Written by: Kate, Mars Finance
In our mid-year review, we presented 10 charts covering key fundamental and technical trends in the crypto market.
Key Points
We standardized the growth in Total Value Locked (TVL) by appreciating the prices of native gas tokens on Layer 1 (L1) and Layer 2 (L2) networks.
We isolated the impact of CME futures-based trading pairs on ETF flows, showing a significant slowdown in unhedged exposure to BTC ETFs since early April.
In our mid-year review, we provided 10 charts covering key fundamental and technical trends in the crypto market. We standardized the growth in Total Value Locked (TVL) by appreciating the prices of native gas tokens on Layer 1 (L1) and Layer 2 (L2) networks. We also took a relative approach by measuring the impetus of on-chain activity in these networks through total transaction fees and active addresses, and then specifically broke down the major driving factors of Ethereum transaction fees. We then examined on-chain supply dynamics, correlations, and the current state of liquidity in the crypto spot and futures markets.
Furthermore, a closely monitored metric in the cryptocurrency space is the inflow and outflow of the US Bitcoin Spot ETF, which is typically seen as an indicator of changes in cryptocurrency demand. However, the growth in open interest (OI) of CME Bitcoin futures contracts so far suggests that some of the inflows into ETFs have been driven by basis trading. We isolated the impact of CME futures-based trading, showing a significant slowdown in unhedged exposure to BTC ETFs since early April.
Fundamentals
TVL Growth
We tracked the growth in TVL not by comparing the original TVLs of different chains, but by appreciating the prices of their native gas tokens. Typically, native tokens make up a large portion of TVL in an ecosystem due to their use in collateral or providing liquidity. Adjusting TVL growth by price appreciation helps differentiate how much of the TVL growth comes from net new value creation rather than pure price appreciation.
Overall, the growth rate of TVL exceeded the growth rate of the total crypto market capitalization, growing by 24% year-on-year. The fastest-growing chains – TON, Aptos, Sui, and Base – can be considered relatively new and have benefited from rapid growth phases.
Activity Drivers: Fees and Users
We compared the number of average daily active addresses in each network in May with the average daily fees or revenue, both measured in standard deviations compared to the previous four months (January to April). It shows:
– On-chain fees in May generally decreased, except for Solana and Tron.
– Active addresses on Ethereum L2 (especially Arbitrum) saw a significant increase following the EIP-4844 fee reduction.
– Fees on Cardano and Binance Smart Chain were lower despite a decrease in wallet activity.
Fee Driving Factors
We categorized fee details for the top 50 Ethereum contracts. Together, these contracts accounted for over 55% of the total gas consumption from the beginning of the year. After the Dencun upgrade in March, rollup spending gradually decreased from 12% of the mainnet fees to less than 1%. Transaction fees driven by MEV increased from 8% to 14%, while direct transaction fees increased from 20% to 36%. Despite inflation on Ethereum starting in mid-April, we believe the return of market volatility (and high-value trading demand) may offset this trend.
Ethereum L2 Growth
TVL on Ethereum L2 grew by 2.4 times year-on-year, reaching a total TVL of $9.4 billion by the end of May. As of early June, Base currently accounts for approximately 19% of the total L2 TVL, second only to Arbitrum (33%) and Blast (24%). Meanwhile, total transaction fees saw a significant decrease after the Dencun upgrade on March 13, despite TVL (and many on-chain transaction counts) reaching historical highs.
Bitcoin Active Supply Changes
The decrease in active Bitcoin supply, defined as Bitcoins moved in the past three months, historically lags behind price peaks, indicating a slowdown in market volume. Active Bitcoin supply peaked at around 4 million Bitcoins in early April, the highest level since 1H20, before dropping to 3.1 million Bitcoins in early June. However, non-active Bitcoin supply, i.e., BTC not moved for over a year, has remained stable since the beginning of the year. This suggests a weakening of recent market optimism, although long-term cyclical investors remain attentive.
Technical Analysis
Correlations
Over a 90-day window, Bitcoin returns appear moderately correlated with daily changes in some key macroeconomic factors. This includes US stocks, commodities, and the multilateral US dollar index, although the correlation with gold remains relatively weak. At the same time, the correlation between Ethereum and the S&P 500 index (0.37) is almost identical to the correlation between Bitcoin and the S&P 500 index (0.36). Cryptocurrencies continue to trade with high correlation compared to cross-industry comparisons, although the BTC/ETH correlation slightly decreased from a peak of 0.85 from March to April to 0.81.
Increased Market Liquidity
The total daily spot and futures trading volume for Bitcoin and Ethereum decreased by 34% from the peak of $111.5 billion in March 2024. However, the sales volume in May ($74.6 billion) still exceeds any month since September 2022, except for March 2023. Following the approval of the US Bitcoin Spot ETF in January, spot Bitcoin trading volumes also significantly increased, with centralized exchange (CEX) Bitcoin trading volumes in May increasing by 50% from December ($7.6 billion to $5.1 billion). In May, spot Bitcoin ETF trading volumes reached $1.2 billion, accounting for 14% of global spot trading volume.
CME Bitcoin Futures
CME open interest in Bitcoin futures has grown 2.2 times since early 2024 (from $4.5 billion to $9.7 billion) and 8.1 times since early 2023 (reaching $12 billion). We attribute much of the new capital flows since the beginning of the year to basis trading following the approval of spot ETFs. The market share of CME futures has significantly increased from 16% in early 2023, indicating increased interest from US onshore institutions.
CME Ethereum Futures
CME ETH futures open interest is nearing historic highs. However, ETH futures open interest is still dominated by perpetual futures contracts, which are only available in certain non-US jurisdictions. As of June 1, 85% ($12.1 billion) of the total open interest trading volume is in futures trading, while CME futures trading only accounts for 8% ($1.1 billion).
The impact of endogenous ETH catalysts on open interest is often visible, with the last significant surge in open interest occurring after the approval of the US spot ETH ETF (19b-4 filing). Prior to this, the Dencun upgrade on March 13 led to a peak in open interest. Additionally, traditional fixed-term futures on centralized exchanges remain popular, with open interest amounts comparable to CME futures.
Isolating CME Bitcoin Basis Trading
Standardizing the comparison of total market value of spot ETFs with CME Bitcoin futures open interest shows that since early April (day 55), most of the spot ETF flows can be attributed to basis trading. Following the approval of spot ETFs, as of March 13 (day 43), approximately 200,000 Bitcoins were added to ETF custody. This indicates directed buying of Bitcoin during that time, which partly explains the price increase. Since then, the amount of Bitcoins held in ETF custody remained between 825-850k until breaking above this range at the end of May.