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Tom Rodgers
Tom Rodgers Head of Research
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ETC Group Crypto Minutes Week #36

Derivatives markets are screaming out for Ethereum in place of Bitcoin as trading volumes explode to record highs; Solana could gobble up the entire Helium blockchain; and the deadline day for comprehensive US digital asset regulation has finally arrived.

Ethereum futures surpass Bitcoin for first time as Merge narrative explodes

Bitcoin futures volumes have dipped to a near two-year low while its closest rival Ethereum is breaking records, new data shows.

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Figures from across the world's largest derivatives exchanges show August 2022 as the Bitcoin futures trading volume had cooled to $941bn.

August marked the first time since records began that Ethereum futures trading volume surpassed Bitcoin, at $1.07trn across the month. Over the last three years Bitcoin futures volume has generally exceeded its closest rival by a ratio of between 2:1 and 5:1.

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In August 2022 Ethereum monthly futures volume crossed a trillion dollars for only the second time in history. The previous point was May 2021. Reuters reported at the time that the underlying asset ETH had hit a record high price of $3,917.50 that month, producing gains of nearly 500% on the year. As of 6 September 2022 spot ETH is trading between $1,550 and $1,650.

Futures volumes are not an indicator for future prices of cryptoassets per se, rather they determine market sentiment and the potential strength behind current price trends. More volume means there is greater liquidity in one asset or another, which is desirable from a trading perspective as there are plenty of buyers and sellers.

That would suggest Ethereum's 16% bounce to the upside since 29 August will continue apace. But volatility is the watchword for the systemically-important blockchain. As noted in ETC Group's 40-page research report on The Merge:

Higher volatility in Ethereum pricing should be expected in the days in and around 15 September. Uncertainty around the status of the Merge, its progress, and the state of the [Proof of Work fork of Ethereum] will contribute to higher volatility in spot markets.

The report defines and explains all the key information on the largest software upgrade in blockchain history.

Open interest leverage ratios for both BTC and ETH have also soared to record highs, opening the door to long/short squeezes: rapid moves in asset prices fuelled by traders being caught offside in short-term trading positions.

We expect higher levels of trader liquidations in the coming weeks as these colliding narratives play out.

Those with a longer-term mindset who have capital on hand are watching these levels closely. Investors are bearish in wider equity markets, but no longer ‘apocalyptically so', said a recent Bank of America poll of fund managers. And long BTC is no longer the extraordinarily crowded trade it once was. Crowded trades introduce significant volatility because they engender fragility and the potential for squeezes around specific price points.

All the focus for the next few months will be on Ethereum, and the potential for the so-called Flippening: the putative point at which Ether's market cap exceeds Bitcoin. This has never happened before, and could mark an historic shift in market priorities.

Helium Solana switch sees blockchain match the internet

Helium, a network of peer to peer internet providers, may be shutting down its blockchain and relocating wholesale to Solana. The migration proposal HIP 70 will be decided by votes from and the Helium community – developers, node operators, and tokenholders – between 12 and 18 September 2022.

Helium core developers cited Solana's transaction speeds, growing ecosystem, and interoperability with other blockchains as key factors.

The Helium network represents a decentralised Internet of Things (IoT) that challenges centralised internet services offered by telecoms companies. There are more than 940,000 Helium hotspots spread across North America, Europe, and other parts of the world.

Helium users host data hotspots using wireless routers or other smart devices that share bandwidth. Hotspot providers receive Helium's utility token HNT as a reward. As of 6 September 2022 HNT was the 78th-largest cryptoasset by market cap, with a total token value of $466m. Solana occupies the ninth spot globally, with a market cap of more than $11bn.

Like other blockchain projects, Helium extracts revenue from the gas fees users must pay to use services on its platform. That revenue is distributed between hotspot providers, validators that confirm transactions on the blockchain, and the Helium community treasury.

Over the last 180 days, Helium has generated $19.1 million in total revenue, compared to $12.4 million for Solana. This raises one obvious question: why fix something that isn't broken?

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The Helium foundation has made it clear that the blockchain they designed in 2018 to disrupt the $800bn IoT industry is no longer capable of meeting the expanding user demand and hotspots springing up on its network. Put plainly, Helium has outgrown its own blockchain; now confronting inefficiencies and data bottlenecks.

Developers believe that rather than expending time and resources levelling up the Helium blockchain, it would make more sense to shift to a blockchain that can offer it the speed, reliability, and scalability it needs. Solana can handle more than 3,000 transactions per second compared to the 13 transactions per second on Ethereum, for example.

Helium's shift to Solana could be likened to a small nation joining a large federation. The de facto currency would be Solana's native asset SOL, the lingua franca would switch from the Erlang programming language to the more popular Rust, and borderless movement would be manifest in the interoperability between protocols populating the network.

Solana is home to a constellation of DeFi, NFT, and Metaverse protocols calibrated by thousands of developers. Helium would also be subsumed by a blockchain that is prized for its fast transactions at inexpensive prices.

