2022 On-Chain Data Report: BTC, ETH, and Stablecoins

Source: Checkmate, Glassnode

Compiled by: The Way of DeFi

As the chaotic, turbulent, and brutal year of 2022 comes to an end, we explore the state of the Bitcoin, Ethereum, and stablecoin markets. This retrospective analysis will be our last edition of the year, and we look forward to returning in the exciting year of 2023.

2022 has been one of the most chaotic, turbulent, and brutal years, not only for the digital asset industry but also for the broader financial markets. With central bank monetary policies making a 180-degree turn after decades of extremely loose credit conditions, the tightening environment has led to severe and rapid shrinkage across most asset classes.

This edition of on-chain analysis will be our last for the year (unless significant industry dynamics prompt us otherwise). In this article, we will cover:

• Volatility, derivatives, and futures leverage.

• The severity of realized losses from last year.

• The supply structure and concentration of Bitcoin on-chain.

• The cooling of the Bitcoin mining industry.

• Supply dynamics post-Ethereum merge.

• The evolving trend of Ethereum gas consumption dominance.

• Trends and dominance in the stablecoin market.

Quiet Futures Market

After a truly chaotic year, the Bitcoin market has become very quiet as it enters December. The short-term realized volatility of BTC is currently at a multi-year low of 22% (1 week) and 28% (2 weeks), marking the lowest volatility since October 2020.

Futures trading volume is similarly sluggish, nearing multi-year lows. The trading volume in the BTC and ETH markets is currently similar, ranging from $9.5 billion to $10.5 billion daily. This reflects the significant impact of tightening liquidity, widespread deleveraging, and the damage to many lending and trading sectors in the space.

Following the collapse of FTX, open interest in the futures market has significantly decreased. The chart below shows the leverage ratio, calculated as the ratio of futures open interest to the corresponding asset market cap.

For ETH, the establishment and unwinding of futures leverage in November were noticeably more severe, likely a result of the remaining "merge trades" being closed out. The proportion of ETH open contracts to market cap fell from 4.75% to 3.10%. BTC leverage peaked the week prior in the ETH market and has decreased from 3.46% of market cap to 2.50% over the past month.

Both Bitcoin futures and perpetual contracts are in a spot premium state, with annualized basis rates of -0.3% and -2.5%, respectively. A sustained spot premium period is uncommon, with the only similar period being the consolidation phase between May and July 2021. This indicates that the market is relatively "hedged" against further downside risks and/or there are more short speculators.

Market Reversal

The excess liquidity bubble created during the loose monetary policy era of 2020-21 resulted in record annual total realized on-chain profits. Bitcoin investors moved funds on-chain, achieving over $455 billion in annual profits, peaking shortly after the ATH in November 2021.

Since then, the market has been dominated by bears, and it has reversed over $213 billion in realized losses. This amounts to 46.8% of the profits from the 2020-21 bull market, which is very similar to the relative scale of the 2018 bear market, during which the market reversed 47.9%.

Notably, the contribution from long-term holders (LTH) has resulted in the two largest relative loss peaks in history during this cycle. By November, the peak loss for LTH was -0.10% of daily market cap, comparable only to the cycle lows of 2015 and 2018. The sell-off in June was similarly impressive, reaching -0.09% of daily market cap, with LTH dominance locking in losses of -50% to -80%.

Looking Ahead

Despite these staggering losses, the age of coin supply and the HODL tendency of those remaining continue to rise. The supply held by long-term holders has completely reversed the panic spending following the FTX disaster, reaching a new ATH of 13.908 million BTC (72.3% of circulating supply).

This metric shows an almost linear upward trend, reflecting the significant accumulation of BTC that occurred in June and July 2022, immediately following the deleveraging events triggered by 3AC and the failures of lenders in the space.

The chart below provides a view of coin supply density and distribution colored by coin age.

Note:

• Warm colors indicate a large distribution of old coins, typically seen at market tops and capitulation bottoms.

• Cooler colors indicate maturity, as investors accumulate and leave BTC unused.

• Darker bars indicate heavier coin density (and vice versa).

After each market downturn in 2022, we can see an increase in BTC redistribution density (and thus accumulation). Notably, the area from June 2022 to October 2022 stands out, with a lot of BTC being acquired between $18,000 and $24,000, and they have now aged into the 6-month-plus range (hence the increase in LTH supply above).

Tough Times for Miners

Last week saw the largest mining difficulty adjustment since the great mining migration in July 2021. The difficulty decreased by 7.32%, indicating that a significant portion of active hash power has been shut down, likely due to ongoing revenue pressures.

This led to a reversal in the hash rate band, with the crossover occurring in late November. This indicates that the mining industry is under enough pressure that some operators are shutting down ASIC miners. This is typically associated with miner revenue falling below their OPEX expenses, making ASIC mining unprofitable.

