Produced by Coinbase, a must-have for institutional investors: Q1 crypto market guide analysis

The guide is a research report jointly created by Coinbase Institutional and Glassnode , which provides in-depth analysis of the most critical crypto market indicators and trends for institutional investors.

Market Overview

Total cryptocurrency market capitalization

The total market value of cryptocurrencies is an important indicator of the value of the global digital asset market, covering Bitcoin (BTC), Ethereum (ETH), tokens and stablecoins, etc. In 2023, driven by the strong performance of Bitcoin and Ethereum, the total market value of cryptocurrencies increased by more than 108%.

Cryptocurrency dominance

Cryptocurrency dominance measures the market capitalization of a particular cryptocurrency as a percentage of the total market capitalization of all cryptocurrencies. In 2023, Bitcoin's dominance increased as the market became increasingly bullish on the prospects of Bitcoin spot ETF approval and funds shifted to high-quality assets. Some market participants also see the Bitcoin halving in April 2024 as a potential catalyst for price increases.

Relevance

Historically, cryptocurrencies have a low correlation with traditional asset classes. 2022 was an exception, when almost all assets fell in sync, but the market returned to historical norms in 2023, indicating that cryptocurrencies will become one of the sources of non-systemic risk.

Portfolio Diversification

Cryptocurrency allocations can help traditional portfolios diversify risk and improve returns. In this table, we analyze the effect of a small allocation to the Coinbase Core Index (COINCORE) in a portfolio consisting of 60% MSCI ACWI and 40% US Agg. COINCORE is a market-cap-weighted cryptocurrency index that is rebalanced quarterly, with Bitcoin and Ethereum accounting for 65.3% and 28.7% respectively, and a combined weight of nearly 94%. The setting period is from March 2018 to October 2023, covering two major volatility cycles in the cryptocurrency market. The results show that the absolute and risk-adjusted returns of the portfolio are improved after adding COINCORE.

Stablecoin Circulating Supply

Stablecoins are digital currencies designed to maintain a stable value. They are usually pegged to the US dollar or other fiat currencies at a fixed exchange rate of 1:1 and hold corresponding reserve assets. Stablecoins backed by fiat currencies dominate the stablecoin market. When evaluating stablecoins, market participants should focus on the amount and type of their reserve assets.

Bitcoin

BTC price and market capitalization

Bitcoin prices have risen more than 155% in 2023. Market participants are encouraged by a number of factors, including a slowdown in the pace of inflation and the increased likelihood of approval of spot cryptocurrency exchange-traded funds (ETFs).

BTC price performance since cycle low

Bitcoin has gone through four complete bull-bear cycles. In this chart, we can see how the current market cycle, which began in 2022, compares to previous cycles.

Adjusted net unrealized profit and loss (NUPL) of Bitcoin physical holdings

Net Unrealized Profit and Loss (NUPL) is the difference between relative unrealized profits and relative unrealized losses. Adjusted NUPL excludes transactions between the same entity addresses ("inside" transactions) to more accurately measure real economic activity and provide a more optimized market signal than unadjusted NUPL.

BTC Supply Profitability

The circulating supply of cryptocurrencies is composed of losing supply (all coins with a cost basis above the current spot price) and profitable supply (all coins with a cost basis below the current spot price). Looking at supply profitability helps reveal where crypto prices are in the current market cycle. Previous cryptocurrency market cycles have been characterized by three phases:

Bottom finding period: In the final stages of a bear market, when long-term price depreciation leads to a rising percentage of losing supply (percentage of profitable supply < 55%).

Mania: During the bull market, when prices are trending parabolicly upward, the proportion of profitable supply dominates (profitable supply percentage > 95%).

Bull-bear transition period: the transition period between the bottom discovery period and the frenzy period, when supply profitability is closer to equilibrium (the percentage of profitable supply is between 55% and 95%).

BTC daily active addresses

The number of active addresses refers to the number of unique addresses that remain active as senders or receivers in the network. This indicator is critical for measuring user acceptance, network status, and economic activity.

BTC daily active entities

Although the number of active addresses is an important metric, a single entity can have multiple addresses, so we also need to focus on the number of active entities. Entities are defined as a group of address clusters controlled by the same network entity, which are estimated through advanced heuristics and Glassnode's proprietary clustering algorithm. Here, "advanced heuristics" refers to a complex method or technique based on experience, knowledge, and observed patterns to make estimates or decisions when information is incomplete.

Total BTC supply held by long-term holders

Glassnode defines long-term holders (LTHs) as investors who hold cryptocurrencies for at least 155 days. This holding period generally means that the probability of these assets being sold is greatly reduced. Therefore, observing the activity patterns of long-term holders can serve as an effective indicator for predicting cyclical fluctuations in the cryptocurrency market and help identify potential peaks and troughs.

