Cryptocurrency adoption has grown considerably during the past year, however, many people still may not yet fully understand how diverse this space really is as an “asset class,” according to a new report from Chainalysis.
The team at Chainalysis, a leading blockchain analysis firm, notes that every major digital currency has its own unique value proposition or use-cases that are driving its growth.
By using blockchain or distributed ledger technology (DLT) analysis to keep track of transaction patterns and analyze the key characteristics of the largest wallets holding various virtual currencies, Chainalysis is able to learn more about how these different use-cases serve to complement each other to offer a “dynamic” crypto ecosystem.
By looking across all cryptos during Q1 2021, the following have the highest transaction volumes (as shared in a report from Chainalysis):
- Stablecoins: $869 billion
- Ethereum: $840 billion
- Wrapped Ethereum (wETH): $635 billion (Note: wETH is an ERC-20 token of equivalent value to Ethereum commonly used on DeFi platforms.)
- Bitcoin: $623 billion
Together, these four major categories currently make up most of the digital currency transaction volume.
The data indicates that Bitcoin is mainly held as a “long-term investment,” Chainalysis reveals while noting that it has taken a detailed look into the types of wallets holding BTC compared to crypto wallets holding other types of assets.
The blockchain analysis firm was able to separate digital asset wallets into the following categories:
- Investors, which they define as “self-hosted wallets that have held 75% or more of all cryptocurrency value they’ve ever received”
- Traders, which they define as “self-hosted wallets that have held less than 75% of all cryptocurrency value ever received”
- Services, which are “simply wallets hosted by services such as exchanges”
As noted in the report:
“73% of Bitcoin is held by investors, versus just 58% for Ethereum and 43% for the popular stablecoin USDT_ETH, which is an ERC-20 token version of Tether. Meanwhile, just 7% of all Bitcoin is held by traders, who tend to seek shorter-term gains by trading between a wider variety of assets, versus 18% for Ethereum and 14% for USDT_ETH.”
The report also mentioned that Bitcoin’s use-case as a long-term investment becomes “even clearer when we dig more into average “age” of each coin, meaning the amount of time it’s been in its current wallet.” According to Chainalysis’ findings, the data is quite “striking.”
The firm reveals that the average Bitcoin held in a self-hosted wallet was “acquired roughly 150 weeks ago, versus 75 weeks for Ethereum and six to seven weeks for popular stablecoins Tether and USDC.” In other words, cryptocurrency users hold Bitcoin “for roughly twice as long as they do Ethereum and more than 20x longer than they do stablecoins.”
Chainalysis also asks “who exactly are these long-term Bitcoin investors?” The blockchain firm notes that they characterize institutional transfers as transfers “above $1 million USD, professional transfers as transfers between $10,000 and $1 million, large retail transfers as transfers between $1,000 and $10,000, and small retail transfers as transfers below $1,000.”
The data reveals that institutional investors likely accounted for 69% of “all Bitcoin transaction volume during the time period studied, based on the sizes of the individual transactions.” When taken together, the data largely “fits the narrative we’ve heard over the last year: Investors, especially those from mainstream financial institutions, have embraced Bitcoin as a long-term investment, with many positioning the asset as a hedge against inflation and other worrisome economic trends,” the report revealed. It also pointed out that this is why they are seeing such a high percentage of Bitcoin being held “for long periods of time compared to other cryptocurrencies, and so much held by investors whose large transaction sizes suggest they’re at the professional or institutional level.”
Chainalysis further noted that as a reminder, despite its lower market cap and “less frequent” media coverage, Ethereum had “more transaction volume than Bitcoin in Q1 2021.”
“If we were to combine Ethereum’s transaction volume with that of wETH, its ERC-20 token equivalent, Ethereum would have by far the highest transaction volume of any cryptocurrency.”
The company also mentioned that since January 2020, the majority of Ethereum transactions have “involved at least one DeFi platform, with the majority of these occurring between two DeFi platforms.”
As explained in the report:
“DeFi platforms are cryptocurrency services built on top of smart contract-enriched blockchains. Once built, they can run autonomously, executing specific financial functions — trades, loans, or other transactions — automatically when specific conditions are met as defined by the underlying code. Because of this, DeFi platforms can exist independently of a company or other governing body.”
Importantly, almost all decentralized finance platforms are developed on the Ethereum blockchain – which clearly means they mainly accept Ethereum, along with ERC-20 tokens.
