Analysis for the next two weeks: ETH, BTC, Solana ecosystem, and the return of Meme

Quick Facts

• Bitcoin broke through its all-time high this week. The short-covering move that initially drove the rally now appears to have been exhausted, and U.S. spot Bitcoin ETFs continue to be a key support for Bitcoin demand.

• That said, we think the Crypto market could face some significant macroeconomic headwinds and negative technical factors in the coming weeks, after which we could witness the next leg up.

• We believe that the comparison between newly mined Bitcoin and ETF inflows does not fully capture the full picture of long-term cyclical supply trends.

Market Observation

Bitcoin broke out to an all-time (intraday) high of $69,338 this week before retreating from that level and bouncing back again. The short-covering move that fueled the initial rally now appears to have been exhausted, but US spot Bitcoin ETFs remain a significant support for Bitcoin demand, as reflected by average daily net inflows of $400 million over the past two weeks. Additionally, liquidity has been a major impediment to price momentum in previous cycles, but this does not appear to be the case now. Nonetheless, we believe these supportive drivers may run into some important macro and technical resistance in the coming weeks.

For example, the Fed is expected to let the Bank Term Funding Program (BTFP), set up to support U.S. regional banks, expire on March 11. This could create arbitrage opportunities for banks, but at the cost of potentially reintroducing fragility into the financial system. On the economic data front, U.S. February CPI data will be released on March 12 (Bloomberg median forecast is 3.1% year-on-year), and any negative surprises could cause cryptocurrencies to retreat along with other risk assets. Meanwhile, falling fund managers’ cash reserves (based on Bank of America Global Research’s monthly fund manager survey) coupled with end-of-quarter rebalancing could constrain liquidity.

Given these offsetting dynamics, we believe the most likely scenario is that Bitcoin prices may trade in a narrow range over the next few weeks until we get closer to the next major event (Bitcoin halving in April) before reaching a true price discovery zone. However, ETFs have changed Bitcoin’s market dynamics, making the study of previous halving cycles somewhat irrelevant. In fact, the cumulative net growth rate of BTC held by ETFs is nearly three times that of miners (see Figure 1). That said, we believe the imbalance between newly mined Bitcoin and ETF inflows is just a sideshow behind the long-term cyclical supply trend.

The reality is that the growth in liquid circulating supply (which we define as the movement of Bitcoin over the past 3 months) has been significantly faster than the cumulative inflows into the ETF (see Figure 2). In fact, while 150,000 new BTC have been mined since Q4 2023, the liquid BTC supply has increased by 1.2 million. We suspect that the recent increase in BTC’s liquid circulating supply of 200,000 during the March 3-6 period is likely due to medium-term holders preparing to sell during a bull run. This is reminiscent of the similar increase in liquid circulating supply during the January 3-5 period when spot ETFs were approved.

To put this into context, in previous cycles, the growth of Liquid Circulating Supply has outpaced the growth of Bitcoin mining by a factor of 5. In the 2017 and 2021 cycles, Liquid Circulating Supply nearly doubled, from 2.9 million to 6.1 million (an increase of 3.2 million), and from 3.1 million to 5.4 million (an increase of 2.3 million), respectively. In comparison, newly mined BTC was approximately 600,000 and 200,000 in the same timeframe.

Looking ahead

In addition to BTC, we expect Ethereum (ETH) to receive more attention in the coming week as the Deneb/Cancun (Dencun) fork is expected to be launched on the Ethereum mainnet on March 13. The next Prague/Electra (Pectra) is planned for later this year. As discussed in our 2024 Crypto Market Outlook, we believe that this upgrade will mainly benefit Layer 2 as the fork focuses on Proto-Danksharding (EIP-4844), which integrates binary large objects (blobs) into blocks, which may reduce L2 fees by 2-10 times.

Lowering the block space cost of L2 has raised concerns about whether Dencun will dilute ETH revenue in the short term. However, we believe that L2 activity currently only accounts for about 10% of transaction fees on average, which means we believe the impact of Dencun is likely to be relatively small. In addition, a relatively underestimated change in the Dencun upgrade is EIP-7514, which will reduce the maximum validator change limit from the current 14 to 8 per epoch, which will slow the growth of the validator set and thus affect the absolute level of staking rewards.

Meanwhile, at a hearing of the U.S. House of Representatives Agriculture Committee this week, Commodity Futures Trading Commission (CFTC) Chairman Rostin Benham reiterated his view that ETH is a commodity, suggesting that Prometheum's plan to custody ETH is an "independent decision" and has nothing to do with the U.S. Securities and Exchange Commission (SEC). As the deadline for the U.S. Securities and Exchange Commission (SEC) to make a final decision on approving the first batch of spot ETH in the United States approaches, discussions around ETH ETFs are likely to heat up in the next two and a half months.