BTC annualized 3-month volatility

As cryptocurrencies mature as an asset class and institutional participation increases, their volatility has shown a steady downward trend.

BTC monthly realized volatility band

This chart uses Bollinger Bands to analyze one month's realized volatility to identify potential volatility turning points. If volatility deviates from the one-month mean by more than one standard deviation, a reversal is more likely.

BTC Realized Price and MVRV

Realized price refers to the average price of cryptocurrency supply, calculated as the value of each coin on the day it last traded on-chain; it is often viewed as the on-chain cost basis of the market. MVRV is an abbreviation for market value to realized value; it represents the ratio between market value (spot price) and realized value (realized price). An MVRV of 2.0 means that the current price is twice the average cost basis of the market (the average holder is making twice as much money).

An MVRV of 1.0 means that the current price is equal to the market’s average cost basis (the average holder is at breakeven).

An MVRV of 0.50 means that the current price is 50% below the market average cost basis (the average holder loses 50%).

Extreme MVRV values ​​can reveal periods when the market is overheated or undervalued, and when investors' profits are far above or far below the average (i.e., realized prices).

BTC MVRV Momentum

This chart illustrates the MVRV ratio along with a six-month simple moving average (SMA) used as a momentum indicator. Periods where the MVRV is above the six-month SMA generally depict an uptrend in the macro market, while periods where it is below the line generally depict a downtrend.

Cycle turning points are usually indicated by MVRV’s strong breakout above the six-month SMA. A strong breakout above the SMA indicates that a large amount of BTC is being acquired at levels below the current price, while a strong breakout below indicates that a large amount of BTC is being acquired at levels above the current price.

BTC Derivatives

BTC futures trading volume

Crypto futures trading volume is divided between traditional futures, also known as time-based or calendar futures, and perpetual futures (perps), which are unique to cryptocurrencies. Perpetual futures have no expiration date, so holders do not need to roll over.

BTC Futures Open Interest

Although perpetual futures are the main force in BTC futures trading, traditional futures still occupy an important position in BTC futures open interest due to their widespread application in hedging and spot arbitrage trading.

BTC Futures Annualized Rolling Basis (3M)

Basis in the cryptocurrency markets has historically been positive (except in market dislocations). Extreme swings in basis, both positive and negative, tend to be associated with large swings in market sentiment.

BTC Perpetual Futures Funding Rate

Perpetual futures do not have a set expiration date, so holders do not need to roll over. In order to maintain a reasonable gap between the price and the spot price, perpetual futures introduce a funding rate mechanism. This rate is regularly transferred between long and short parties: when the funding rate is positive, longs pay shorts; when the funding rate is negative, shorts pay longs.

BTC Perpetual Futures Liquidation

Liquidation is the forced closing of a futures position by an exchange due to a partial or full loss of the initial margin of the futures position. Large liquidations can signal the top or bottom of a sharp price movement.

BTC options open interest

As institutional investors increasingly enter the space, options open interest has increased in 2023. In October 2023, BTC options open interest exceeded BTC futures for the first time.

BTC Traditional Futures Specifications

Bitcoin futures are offered by multiple exchanges in varying sizes and denominations.

The next market event for BTC: Bitcoin halving

We predict that the upcoming Bitcoin halving in Q2 2024 could boost the token’s performance. Nevertheless, this correlation remains speculative as supporting evidence is limited. With only three halvings in history, a completely clear pattern has yet to emerge, especially given that previous events were influenced by multiple factors, including global liquidity measures.

Ethereum

Ethereum (ETH) Price and Market Cap

In 2023, the price of Ethereum (ETH) rose by more than 90%, thanks to the successful Shapella upgrade and the increasingly clear prospects for approval of cryptocurrency spot exchange-traded funds (ETFs), which encouraged market participants.

Price performance since cycle low

Ethereum has gone through two complete bull-bear cycles. In this chart, we can see how the current market cycle, which began in 2022, compares to previous cycles.

Ethereum Unrealized Net Profit and Loss (NUPL)

Net unrealized profit or loss is the difference between relative unrealized profit and relative unrealized loss.

Ethereum (ETH) Supply Profitability Status

The circulating supply of cryptocurrencies is composed of losing supply (all coins with a cost basis above the current spot price) and profitable supply (all coins with a cost basis below the current spot price). Looking at supply profitability helps reveal where crypto prices are in the current market cycle. Previous cryptocurrency market cycles have been characterized by three phases:

Bottom finding phase: In the final stages of a bear market, when the long-term price depreciation leads to an increase in the proportion of losing supply (profitable supply percentage < 55%), the market enters the bottom finding phase.