According to Electric Capital, Solana is one of the five largest developer ecosystems in blockchain today, alongside Ethereum, Polkadot, Cosmos and Bitcoin. In 2021 the number of developers joining Solana grew by almost five times.

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Source: Electric Capital

Still, market participants have viewed a Helium switchover to Solana with concern. Since the proposal was announced on 30 August, the price of HNT has sunk by 37% to $3.90. The value of SOL by contrast has been relatively unmoved.

Helium's backers may be disappointed that developers have raised Solana as the answer to the project's growing pains rather than alternatives like Ethereum or Avalanche that have better network performance track records.

It is unclear whether the Helium community will vote to migrate to Solana. But this event may represent a microcosm of what is to come as the digital asset space matures. It is not impossible to imagine more developers transferring their projects away from original blockchains to those with the strongest properties: security, scalability, or marketability.

And this may be the natural endpoint of a story we've heard before. When the internet first burst onto the scene, there were dozens of protocols vying to become the standard way to pass data between computers. Only the four most successful protocols survived: HTTP, FTP, SMTP, and TCP/IP.

For their part, Solana and other blockchains that lead in terms of user adoption, throughput and the blessings of moneyed VCs may well assimilate smaller rivals. In this scenario, the disjointed blockchain space of today will be succeeded by a more streamlined future.

Deadline day: Biden Executive Order on Crypto meets US Midterms

With US midterm elections on the horizon, the sands are beginning to shift for regulators and digital asset companies.

President Biden's bombshell Executive Order on “Ensuring Responsible Development of Digital Assets” on 9 March 2022 threw the entire weight of the US government machine behind advancing the global regulatory landscape. As of 6 September, the first 180-day deadline is now up, and markets are eagerly awaiting reports from the most powerful and well-funded American agencies.

As ETC Group noted at the time, the decision to create long-sought after national frameworks for digital assets was unequivocally bullish on all timelines.

The upcoming reports include:

  • A framework “for enhancing United States economic competitiveness in digital assets” from The Commerce Department;
  • The possibility of issuing a CBDC or digital dollar, with reports sought from the Justice Department, The Office of Science and Technology Policy (OSTP) and the Treasury Department
  • A report from the OSTP on energy use in digital assets, likely with a focus on Bitcoin's Proof of Work mechanism that “examines the potential for digital assets to impede or advance efforts to tackle climate change and the transition to a clean and reliable electricity grid.”

Two broad reports on international law co-operation from the Justice Department, and one on international policy setting with the G7, G20, FATF and Financial Stability Board via the Treasury Department are already in place.

But many US regulatory bodies appear to be stuck in the past. Data has repeatedly shown that the growth in legitimate transactions far outpaces criminal crypto. Blockchain intelligence firm Chainalysis, for example, found in 2022 that transactions involving illicit addresses only account for 0.15% of total volume.

The House Committee on Oversight and Reform has addressed letters to several US regulatory agencies and crypto exchanges asking them how they intend to deal with fraud in the sector, while the SEC continues to make the argument that some digital assets represent securities. On 26 August 2022 it again deferred the arrival of a spot Bitcoin ETF on traditional exchanges, this time for fund manager VanEck, even while the highly-regulated US Bitcoin futures markets proceed unabashed.

For its part, Coinbase has turned one eye away from consumer protection toward electoral politics. The exchange is launching a voter registration tool for US customers ahead of Congressional elections in November. The product intends to inform users on the debates dividing the cryptoasset space and on which side political representatives stand.

Congress has sounded the clarion call for regulators and exchanges to come together and find solutions to problems restricting the sector. But its reluctance to take matters into its own hands is likely to continue until the midterm elections in November.

US legislators have dodged questions on crypto regulation, tax, and security by stalling on the delivery of a comprehensive bill to set things straight. But with almost 20% of Americans having bought or held crypto, positive policy may be the key message that distinguishes candidates from the competition in this new electoral cycle.

Markets

Bitcoin dropped 5% of its value across the fortnight and has been languishing near the $19,500 support zone for the last ten days. Bitcoin dominance is at its lowest since 2018. Bitcoin represents 38% of the total cryptoasset market cap today compared to Ethereum's 20%.

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Ethereum is the most closely watched digital asset this month with the Merge drawing nearer. Its value has climbed by 4% over the past fortnight and in recent days broke through the near-term $1,600 resistance barrier.

The Ethereum scaling solution Polygon (MATIC) and rival Layer 1 blockchain Cardano (ADA) have witnessed price rises of more than 10%. Polygon rallied strongly amid news that Robinhood and NFT platform OpenSea will be integrating it.

Cardano has benefited from developers confirming that its Vasil hard fork will take place on 22 September. It is expected to significantly improve the performance of the network.

The losses Avalanche (AVAX) saw toward the end of August have been compounded in the last two weeks. The blockchain has lost more than a tenth of its value since it was reported that a lawyer with close ties to Ava Labs was trying to derail its competitors by filing speculative and unfounded lawsuits against them.

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