A collection of my research from trends and events this summer.

Note: Crypto moves fast. So fast that my analysis and charts became outdated soon after I created them. Therefore, this research is based on data as of August 1st, 2022. I added some comments on August 18th to address the recent events surrounding USDC and Tornado Cash.

For the first part of my research, I decided to examine investor sentiment and changing preferences in crypto markets based on ETH/BTC metrics and movements of the top stablecoins. To do this, I analyzed the relationship between the BTC/ETH price ratio vs. the BTC/ETH market cap ratio. Investors have historically used the ETH/BTC price metric to estimate trends. As the ratio increases, it signals a shift from BTC to ETH and altcoins. However, I believe the ETH/BTC market cap metric could be a better indicator of investor preference because it accounts for the differences in the two coin’s inflation rates and supplies.

Next, I sought to understand how this summer’s industry events affected investor preference for the top four stablecoins after the crash of UST. By investigating the last three years of stablecoin market cap data and stablecoin treasuries, I hoped to understand better why Tether’s (USDT) once dominant hold on the stablecoin industry has almost evaporated. I also analyzed the change in stablecoin holdings during significant events this summer to see if there were any connections with the ETH/BTC ratios.

Finally, I look at a new metric to measure the sentiment of the crypto industry: stablecoin supply as a % of the total crypto market cap.

Traders often use the ETH/BTC price metric to confirm trend reversal and breakouts as money in crypto will often flow from BTC to ETH to alts and vice versa. As Bitcoin continues to push the store of value narrative, the industry can be seen as being in “risk-off” mode during times when BTC appreciates against ETH. In contrast, if the ETH/BTC price ratio is rising, it could signal that the industry is in a “risk-on” period, and money will soon flow into riskier altcoins.

Historically, the ratio has been a good indicator of where the market is in its current cycle. For example, the ratio bottomed in September 2019 at 0.016, which coincided with the end of the crypto winter and the beginnings of DeFi. Similarly, the entire crypto market cap peaked in November 2021, and the ETH/BTC ratio peaked shortly later, on December 12th, at 0.0877.

Looking over the previous bull cycle, it is clear the ETH/BTC ratio reflects the current narrative of development in crypto. To briefly recap some of the significant events, the ratio rises as DeFi summer takes off. Then, in the fall of 2020, BTC begins its major move and breaks above previous all-time highs in December. This causes the ratio to fall back to ~0.025. Next, from March-May 2021, NFTs go mainstream with NBA TopShot, and the price of ETH begins to explode from ~$1500 to over $4000. The ETH/BTC ratio peaks on May 15th, and the subsequent deleveraging event on May 19th results in the ratio falling sharply. The industry then goes into a risk-off mode for the rest of the summer until NFTs and the DeFi 2.0 narratives kick off another mini bull run until November.

Even in shorter timeframes, the ETH/BTC ratio measures investor sentiment reasonably well. Take this past summer, for example:

In April 2022, macro markets worsened and investors started to rotate their assets back into BTC over ETH. In May, the ETH/BTC ratio fell sharply as the UST depeg and subsequent Luna ecosystem collapse sent shockwaves across the industry. The ratio continued to decline sharply as it became clear which companies and firms were over-exposed to Luna. It bottomed June 13th once Celsius halted withdrawals and 3AC announced bankruptcy. Afterward, the ratio begins to stabilize as the uncertainty and forced selling surrounding major lenders, miners, and hedge funds are removed from the market. Finally, as excitement for the Ethereum Merge builds, the ratio rises sharply in late July.

Overall, it is not too surprising that the ratio mirrors the current narratives playing out in crypto. The ratio serves as less of a predictor but more of a confirmation of how the industry is feeling.

The ETH/BTC market cap metric is often referred to when discussing the "Flippening," the idea that Ethereum will eventually overtake Bitcoin as the #1 cryptocurrency. However, in June and July, the ratio fell to its lowest level since the major ETH run in April and May 2021 and signified that investors were more fearful about the future of crypto prices than they were after the crash in late May 2021.

It is not surprising that at first glance, the ETH/BTC MC chart since 2019 looks very similar to the ETH/BTC price ratio chart.

