1. November Markets: Bitcoin is always setting a new level while gold is plummeting
In November crypto continued its strong Q4 with bitcoin setting a new all-time high of ~ $ 19,783 on November 30th (Table 1). For the year bitcoin is now up 173%.
For the third time this year Ethereum (ETH) showed monthly earnings of 57%. The other months when this happened were April and July, with June being the best month this year for $ ETH at + 70%.
Table 1: Price Comparison: Bitcoin, Ethereum, Gold, US Equity, US Dated Treasuries, US Dollar (Change%)
November was a remarkable month for bitcoin and crypto as a whole, with positive developments in particular coming from Wall Street and the adoption of institutional investors. Counterfeit hedge fund manager Stan Druckenmiller publicly disclosed for the first time that he now owns bitcoin, while longtime bitcoin fund founder Ray Dalio, founder of the world’s largest hedge fund, acknowledges he may be “missing something” with its traditional bearish bitcoin stance.
What happens with gold?
One potentially significant longer-term development we will be watching was the November difference between the price of bitcoin and gold, which dropped -5% for the month. There is some discussion that gold investors may be rotating into bitcoin, and the November outflows of Gold ETFs offer potential evidence of this. Rick Rieder, BlackRock’s Chief Investment Officer, interviewed CNBC on November 20 where he suggested bitcoin could replace gold.
The downward movement in gold in November was particularly impressive given that the US dollar resumed its 2020 slide to hit a year-and-a-half low and inflation concerns persist, driven by growing calls for fiscal stimulus more remarkable.
We have argued that gold and bitcoin can be considered complementary, and Blockchain.com recently launched wrapped Gold (wDGLD). The total market value of all gold is approximately $ 10 trillion, or over 20x the size of bitcoin’s market value (~ $ 350 billion). Any continued move by gold investors to diversify their hard-assets portfolio into bitcoin should provide strong support for further valuing bitcoin prices.
Long-dated US Treasuries gained + 2% and are now outperforming gold for 2020 (+ 18% compared to + 17%, respectively), while equities reverse losses October to gain 11% for the month and are up 12% YTD.
All in all, 2020 is arguably the best year of crypto yet on many levels. Unsurprisingly, three of the best 5 months in history are now on average for crypto prices from 2020 (Figure 1).
Figure 1: The Top 5 Months by Average Daily Bitcoin Price
2. On-Chain Analysis
Each month we dive into data on the chain to explore interesting trends or movements on the Bitcoin network. (Table 2)
Table 2: Bitcoin network activity – November vs October
The highest ever setting of November’s bitcoin price action occurred alongside a strong rise in bitcoin activity on the chain. Daily transaction volumes increased by 1.8% and daily payments increased by 3.4%; the daily number of active referrals was also up 8.9%.
This increased activity led to higher average fees per transaction in November with an average of $ 6 per transaction, which is still much lower than that seen during the 2017 bull run where the daily average fee per transaction remained higher than $ 20 during more than 30 days.
Last month we were talking about the sharp 25% drop in the estimated hash rate towards the end of October. It has now bounced back from an average of 108 EH / si solid 129 EH / s, thanks to the difficulty adjustment and rising bitcoin price which is attracting additional mining hashing power. (Less efficient mining hardware can once again become profitable to operate as the bitcoin price rises.)
Bull running comparison: December 2017 versus November 2020
The mempool is where all valid transactions are waiting to be confirmed by the Bitcoin network before being added to the blockchain. High mempool size indicates more network traffic.
Interestingly, the recent price action saw relatively low levels of mempool activity compared to the previous bull run in December 2017 (Fig. 2a).
Figure 2a: Mempool size showing lower activity in November 2020 than during December 2017 bull run
Taking a closer look, Figure 2b shows that the size of the mempool stayed high during the 2017 bull run, with a tight correlation between the size and price of mempool.
Figure 2b: The December 2017 bull run saw mempool size increase as the price increased
Initially, activity in November 2020 shows a similar pattern to 2017, with mempool size returning to normal levels in the middle of the bull run (Fig. 2c). Part of the recent transaction backlog was caused by a decrease in the hash rate just before the difficulty adjustment on November 3rd, rather than an abnormal increase in transactions on the chain.
Figure 2c: Mempool size remained low in November 2020 except for a short sting mainly due to the decrease in hashrate – not the price
This suggests two possibilities:
- Chain transactions are being conducted more efficiently these days with batch transactions and more widely used segmented transactions (ie withdrawals from exchanges that batch transactions occupy less block space)
- Price action is driven more by off-chain exchanges and large organizations rather than retail transactions, which may have a larger proportion of transactions settled on the chain
On another note, although the December 2017 rally around the $ 19k price mark took place towards the end of the halving cycle, we are currently relatively early in the cycle (Figure 3).