Mania phase: When a parabolic price uptrend occurs during a bull market, the proportion of profitable supply becomes dominant (profitable supply percentage > 95%) and the market enters the mania phase.

Bull-Bear Transition Phase: This is the transition period between the bottom discovery phase and the frenzy phase, when the profitability of the supply is closer to equilibrium (the percentage of profitable supply is between 55% and 95%).

Ethereum (ETH) Weekly Active Addresses

Active addresses refer to the number of unique addresses participating in activities as senders or receivers in the network. It is an important indicator for measuring user adoption, network health, economic activity, etc.

Ethereum Annualized 3-month Volatility

As cryptocurrency matures as an asset class and institutional participation increases, volatility has been trending steadily downward.

Ethereum Monthly Realized Volatility Bands

This chart uses Bollinger Bands to analyze one month's realized volatility to identify potential volatility turning points. If volatility deviates from the one-month mean by more than one standard deviation, a reversal is more likely.

Ethereum (ETH) Realized Price vs. MVRV

Realized price refers to the average price of cryptocurrency supply, calculated as the value of each coin on the day it last traded on-chain; it is often viewed as the on-chain cost basis of the market. MVRV is the abbreviation for market value to realized value, which represents the ratio between market value (spot price) and realized value (realized price).

An MVRV of 2.0 means that the current price is twice the market average cost basis (the average holder is making twice as much).

An MVRV of 1.0 means that the current price is equal to the market’s average cost basis (the average holder is at breakeven).

An MVRV of 0.50 means that the current price is 50% below the market's average cost basis (the average holder loses 50%).

Extreme MVRV values ​​help identify periods when the market is overheated or undervalued, as well as periods when investor profitability deviates significantly from the mean (realized price).

Ethereum (ETH) MVRV Momentum

This chart shows the MVRV ratio along with a six-month simple moving average (SMA) used as a momentum indicator. Periods when the MVRV is above the six-month SMA generally depict an uptrend in the macro market, while periods when it is below generally depict a downtrend.

Cycle turning points are usually characterized by MVRV's strong breakout above the six-month SMA. A strong breakout above the SMA suggests that a large amount of ETH was bought below the current price, while a strong breakout below the SMA suggests that a large amount of ETH was bought above the current price.

Ethereum (ETH) Total Staked Value

Staking is a way of investing in the Proof of Stake (PoS) blockchain, where token holders pledge assets to secure the network and receive additional tokens as rewards. In order to stake ETH, holders need to pledge at least 32 ETH and run a validator node.

Total locked value of Ethereum (ETH) in DeFi

The total locked value (TVL) is the total value of assets locked in smart contracts or deposited in decentralized applications on the Ethereum blockchain, including ETH, stablecoins, and various tokens. It is an important indicator for evaluating financial activities and liquidity within the Ethereum ecosystem.

Ethereum (ETH) Derivatives

Ethereum Perpetual Futures Trading Volume

Crypto futures trading volume is divided into traditional futures (also known as fixed-term or calendar futures) and perpetual futures (perps), which are unique to cryptocurrencies. Perpetual futures have no expiration date, so holders do not need to roll over. Ethereum futures trading volume is dominated by perpetual futures.

Ethereum Perpetual Futures Open Interest

Ethereum futures positions are mainly concentrated in perpetual futures, while traditional futures trading volume is relatively small.

Ethereum Futures Annualized Rolling Basis (3M)

The basis of the crypto market is usually positive. Its extreme volatility, whether positive or negative, is closely related to the sharp changes in market sentiment.

Ethereum Perpetual Futures Funding Rate

In order to maintain a reasonable gap between the price and the spot price, perpetual futures introduce a funding rate mechanism. This rate is regularly transferred between long and short parties: when the funding rate is positive, longs pay shorts; when the funding rate is negative, shorts pay longs.

Ethereum (ETH) Options Open Interest (Weekly)

Ethereum options open interest hit an all-time high in the fourth quarter of 2023 as market participants became increasingly bullish on the prospects of spot ETFs and Ethereum development in 2024.

Ethereum (ETH) Traditional Futures Specifications

Ethereum futures are offered by multiple exchanges in different sizes and denominations.

What are the next market events for Ethereum (ETH)?

After the successful completion of the Shapella upgrade, the Ethereum community is looking forward to the arrival of the Cancun ("Decun") upgrade, which is expected to be implemented in the first quarter of 2024. The Cancun upgrade will mainly enhance the scalability and security of the Ethereum network by introducing Proto- Danksharding . The design goal of Proto-Danksharding is to significantly reduce the fees of second-layer transactions and significantly increase the transaction processing capacity of the Ethereum network per second.