In traditional markets, a public company’s market cap is the agreed-upon metric that best displays a firm’s overall value. However, price is relative to each individual stock, so it is impossible to compare the price of 1 stock to another directly. I believe that the same theory should play out in crypto and that comparing the market caps of BTC and ETH rather than their price makes more sense. To determine any significant differences, I graphed the returns of both ratios since the start of 2019.

Interestingly I found that prior to the 2020 Bitcoin halving, the ETH/BTC price and market cap ratio tracked closely together. However, the gap between the two ratios has widened since 2020’s DeFi Summer. I believe this can be attributed to a few factors, such as differences in the inflation rates and that ETH has started to capture more investor attention over time.

Before the latest Bitcoin halving, its inflation rate was ~3.7%. The inflation rate now hovers around 1.6%. In contrast, Ethereum’s inflation rate was 4.5% before the EIP-1559 upgrade went into effect last August. This past year, Ethereum’s inflation has been around 2%.

The market cap ratio has performed better since the start of 2019 despite Ethereum having a higher inflation rate. This can be a sign that ETH’s price is holding up well against the higher issuance, which would result from from increased investor demand for ETH since the creation of DeFi, NFTs, and other applications built on Ethereum. Overall, it appears that the ETH/BTC market cap ratio is a better metric as it considers differences in the two asset’s supply issuance.

Stablecoins have been praised as crypto’s killer app and digital dollars are being used by individuals worldwide. As one of the first stablecoins to be created, USDT and Tether, the company behind the stablecoin, originally had a huge first mover advantage in the market. However, since the beginning of 2019, the supply of USD pegged stablecoins have increased over tenfold and many new players have entered the market. Below are the market caps of the five largest stablecoins.

Note: UST is included since at one point it was the 3rd largest stablecoin and highlights the impact of its collapse.

While USDT still has the largest market cap out of all the stablecoins, its market share peaked in July 2020 at ~90% and has been steadily decreasing. It is also interesting to note that USDC primarily captured UST’s market share.

Unfolded conducted a similar analysis of USDT’s declining dominance without including UST. Unfolded’s chart below illustrates that USDT has fallen from 88.3% of the stablecoin market to 45.2% as of July 12th, less than half of the market. In contrast, USDC dominance has grown 4.2x, BUSD by 7.5x, and DAI by 3.9x over the same 2y timeframe.

Another sign of investors favoring other stablecoins is the ratio between USDT and USDC. The ratio has been steadily increasing since July of 2020 and since the collapse of UST, it is quickly approaching 1. The impending “flippening” of the two stablecoins in terms of total supply is probably the best indicator that a growing number of institutions and individuals prefer USDC as a safe haven over other stablecoins.

Overall, it is a good sign that more stablecoin issuers are entering the market. This not only gives investors more options but signals a strong market fit. The dramatic drop in USDT market share is likely partly attributed to these increased offerings and the stablecoin industry beginning to mature. However, for many years Tether’s finances and reserves have been called into question. Even after an investigation by the New York Attorney General’s office that resulted from Tether being prohibited from doing business in New York, there is still uncertainty surrounding the treasury backing USDT.

Reserves and descriptions are taken directly from USDC and USDT's statements.

Above is a breakdown of the reserves as of March 31st, 2022 given by Tether and audited by Moore Cayman. There are several significant concerns for investors. The first is that Tether holds 6% of its reserves in "other investments," including cryptocurrencies. 6% of USDT's market cap represents $4 billion.

Secondly, one-fourth of the balance sheet holds commercial paper and certificates of deposit, and USDT does not disclose whose debt it holds. Last year, investors were worried that Tether was holding Evergrande debt and the Chinese company going bankrupt would cause USDT to depeg. Tether’s lawyers publicly stated that the company did not hold any Evergrande debt, but they declined to verify that the company does not hold other Chinese commercial paper.

Thirdly, the category titled "corporate bonds, funds, and precocious metals" is very opaque, as investors do not know which companies are included in this, nor what constitutes a precious metal according to Tether. Further, 3.82% of the reserves are in secured loans, but investors don't know to who they have exposure.

These categories totaled $26B of USDT's total market cap. Also, there is a concerning point of vagueness in the "US Treasury Bills" that make up almost half of Tether's reserves. The company has failed to reveal if they are comprised of more liquid, short term or longer-term treasuries.