Figure 3: The November 2020 bull run is earlier in the halving cycle than December 2017
Measures of bitcoin ownership concentration on the chain can be challenging to interpret during significant price changes
One concern that has arisen about bitcoin is the concentration of ownership. More specifically, the concern is that a relatively small number of people are managing a large share of bitcoin compared to other asset ownership concentrations. This concern was cited by the U.S. Securities and Exchange Commission as one of the reasons for their reluctance to approve a bitcoin ETF.
We continue to monitor metrics on the chain to try to get a sense of how bitcoin’s concentration of ownership is evolving. Though on the chain metrics seem to suggest a bit reduction in the number of individual owners of bitcoin in November, these data can be misleading, especially during large prices as we have seen recently.
In November we saw a slight decrease from October in the number of individual bitcoin addresses holding 0.1 and 1 bitcoin:
- 3,178,169 addresses (9.59% of total addresses) have more than 0.1 BTC, and represent 98.82% of total bitcoins
- 822,971 addresses (2.48% of total addresses) have more than 1 BTC, and represent 94.82% of total bitcoins
- 3,115,354 addresses (9.38% of total addresses) have more than 0.1 BTC, and represent 98.85% of total bitcoins
- 821,358 addresses (2.47% of total addresses) have more than 1 BTC, and represent 94.95% of total bitcoins
How do these reductions fit with reports of significant increases in the number of new owners of cryptoassets during November? Several possibilities exist.
First, it is likely that many new cryptoasset owners primarily use third-party intermediary exchanges that hold cryptoassets on behalf of individuals, such as PayPal, Square, and the Blockchain.com Exchange. Growth in new users of custodial exchanges would not necessarily appear in the statistics of chain ownership dispersion.
Furthermore, during periods of large price swings coins tend to move more frequently than during the “crypto winter” periods. The address account decline could reflect individual owners moving coins to exchanges or consolidating balances.
One thing we can say for sure: recent price gains have made all bitcoin holders, regardless of ownership levels, financially better off (Table 3).
Table 3: Bitcoin owner wealth increasing
3. How I learned to stop worrying and loving freebies – Guest post from Coin Center
Self-sustaining (or “homeless”) wallets have become a bigger part of the regulatory conversation about cryptocurrencies in 2020. This month, instead of publishing guest mail, we want to highlight a piece from our friends at Coin Center.
Jai Ramaswamy, former Chief of the US Department of Justice Anti-Money Laundering (AML) who is now cLabs, writes about the possibility of new regulations targeting self-sustaining wallets, and why this would be a bad policy for all interested parties .
Over the past year, governments around the world have expressed concern about the risks of illegal financial activities such as money laundering, terrorism financing, and the avoidance of international sanctions arising from the use of “unwieldy” wallets – software applications that allow users to conduct transactions a personal, pseudonym in crypto assets over the internet without using a financial intermediary.
Having dealt with some of the history of the issue, he offers a plausible explanation for why this would be mistaken:
Perhaps most importantly, policymakers have to come to terms with technological change that is driving the rise of decentralized blockchain protocols. Those changes have the potential to transform the architecture of the internet, blur the distinction between communication and settle value on networks, and rewire some of the ways we think about financial services, especially in driving financial inclusion.
Crucially, these are primarily technological advances that lead to financial innovations, and therefore policy makers seeking to prohibit or restrict their development and use would be wise to heed King Canute’s warning of futility prevent rising ocean tides. A sober review of the technology explains why such efforts are bound to fail and will only serve to undermine rather than enhance efforts to detect and disrupt illegal financial activity.
And why he could do law enforcement work harder:
Bans or restrictions against personal cryptocurrency transactions are not only impractical and ineffective in preventing illegal financial activity, they can also undermine efforts to combat it. This should come as no surprise as restrictions on blockchain technology and personal cryptocurrency transactions equate to capital controls, which tend to drive financial activity to underground black markets where they have been adopted. Black market peso exchanges, hawalas, and other informal channels that support illegal financial activity were born in part because of capital controls that deprive businesses and individuals – including many on the periphery of the financial systems – of legitimate and safer institutional channels to meet with their daily economic needs.
The full article is a long read, but it is an important policy debate for anyone watching the cryptocurrency space to understand.
Read the full article here.
4. What we read, hear and watch.