Author: Murphy (X: @Murphychen888)
Detailed analysis of ETH chain data, here's what you've been waiting for:
Why has ETH performed so poorly this round?
Is there still hope for ETH?
Under what circumstances can ETH make a comeback?
In response to the concerns of my fellow partners, I've tried to make some comparisons and analyses from the perspective of on-chain data, hoping to provide some reference. I will analyze and discuss in the following 5 sections, and if you can be patient, I believe you will gain some insights.
(1/5)
It may be because ETH has been performing "exceptionally well" recently, and more and more partners have left me messages asking me to analyze some of ETH's on-chain data, including the class I gave in Shenzhen, where the partners asked me the most about ETH after the class.
Ah...... What's so special about ETH that so many partners are so concerned about it. When asked how ETH can get out of its slump, I usually jokingly answer: "Unless V God goes with Satoshi Nakamoto, and the Ethereum Foundation is dissolved"...... Of course, jokes aside, to analyze the reasons, we still need to start with effective data.
I believe everyone has also seen many bloggers analyze this round of ETH from multiple perspectives such as narrative ability, ecosystem building, and technical competition, and I won't repeat them here. In fact, whether the price is good or not, it ultimately comes down to whether the "money" is good or not. As long as it can attract the attention and pursuit of capital, there is nothing that a big green candle cannot solve.
Therefore, how to judge whether ETH is getting the attention of capital becomes particularly important. I have 2 evaluation criteria, one is "the proportion of ETH flow on exchanges", and the other is "the overall on-chain activity";
The so-called exchange flow refers to the total of inflows and outflows on the exchanges every day, and the inflows can be seen as supply, and the outflows as potential demand; When the "flow" becomes higher and higher, it at least means one thing, that ETH is starting to get the attention of more capital!
Especially, we can take #BTC as a reference, after all, the status of the big pie is irreplaceable, by observing the flow ratio of ETH relative to BTC, we can clearly see the changes in capital preferences.
Figure 1 is the flow data of BTC & ETH on the exchanges, and in order to facilitate the subsequent explanation, we need to first understand some of the key elements in the figure:
1. The gray and light green lines in the figure represent the prices of BTC and ETH respectively;
2. The red wave line represents the inflow and outflow of BTC on the exchanges; the blue wave line represents the flow of ETH on the exchanges;
3. The area above the zero axis represents the inflow, and the area below the zero axis represents the outflow.
(Figure 1)
First, let's look at the flow performance of ETH in the previous cycle:
From January to April 2021, it was the leading period for BTC, and the attention of the on-chain capital was almost all on BTC; for example, on the day I extracted, February 9 (see mark 1 in Figure 1), BTC had an inflow of $2.9 billion and an outflow of $2.5 billion; ETH had an inflow of $1.14 billion and an outflow of $1.19 billion; at this time, the exchange flow of ETH was about 30% of BTC.
(Figure 2)
From April to May 2021, BTC began to correct, while ETH began to make up for it, and we can see that the essence behind this is the change in capital preference. For example, on the day I extracted, April 27 (see mark 1 in Figure 2), BTC had an inflow of $2.8 billion and an outflow of $2.7 billion; while ETH had an inflow of $1.6 billion and an outflow of $1.5 billion; from the perspective of flow ratio, it reached 50% of BTC.
Please note the causal relationship here, it's not that BTC corrected and then ETH must make up for it; it was the push of capital that made ETH perform strongly at that time. The amplification of the flow ratio just shows the spillover effect of capital (see mark 2 in Figure 2), and more and more capital began to focus on ETH. Therefore, ETH first reached its historical high of $4,172 about 1 month after BTC reached its price high.
(Figure 3)
After May 2021, due to the occurrence of the May 19 black swan event, the panic sentiment dragged down the overall market, and the exchange flow of BTC and ETH began to shrink simultaneously, and the coin prices also fell synchronously. At this time, we can find that even though the overall shrinkage, the proportion of ETH's exchange flow did not decrease but increased, almost on par with BTC, rising from the previous 50% to 100%! (see mark 1 in Figure 3)
This indicates that at this time, the market capital did not flow back to BTC due to the panic sentiment, but rather looked more firmly at ETH. This is also the fundamental reason why ETH can even be higher and more stable than BTC in the second top area of the previous bull market.
(2/5)
I can summarize that in the previous cycle, when BTC started, the ETH flow ratio was 30%; when it first reached the top and fell back, the ETH flow ratio was 50%; when it reached the second top, it had reached 100%.
Now let's look at the flow performance of ETH in this round:
From October 2023 to March 2024 was the leading period of BTC in this cycle, and due to the expected hype of Blackrock's application for a spot ETF, the on-chain capital was also more focused on BTC;
(Figure 4)
From the day I extracted, February 2 (see mark 1 in Figure 4), BTC had an inflow of $3 billion and an outflow of $2.8 billion; while ETH had an inflow of only $440 million and an outflow of $510 million; at this time, the exchange flow of ETH was only about 15% of BTC, which can be said to be pitiful.
In March, BTC price broke through the historical high of $73,000, and at this time ETH also followed the rise, but the exchange flow of ETH compared to BTC did not improve significantly, just like the screenshot I took on March 13 (see mark 2 in Figure 4), BTC had an inflow of $5.4 billion and an outflow of $4.9 billion; ETH had an inflow of $1.4 billion and an outflow of $1.3 billion; even in the most FOMO time of the market, the exchange flow of ETH was only about 25% of BTC.