In contrast, Circle has provided clarity and transparency regarding the reserves of USDC and constructed a much simpler and safer balance sheet than USDT. It is important to note that while Circle specifies that their US Treasury holdings are short-duration. With almost 25% of the treasury in cash, it is clear why USDC has gained investors' confidence and was the stablecoin of choice this past summer.

August 18th: Tether announced that they will be switching to a new accounting firm, BDO Italia, and will begin publishing monthly attestations on the backing of USDT to help improve investor confidence. The announcement follows the OFAC sanction of Tornado Cash’s contracts. The event made crypto investors keenly aware of Circle’s obligation to submit to US government policy and the blacklist function present in USDC’s contract. These events could reverse the recent trend of USDC supply growth.

After understanding why USDC and other stablecoins captured significant market share, I thought it would be interesting to see if there were noticeable patterns in stablecoin supply change during volatile days. Drops in the stablecoin supplies typically mean that 1 of 2 scenarios is playing out:

1. Money that was sidelined in stablecoins is now flowing back into riskier assets like BTC and ETH

2. Money is exiting crypto entirely.

By analyzing changes in stablecoin supply, I hoped to understand the above scenarios better and answer the following two questions:

1. Are drops in certain stablecoin supplies the result of money flowing between stablecoins rather than leaving crypto entirely?

2. Do investors prefer BTC or USDC as a safe haven during periods of high volatility?

I first took the top 10 days of stablecoin outflows. I knew many of the largest outflows of stablecoins would be dates surrounding the UST depeg event, but I chose to include UST at the beginning of this analysis.

As originally suspected, 8/10 of the largest stablecoin supply outflows occurred in the summer of 2022. On both 1/8/2022 and 1/22/2022 the outflows were caused by an extremely large USDC redemption (over $3 billion) and upon closer analysis, these were determined to be outliers. By excluding those 2 dates and UST, the other largest outflows are mostly led by USDT. I then compared the total change in stablecoin supply from those 10 dates to changes in the market caps of BTC and ETH.

There were not any immediately obvious patterns, but I did notice a trend in the dates during the UST and Luna crash. Following the events chronologically, May 10th, 12th, and 13th were days of huge BTC and ETH drops as the market was in panic while UST began to collapse. By the end of May 13th, UST was at $.10 and it was clear that the stablecoin was completely dead. Afterward, investors probably felt that prices were oversold given the situation and as a result, May 14th and 15th saw some money flow back into BTC and ETH.

Since the major decreases in the stablecoin market cap during those dates coincided with large drops in BTC and ETH, it appears that during extreme periods of volatility investors are moving to convert some money back to fiat and still do not see BTC as a safe haven.

While it was interesting to examine that trend, for the next step of my analysis I removed UST from the stablecoin market cap data and the 2 extreme outliers in USDC outflows in order to better understand the outflows related to USDT.

Again 9/10 days of the largest outflows from Tether occurred since the start of May. However, on 8/10 of those days, money flowed into USDC, which confirmed the previous findings that investors have begun to favor USDC over USDT, especially during times of volatility. The chart below best summarizes these trends and flows in stablecoins, highlighting the subsequent changes in USDC and USDT supplies during critical events this summer.

The stablecoin supply as a percent of the total crypto market cap is a metric that has been used recently also to determine investor sentiment. If a large percentage of crypto assets are in stablecoins, the market is considered risk-off. This is similar to the ETH/BTC ratios; however, it only recently emerged as the stablecoin industry exploded in popularity this past year.

This metric alone is hard to interpret, but the dramatic rise in 2022 can be attributed to both the market downturn and the rising adoption of stablecoins. Below is the ETH/BTC market cap ratio compared to the stablecoin supply % ratio.

When compared directly to the ETH/BTC market cap ratio, it is clear that the two metrics are inversely related. As the stablecoin supply % increases, the ETH/BTC ratio decreases, which signifies the market is in a risk-off mode. The stablecoin supply % metric follows the same trends over the summer as it increased sharply during the crash of UST and subsequent lenders crisis in June. Both metrics help paint a picture of how investors feel about crypto markets.

