From what began as a quiet week, ended with sparks as bitcoin and ether rallied 5.4% and 3.2% on Sunday to finish with a 3.1% and 8.5% gain on the week. This rally continued into Monday, with both assets making new all-time highs as bitcoin reached $66,539 and ether reached $4,795 as per the Bloomberg.
With bitcoin and ether now in price discovery mode, $70,000 and $5,000 feel as if they are right around the corner. Strong seasonal tailwinds, significantly positive sentiment, and consistent inflows from institutional and retail investors have set the stage for an advancement into the end of the year, notwithstanding the usual speedbumps and pullbacks market participants often experience as price makes new highs.
Particularly, digital asset investors have something to celebrate, with total market capitalization of crypto nearing $3 trillion dollars. Much of the broader wealth and asset management firms are just entering the space, and the trajectory of both investment and innovation over the next decade is more exciting than ever. Price has soared to new highs as a result of financial integration and portfolio adoption, with bitcoin now a major macro asset in traditional portfolios.
This week, we comment on the Treasury’s report on stablecoins and highlight on-chain metrics such as adjusted SOPR and Market Value to Realized Value.
President’s Working Group Report on Stablecoins
The highly anticipated report on stablecoins from the President's Working Group was published last week, outlining the US Treasury’s viewpoints on both opportunities and risks in a $127 billion (and growing) stablecoin market. To summarize the 26 page report, the Treasury believes stablecoins could support faster, more efficient, and more inclusive payments options if risks can be properly mitigated. The report was balanced and fact-driven, and ultimately recommended legislature that supports the use and growth of stablecoins. Key recommendations from the President’s Working Group are below:
- “To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions”
- “To address concerns about payment system risk… legislation should require custodial wallet providers to be subject to appropriate federal oversight”
- “To address additional concerns about systemic risk and concentration of economic power, legislation should require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities… and implement standards to promote interoperability across stablecoins”
These, if enacted, would provide increased confidence around the stability and backing of stablecoins, and thus, the overall stability of the digital asset market. Anything supporting such confidence is bullish, and the market certainly viewed this report as a positive.
The Federal Reserve will soon release their findings on a Central Bank Digital Currency (CBDC) as well.
On-Chain: Adjusted SOPR
One way to understand the market’s near-term sentiment is the adjusted SOPR, or Spent Output Profit Ratio. This ratio assesses the profitability of on-chain bitcoin transactions by comparing the price in which bitcoins are transferred versus the price in which they entered the wallet. The metric provides insight into the aggregate profit and loss of bitcoins that are changing hands. The ratio is adjusted to exclude transactions with a lifespan of less than one hour to provide a more accurate signal of activity.
A SOPR value of greater than one implies that coins moved that day are selling at a profit, while a value below one implies that coins moved are selling at a loss. Thus, extremes in the SOPR value can give insight into the market’s sentiment at various points in time.
As of Sunday, the 7 day average Spent Output Profit Ratio was 1.04, implying coins that are being spent on chain are in profit. This number, however, remains much lower than the 1.13 that was seen earlier this year, or the 1.11 at the end of the bull market in December 2017. A current SOPR of 1.04 implies the market is far from overheating, which is a good sign as price breaks into new highs.
Market Value to Realized Value
Another valuation metric, and one of the oldest, is the Market Value to Realized Value, or MVRV.
Market Value is bitcoin’s current market capitalization, while realized value is bitcoin’s capitalization using the price at which each bitcoin was moved on-chain. Because many coins are moved to cold storage at prices lower than today, realized value becomes the on-chain cost basis. Currently, bitcoin’s realized capitalization is $445 Billion:
Therefore, the Market Value to Realized Value assesses the multiple of current market capitalization to the on-chain cost basis:
During the rally in December of 2017, market capitalization reached 4.3x realized capitalization, while in the rally in April of this year, MVRV hit a high of 3.95. Currently, market capitalization is just 2.8x realized capitalization, which does not imply significant froth in the market.
With today’s realized capitalization of $445 billion, an MVRV similar to the 3.95 seen earlier this year would indicate a market capitalization of $1.76 trillion, or ~$93,400 with today’s circulating supply.
As always, please reach out with any questions or comments.
Joseph Orsini, CFA
Director of Research