Compared to the previous cycle on April 27, 2021 (see Figure 2 in 1/5), when the ETH price was also around $2,600 (similar to the current), the ETH flow ratio had already reached 50% of BTC, and then it had the subsequent historical high of $4,172.
It is very clear that in this cycle, after BTC broke through its historical high, the capital did not flow out from BTC to ETH like in the previous cycle.
(Figure 5)
Even around the time when the ETH spot ETF was approved in July (as shown in Figure 5), the ETH exchange flow was only about 34% of BTC, completely incomparable to the 50% reasonable level in the previous cycle, not to mention that in the second top area, the ETH flow even once reached 100% of BTC (see Figure 3 in 1/5).
It was because I saw this data that I decided to exchange my ETH for BTC on the day the ETH spot ETF was approved.
(Figure 6)
On October 19, when BTC rebounded to $68,000, BTC had an inflow of $2 billion and an outflow of $2.3 billion; ETH had an inflow of $700 million and an outflow of $650 million; the exchange flow of ETH has always been maintained at around 35% of BTC (see mark 1 in Figure 6).
The data of an inflow of $700 million and an outflow of $650 million is about the same as the scale in the bull market in November 2023 (see mark 2 in Figure 6).
It can be seen that from the beginning of this cycle until now, the capital's attention to ETH has always been lukewarm, not that there is none, but it is far less compared to the previous cycle, even with the epic good news of the spot ETF approval, it still cannot arouse greater interest from the capital, why is this?
(3/5)
We all know that in 2021, ETH's consensus mechanism shifted from PoW (Proof of Work) to PoS (Proof of Stake), a process known as the "Ethereum Merge", which includes two important stages (as shown in Figure 7):
(Figure 7)
1. On August 5, 2021, the London upgrade mainly introduced the EIP-1559 proposal, which changed the transaction fee structure and reduced the inflation of ETH supply, preparing for the Merge.
2. On September 15, 2022, the ETH mainnet completed the transition from PoW to PoS, and block generation is now handled by validators instead of miners.
Regarding the PoW to PoS transition, there are diverse opinions on whether it is good or bad. For example, @Phyrex_Ni expressed his support for the transition to PoS yesterday, believing that it would be unwise for ETH to remain on the PoW track and compete with BTC in terms of power consumption. @jason_chen had a brilliant article on October 24, where he analyzed the "internal and external factors" that have led Ethereum to a deadlock, using the business cases of Alibaba and Pinduoduo as references.
But regardless of how we discuss the "pros and cons", the funds seem to have already voted with their feet.
(Figure 8)
As shown in Figure 8, from July 2022 onwards, the gap between the ETH exchange trading volume and BTC's has been gradually widening, and this trend has continued to the present. This indicates that funds have been gradually withdrawing from ETH since that time period. Interestingly, this starting time coincides with the eve of the Ethereum mainnet's transition from PoW to PoS.
It should not be the ETFs that have caused the capital preference to return to BTC, as ETFs for BTC and ETH were approved around the same time. But could it be due to the PoW to PoS transition? I'm not sure.
Nevertheless, one thing is certain: if Ethereum maintains the current status quo (both internally and externally), it will be difficult for it to regain a trading volume share of over 50% compared to BTC, even with the support of ETFs. This is because the market has already rehearsed this scenario in the FOMO wave that occurred in March this year.
(4/5)
After looking at the exchange trading volume data, let's take a look at the on-chain activity data for ETH. I have defined the on-chain activity as the integration of three dimensions:
1. Active address count (yellow waveform in the chart)
2. Transaction count (blue line in the chart)
3. Transaction volume in USD (red line in the chart)
(Figure 9)
From Figure 9, we can clearly see that the strong price performance of ETH in 2017-2018 and 2020-2021 was backed by a surge in active address count, accompanied by a synchronous increase in the number of transactions initiated and the transaction volume in USD. During the periods of January 2018 and May 2021, the ETH on-chain transaction volume reached record highs of $18 billion and $15.5 billion, respectively.
In the current cycle, since March, the ETH active address count has been continuously declining. Although the transaction count reached a level close to the 2021 peak in March, the transaction volume in USD was only $6.7 billion, indicating that "large capital" participation in on-chain transactions for ETH has also been lost compared to the previous cycle. Its scale has not even reached half of the 2021 peak, with the number of transactions being close, but all of relatively small capital scale.
(5/5)
Under what circumstances can ETH make a comeback?
The data I have presented are objective facts, but that does not mean I am completely bearish on ETH subjectively. However, I personally believe that now is not the best time to get involved in ETH.
Whether ETH can make a comeback after BTC starts to move up depends on the degree of capital preference, which can be verified by the comprehensive on-chain activity data.
When would be a more appropriate time to get involved? My principles are:
1. When ETH's exchange trading volume share reaches 50% or more of BTC's (currently it is 35%)
2. Even if the price of ETH has already risen by the time it reaches 50%, it will not be the highest. From my perspective, I need to confirm the trend first before executing a strategy.
3. The active address count on the chain should reflect a sustained upward trend in the ETH ecosystem;
4. The transaction count and transaction volume should also scale up synchronously, especially the transaction volume, which is an important indicator of whether large capital is participating.