A collection of my research from trends and events this summer.

Note: Crypto moves fast. So fast that my analysis and charts became outdated soon after I created them. Therefore, this research is based on data as of August 1st, 2022. I added some comments on August 18th to address the recent events surrounding USDC and Tornado Cash.

For the first part of my research, I decided to examine investor sentiment and changing preferences in crypto markets based on ETH/BTC metrics and movements of the top stablecoins. To do this, I analyzed the relationship between the BTC/ETH price ratio vs. the BTC/ETH market cap ratio. Investors have historically used the ETH/BTC price metric to estimate trends. As the ratio increases, it signals a shift from BTC to ETH and altcoins. However, I believe the ETH/BTC market cap metric could be a better indicator of investor preference because it accounts for the differences in the two coin’s inflation rates and supplies.

Next, I sought to understand how this summer’s industry events affected investor preference for the top four stablecoins after the crash of UST. By investigating the last three years of stablecoin market cap data and stablecoin treasuries, I hoped to understand better why Tether’s (USDT) once dominant hold on the stablecoin industry has almost evaporated. I also analyzed the change in stablecoin holdings during significant events this summer to see if there were any connections with the ETH/BTC ratios.

Finally, I look at a new metric to measure the sentiment of the crypto industry: stablecoin supply as a % of the total crypto market cap.

Traders often use the ETH/BTC price metric to confirm trend reversal and breakouts as money in crypto will often flow from BTC to ETH to alts and vice versa. As Bitcoin continues to push the store of value narrative, the industry can be seen as being in “risk-off” mode during times when BTC appreciates against ETH. In contrast, if the ETH/BTC price ratio is rising, it could signal that the industry is in a “risk-on” period, and money will soon flow into riskier altcoins.

Historically, the ratio has been a good indicator of where the market is in its current cycle. For example, the ratio bottomed in September 2019 at 0.016, which coincided with the end of the crypto winter and the beginnings of DeFi. Similarly, the entire crypto market cap peaked in November 2021, and the ETH/BTC ratio peaked shortly later, on December 12th, at 0.0877.

Looking over the previous bull cycle, it is clear the ETH/BTC ratio reflects the current narrative of development in crypto. To briefly recap some of the significant events, the ratio rises as DeFi summer takes off. Then, in the fall of 2020, BTC begins its major move and breaks above previous all-time highs in December. This causes the ratio to fall back to ~0.025. Next, from March-May 2021, NFTs go mainstream with NBA TopShot, and the price of ETH begins to explode from ~$1500 to over $4000. The ETH/BTC ratio peaks on May 15th, and the subsequent deleveraging event on May 19th results in the ratio falling sharply. The industry then goes into a risk-off mode for the rest of the summer until NFTs and the DeFi 2.0 narratives kick off another mini bull run until November.

Even in shorter timeframes, the ETH/BTC ratio measures investor sentiment reasonably well. Take this past summer, for example:

In April 2022, macro markets worsened and investors started to rotate their assets back into BTC over ETH. In May, the ETH/BTC ratio fell sharply as the UST depeg and subsequent Luna ecosystem collapse sent shockwaves across the industry. The ratio continued to decline sharply as it became clear which companies and firms were over-exposed to Luna. It bottomed June 13th once Celsius halted withdrawals and 3AC announced bankruptcy. Afterward, the ratio begins to stabilize as the uncertainty and forced selling surrounding major lenders, miners, and hedge funds are removed from the market. Finally, as excitement for the Ethereum Merge builds, the ratio rises sharply in late July.

Overall, it is not too surprising that the ratio mirrors the current narratives playing out in crypto. The ratio serves as less of a predictor but more of a confirmation of how the industry is feeling.

The ETH/BTC market cap metric is often referred to when discussing the "Flippening," the idea that Ethereum will eventually overtake Bitcoin as the #1 cryptocurrency. However, in June and July, the ratio fell to its lowest level since the major ETH run in April and May 2021 and signified that investors were more fearful about the future of crypto prices than they were after the crash in late May 2021.

It is not surprising that at first glance, the ETH/BTC MC chart since 2019 looks very similar to the ETH/BTC price ratio chart.