However, this is not surprising given that hash rate prices are only slightly above historical lows. Although the spot price (around $17,000) is 70% higher than in October 2020 (around $10,000), the amount of hash power competing to find the next Bitcoin block is now 70% higher.

Post-Ethereum Merge

The Ethereum merge was completed on September 15, arguably one of the most impressive engineering feats of the year. To visually demonstrate the immediacy of the event, the chart below shows the average and median block intervals during 2022. It is clear where we can observe the natural and probabilistic variability of proof of work (PoW) ending, and when the precise, predetermined proof of stake (PoS) 12-second block time began to take effect.

Since the merge, the number of active Ethereum validators has increased by 13.3%, with over 484,000 validators now running. This brings the total amount of staked Ether to 15.618 million ETH, equivalent to 12.89% of the circulating supply.

With the transition to proof of stake (PoS), Ethereum's monetary policy has been adjusted to a significantly reduced issuance schedule. The nominal issuance rate (blue) is around +0.5%, but this is almost entirely offset when considering the EIP1559 burn mechanism (red). In contrast, the net inflation rate before the merge was +3.9%, highlighting how significant the change in issuance is.

At the time of writing, the change in ETH supply since the merge has just turned to net contraction, with the current ETH supply being 242 ETH lower than at the time of the merge. In contrast, the estimated new issuance of Ether based on the previous issuance schedule would have been approximately 1.044 million ETH.

DeFi Deleveraging

Due to the significant drop in token prices and severe liquidity contraction, the total value locked in DeFi has sharply declined. After peaking at $160 billion in November 2021, DeFi TVL has fallen by over $120.3 billion (-75%). This has brought the value of DeFi collateral down to $39.7 billion, returning to levels seen in February 2021.

The dominance of gas consumption by transaction type also indicates a shift in market preferences over the past two years. From July 2020 to May 2021, DeFi protocols accounted for 25% to 30% of all gas consumption, but this has since dropped to just 14%.

During similar boom-bust cycles, in the first half of 2022, NFT-related transactions accounted for 20% to 38% of gas usage, but this has also fallen to a dominant 14%. Stablecoins have maintained a steady 5% to 6% dominance throughout the year.

Stablecoin Outflows

Since 2020, stablecoins have become a cornerstone asset of the industry, with three of the top six assets by market cap being stablecoins. The total supply of stablecoins peaked at $161.5 billion in March 2022, but has since seen massive redemptions exceeding $14.3 billion.

Overall, this reflects a net capital outflow of $4 billion to $8 billion per month from the market. However, it is also noteworthy that this only reflects 8% of the peak stablecoin supply, indicating that a significant amount of capital remains in this new digital dollar.

The relative dominance of stablecoin supply has also changed significantly.

BUSD has stood out, with its market share increasing from 10% to 16% in 2022, currently valued at $22 billion.

Despite a total redemption of $18.42 billion since May, USDT has maintained a relatively stable market share of 45% to 50%.

USDC's dominance peaked at 38% in June but has since fallen to 31.3%, currently valued at $44.75 billion.

While stablecoins are currently experiencing redemptions and net capital outflows, the transfer volume of stablecoins on Ethereum has continued to rise throughout the second half of 2022. For most of 2021-22, the total transfer volume of stablecoins remained stable at around $16 billion daily, and since July, the daily transfer volume has continued to rise to between $20 billion and $30 billion.

During the high-volatility sell-off events in May, June, and November, the total transfer volume of stablecoins peaked between $37 billion and $51 billion, indicating extreme demand for dollar liquidity during deleveraging events.

Summary and Conclusion

This year, both BTC and ETH have fallen over 75% from their all-time highs. Since May, large-scale deleveraging events have occurred frequently, triggering severe credit tightening, numerous bankruptcies, the unfortunate collapse of billions of dollars in Ponzi projects (LUNA-UST), and the regrettable fraud case of FTX.

2022 has been a brutal year, with liquidity and speculative activity drying up, leading to the lowest volatility and trading volumes in years across the market. As speculators have exited, the BTC supply held by long-term holders has surged to another ATH, with investors seemingly accumulating BTC at every price drop. The Ethereum merge was also successfully executed in September, and stablecoins continue to demonstrate meaningful product-market fit.

The resilience of decentralized systems has been built through years of trials and battle scars, ultimately creating the HODLer community, the last buyers. After enduring all the challenges of 2022, the digital asset industry remains standing, learning lessons, and Bitcoin blocks continue to be discovered.

Whatever happens in 2023, we believe this industry will stand the test of time, and we will continue to build the tools and data necessary for analysis, research, and understanding the reasons behind it.

Tick-tock, see you in 2023 for the next block.