On-chain: Meme returns

Additionally, on-chain transaction volume has increased significantly, in part due to the frenzy surrounding Meme coin trading. Its volume more than doubled from $4.8 billion on March 2 to a peak of $11.5 billion on March 5 (see Chart 3). In fact, more than a third of activity is concentrated on Solana, and Solana's decentralized exchange (DEX) market share has increased more than fivefold since early November 2023 (from ~6% to ~30%).

We believe there are two main factors driving this growth. The first is the expectation of future airdrops from Jupiter, the largest DEX aggregator on Solana, as only one of its four airdrop plans has been implemented so far. Since higher trading volume is proportional to larger airdrops, users will trade more frequently due to the expectation of incentives. The second is the reduction in gas costs on the platform, which lowers the user threshold and (mostly) eliminates the problem of gas fees encroaching on retail profit income.

At the same time, we also believe that meme culture in Solana (and other newer ecosystems) may be particularly active as new airdrops, capital inflows, and (importantly) a lack of holders from the old cycle will lead to the formation of a new cultural circle. The rise of meme coins is often a fundamental driver of increased DEX usage, especially for tokens that are not yet widely listed.

Crypto and traditional sector performance

As of March 7 at 4 p.m. ET

AssetPriceMkt Cap24 hour change7 day changeBTC correlationBTC$67,980$1.33T+1.15%+10.99%100%ETH$3,935$467B+0.32%+15.97%63%Gold (Spot)$2,159.98-+0.55%+5.66%-5%S&P 5005,157.36-+1.03%+1.20%29%USDT$1.00$101B---USDC$1.00$29.2B---

Coinbase Exchange and CES Insights

The bullish momentum in cryptocurrencies has continued this week. BTC broke its all-time high and immediately pulled back lower, which seems to be mainly caused by spot market selling. Perpetual futures open interest and funding rates remained relatively stable as prices fell. Similarly, CME's term futures basis did not compress like we saw in the sell-off after the ETF launch in early January. While we did see some small de-risking in the weakness, the counter trade seems to be higher, so the decline was quickly eaten up by more buying.

With the Dencun fork expected to take place next week (on Ethereum), traders’ attention is turning to ETH. While the token did perform relatively well this week, the ETH/BTC pair is still 10% below levels seen in August 2023, when the Bitcoin spot ETF narrative was really starting to take off. SOL (Solana) also got a boost this week when a large, well-known cryptocurrency manager announced plans to launch a Solana fund.

Coinbase platform transaction volume (USD)

Coinbase platform transaction volume (by asset ratio)

Funding Rate

3/7/2024TradFiCeFiDeFiOvernight5.35%5.00% - 10.75%10.75%USD - 1m5.50%5.25% - 11.00%USD - 6m5.75%5.50% - 11.50%BTC1.50% - 5.00%ETH3.00% - 8.00%1.49%

Notable Crypto News

mechanism

• BlackRock’s IBIT Spot Bitcoin ETF Reaches Record $788M Daily Inflows (The Block)

• Michael Saylor's MicroStrategy raises $600 million to buy more Bitcoin (Coindesk)

Regulation

• US Supreme Court case could change crypto regulation (CoinTelegraph)

• Binance.US cuts two-thirds of staff as revenue plummets following SEC lawsuit (Coindesk)

conventional

• Arbitrum, Polygon, Starknet, Base fees will fall, but by how much? (Coindesk)

Coinbase

• How We Ensure the Security of Digital Assets (Coinbase Blog)

• Wallet State - Part 2: Smart Accounts (Account Abstraction - From Theory to Practice) (Coinbase Blog)

Global Perspective

Europe

• UK law enforcement will soon have more powers to seize crypto assets (Coindesk)

• The Bank for International Settlements (BIS) has released a document titled “Recommendations for the Regulation, Supervision and Oversight of Global Stablecoins”. (BIS II)

Asia

• Hong Kong, Singapore, Japan regulators welcome push for tokenization as adoption grows (SCMP)

• Entities without a virtual asset trading platform license will cease operations in Hong Kong by the end of May (SFC)

• Chinese state media warns against cryptocurrency trading as domestic interest surges over Bitcoin rally (SCMP)

• HSBC Hong Kong will allow investment in virtual assets in 2024 (Cryptonews)

• South Korea’s ruling party withdraws election promise for spot Bitcoin ETF (The Block)

• Taiwan’s financial regulator explores special bill to regulate cryptocurrencies (The Block)

• Indonesian cryptocurrency regulator urges Ministry of Finance to adjust digital asset tax rates (Coindesk)