In traditional markets, a public company’s market cap is the agreed-upon metric that best displays a firm’s overall value. However, price is relative to each individual stock, so it is impossible to compare the price of 1 stock to another directly. I believe that the same theory should play out in crypto and that comparing the market caps of BTC and ETH rather than their price makes more sense. To determine any significant differences, I graphed the returns of both ratios since the start of 2019.

Interestingly I found that prior to the 2020 Bitcoin halving, the ETH/BTC price and market cap ratio tracked closely together. However, the gap between the two ratios has widened since 2020’s DeFi Summer. I believe this can be attributed to a few factors, such as differences in the inflation rates and that ETH has started to capture more investor attention over time.

Before the latest Bitcoin halving, its inflation rate was ~3.7%. The inflation rate now hovers around 1.6%. In contrast, Ethereum’s inflation rate was 4.5% before the EIP-1559 upgrade went into effect last August. This past year, Ethereum’s inflation has been around 2%.

The market cap ratio has performed better since the start of 2019 despite Ethereum having a higher inflation rate. This can be a sign that ETH’s price is holding up well against the higher issuance, which would result from from increased investor demand for ETH since the creation of DeFi, NFTs, and other applications built on Ethereum. Overall, it appears that the ETH/BTC market cap ratio is a better metric as it considers differences in the two asset’s supply issuance.

Stablecoins have been praised as crypto’s killer app and digital dollars are being used by individuals worldwide. As one of the first stablecoins to be created, USDT and Tether, the company behind the stablecoin, originally had a huge first mover advantage in the market. However, since the beginning of 2019, the supply of USD pegged stablecoins have increased over tenfold and many new players have entered the market. Below are the market caps of the five largest stablecoins.

Note: UST is included since at one point it was the 3rd largest stablecoin and highlights the impact of its collapse.

While USDT still has the largest market cap out of all the stablecoins, its market share peaked in July 2020 at ~90% and has been steadily decreasing. It is also interesting to note that USDC primarily captured UST’s market share.

Unfolded conducted a similar analysis of USDT’s declining dominance without including UST. Unfolded’s chart below illustrates that USDT has fallen from 88.3% of the stablecoin market to 45.2% as of July 12th, less than half of the market. In contrast, USDC dominance has grown 4.2x, BUSD by 7.5x, and DAI by 3.9x over the same 2y timeframe.

Another sign of investors favoring other stablecoins is the ratio between USDT and USDC. The ratio has been steadily increasing since July of 2020 and since the collapse of UST, it is quickly approaching 1. The impending “flippening” of the two stablecoins in terms of total supply is probably the best indicator that a growing number of institutions and individuals prefer USDC as a safe haven over other stablecoins.

Overall, it is a good sign that more stablecoin issuers are entering the market. This not only gives investors more options but signals a strong market fit. The dramatic drop in USDT market share is likely partly attributed to these increased offerings and the stablecoin industry beginning to mature. However, for many years Tether’s finances and reserves have been called into question. Even after an investigation by the New York Attorney General’s office that resulted from Tether being prohibited from doing business in New York, there is still uncertainty surrounding the treasury backing USDT.

Reserves and descriptions are taken directly from USDC and USDT's statements.

Above is a breakdown of the reserves as of March 31st, 2022 given by Tether and audited by Moore Cayman. There are several significant concerns for investors. The first is that Tether holds 6% of its reserves in "other investments," including cryptocurrencies. 6% of USDT's market cap represents $4 billion.

Secondly, one-fourth of the balance sheet holds commercial paper and certificates of deposit, and USDT does not disclose whose debt it holds. Last year, investors were worried that Tether was holding Evergrande debt and the Chinese company going bankrupt would cause USDT to depeg. Tether’s lawyers publicly stated that the company did not hold any Evergrande debt, but they declined to verify that the company does not hold other Chinese commercial paper.

Thirdly, the category titled "corporate bonds, funds, and precocious metals" is very opaque, as investors do not know which companies are included in this, nor what constitutes a precious metal according to Tether. Further, 3.82% of the reserves are in secured loans, but investors don't know to who they have exposure.

These categories totaled $26B of USDT's total market cap. Also, there is a concerning point of vagueness in the "US Treasury Bills" that make up almost half of Tether's reserves. The company has failed to reveal if they are comprised of more liquid, short term or longer-term treasuries.

