Binance token. They also provide access to “initial exchange offerings” (IEOs), a new asset issuance operated by the exchange. 

As such, BNB and other exchange tokens might be expected to serve as indicators as to the relative success of the issuing exchanges. After all, if an open market for air miles existed, you might expect one airline’s miles to trade at a premium to another’s, depending on flyers’ perceptions of their service. 

Related: Poloniex Crypto Exchange Forced to Roll Back Trades After Update Error

At one time, that was true of exchange tokens, but over the course of the past year it’s become less and less so. For most of these exchange tokens, the correlation between price and the issuing exchanges’ reported volume is weakening over time. (Unlike the exchanges in the revenue chart, not all these exchange token issuers’ reported volume is rated trustworthy.) 

Line graph showing exchange token price and exchange volume correlationSource: Nomics

Even as a more general metric, providing an indicator of the broad demand for crypto assets as a speculative investment, exchange tokens are a weak signal. Or, at least, they are no better than the price of bitcoin. At the same time as their prices have drifted from the reported volume of their parent exchanges, exchange tokens’ daily returns have hewed more closely to those of bitcoin itself.

Line graph showing exchange token and bitcoin returns’ correlation vs timeSource: Nomics

It’s been 11 years since bitcoin was operational and you can make a case that speculation is the best-proven user narrative for the entire asset category. And it is a real use: not everyone in the world has access to volatile assets (and for some, perhaps no asset is volatile enough). For now, exchange tokens appear to be just another flavor of that volatility. Their price movements don’t yet support thinking of exchange tokens as a meaningful innovation in use or ownership. 

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The world is run by organized people. Most of us can’t organize people and resources on the scale that successful executives and politicians do, so the world isn’t just run by organized people, it’s run by other people.