ERC-20 tokens are unique virtual currencies also developed via the Ethereum blockchain, meaning these tokens may be transferred and received from an Ethereum wallet. Many ERC-20 tokens are developed specifically to “mirror the price of existing assets,” Chainalysis explained.
For example, wrapped Bitcoin (wBTC) is an ERC-20 token that “matches Bitcoin’s price, while wETH fulfills the same function for Ethereum.” USDT_ETH and USDC_ETH “match the price of the stablecoins Tether and USDC respectively, which in turn are pegged to the U.S. dollar,” the report noted.
Chainalysis also mentioned in its report that DeFi’s growth is “a relatively recent development.” In June of last year, DeFi platforms “collectively were receiving between $2 and $3 billion in total weekly value.” That figure began “to grow quickly in August, and now consistently stands above $20 billion per week as of May 2021, at times spiking above $60 billion,” Chainalysis added.
The report pointed out that since the beginning of last year, DeFi has been the “fastest growing service category by far, nearly all driven by Ethereum” and in that way, Ethereum is playing a key role in crypto innovation, as DeFi is “the site of development for several new types of financial services and instruments, including NFTs, decentralized exchanges, and automated loan platforms.”
The report continued:
“DeFi has also given cryptocurrency a way to tap into community to launch new platforms. Founders of traditional, centralized exchanges and other services would typically have to raise capital themselves to build a new platform and provide it with its initial liquidity. With DeFi, founders can instead borrow funds from users or other backers, who in return get unique tokens associated with the platform that entitle them to a share of the platform’s fees. We expect to see more innovation in DeFi over the coming years, most of which will likely be powered by Ethereum.”
The report also mentioned that stablecoins are cryptos that are pegged to the price of existing “non-crypto assets.” The two most popular stablecoins, Tether and U.S. Dollar Coin (USDC), have been pegged to the US dollar, which still serves as the global reserve currency.
The report further noted that stablecoins have “a higher collective transaction volume than both Bitcoin and Ethereum.”
As mentioned in the report:
“The data shows that the majority of Tether moves between exchanges — especially crypto-to-crypto (C2C) exchanges, meaning those that only allow users to exchange cryptocurrencies for other cryptocurrencies, and not for fiat currency. This reflects the crucial role that stablecoins play in trade settlement on exchanges, and especially C2C exchanges. Thanks to their, well, stability, stablecoins allow traders to lock in the value of their cryptocurrency in what amounts to U.S. dollars, shielding themselves from the volatility of cryptocurrency without having to move funds off exchanges.”
The report further explained that this role makes stablecoins “by far the most frequently traded assets in the cryptocurrency ecosystem.” Chainalysis reminded users that most trading takes place within the “walled gardens of individual exchanges.”
Notably, what this means is that this trading activity will not show up in the on-chain volume data that Chainalysis has cited. That data is “instead recorded within exchanges’ order books.” The company explained that they are able to use order book data “to compare the rate at which different cryptocurrencies are traded once they reach an exchange using a metric called trade intensity.”
As mentioned in Chainalysis’ report:
“Trade intensity measures the number of time a coin is traded between the time it’s deposited to an exchange and the time it’s withdrawn.”
The report also noted that even though trade intensity has “ebbed and flowed over time, stablecoins have the highest trade intensity by far in most months.” Chainalysis says that it expects to see this “given how often traders exchange other cryptocurrencies for stablecoins in order to store funds in a more stable asset.”
The company added that they are also aware that stablecoins are commonly used for carrying out commercial transactions, particularly in China and areas where Chinese merchants have been doing business with overseas entities.
As noted in the report:
“Stablecoins’ popularity for this purpose (commercial transactions) can again largely be attributed to its stability, and their utility as a U.S. dollar replacement that can be used outside the traditional financial system.”
As mentioned in the report, blockchain analysis reveals that “the story of cryptocurrency is bigger than any one asset or investing strategy.” There are “well-defined” use-cases for each of the “most important, widely used crypto assets” and they are as follows:
- Bitcoin acts as a “long-term investment”
- Ethereum is “more frequently traded and used to power innovative new DeFi platforms”
- Stablecoins are the “most frequently traded, acting as a settlement system and source of stable storage for traders”
Each asset serves an important role in the larger crypto space, Chainalysis noted while adding that as that ecosystem continues to grow and evolve, new coins will “likely crop up to address new use cases, and the utility of existing coins will shift as well.”