In contrast, Circle has provided clarity and transparency regarding the reserves of USDC and constructed a much simpler and safer balance sheet than USDT. It is important to note that while Circle specifies that their US Treasury holdings are short-duration. With almost 25% of the treasury in cash, it is clear why USDC has gained investors' confidence and was the stablecoin of choice this past summer.

August 18th: Tether announced that they will be switching to a new accounting firm, BDO Italia, and will begin publishing monthly attestations on the backing of USDT to help improve investor confidence. The announcement follows the OFAC sanction of Tornado Cash’s contracts. The event made crypto investors keenly aware of Circle’s obligation to submit to US government policy and the blacklist function present in USDC’s contract. These events could reverse the recent trend of USDC supply growth.

After understanding why USDC and other stablecoins captured significant market share, I thought it would be interesting to see if there were noticeable patterns in stablecoin supply change during volatile days. Drops in the stablecoin supplies typically mean that 1 of 2 scenarios is playing out:

1. Money that was sidelined in stablecoins is now flowing back into riskier assets like BTC and ETH

2. Money is exiting crypto entirely.

By analyzing changes in stablecoin supply, I hoped to understand the above scenarios better and answer the following two questions:

1. Are drops in certain stablecoin supplies the result of money flowing between stablecoins rather than leaving crypto entirely?

2. Do investors prefer BTC or USDC as a safe haven during periods of high volatility?

I first took the top 10 days of stablecoin outflows. I knew many of the largest outflows of stablecoins would be dates surrounding the UST depeg event, but I chose to include UST at the beginning of this analysis.

As originally suspected, 8/10 of the largest stablecoin supply outflows occurred in the summer of 2022. On both 1/8/2022 and 1/22/2022 the outflows were caused by an extremely large USDC redemption (over $3 billion) and upon closer analysis, these were determined to be outliers. By excluding those 2 dates and UST, the other largest outflows are mostly led by USDT. I then compared the total change in stablecoin supply from those 10 dates to changes in the market caps of BTC and ETH.

There were not any immediately obvious patterns, but I did notice a trend in the dates during the UST and Luna crash. Following the events chronologically, May 10th, 12th, and 13th were days of huge BTC and ETH drops as the market was in panic while UST began to collapse. By the end of May 13th, UST was at $.10 and it was clear that the stablecoin was completely dead. Afterward, investors probably felt that prices were oversold given the situation and as a result, May 14th and 15th saw some money flow back into BTC and ETH.

Since the major decreases in the stablecoin market cap during those dates coincided with large drops in BTC and ETH, it appears that during extreme periods of volatility investors are moving to convert some money back to fiat and still do not see BTC as a safe haven.

While it was interesting to examine that trend, for the next step of my analysis I removed UST from the stablecoin market cap data and the 2 extreme outliers in USDC outflows in order to better understand the outflows related to USDT.

Again 9/10 days of the largest outflows from Tether occurred since the start of May. However, on 8/10 of those days, money flowed into USDC, which confirmed the previous findings that investors have begun to favor USDC over USDT, especially during times of volatility. The chart below best summarizes these trends and flows in stablecoins, highlighting the subsequent changes in USDC and USDT supplies during critical events this summer.

The stablecoin supply as a percent of the total crypto market cap is a metric that has been used recently also to determine investor sentiment. If a large percentage of crypto assets are in stablecoins, the market is considered risk-off. This is similar to the ETH/BTC ratios; however, it only recently emerged as the stablecoin industry exploded in popularity this past year.

This metric alone is hard to interpret, but the dramatic rise in 2022 can be attributed to both the market downturn and the rising adoption of stablecoins. Below is the ETH/BTC market cap ratio compared to the stablecoin supply % ratio.

When compared directly to the ETH/BTC market cap ratio, it is clear that the two metrics are inversely related. As the stablecoin supply % increases, the ETH/BTC ratio decreases, which signifies the market is in a risk-off mode. The stablecoin supply % metric follows the same trends over the summer as it increased sharply during the crash of UST and subsequent lenders crisis in June. Both metrics help paint a picture of how investors feel about crypto markets.