Summary

In our midyear review, we present 10 charts that cover some key crypto market fundamental and technical trends. We look at the growth in total value locked (TVL) normalized by the price appreciation of the native gas token across the top layer-1 (L1) and layer-2 (L2) networks. We also take a relative approach to measuring the impulse of onchain activity in these networks via total transaction fees and active addresses, before breaking down the largest drivers of transaction fees on Ethereum specifically. Afterwards, we examine onchain supply dynamics, correlations, and the current state of crypto spot and futures market liquidity.

Separately, one of the more closely tracked metrics in crypto are the inflows and outflows from US spot bitcoin ETFs, which are often viewed as a proxy for changes in crypto demand. However, the growth of CME bitcoin futures open interest (OI) YTD suggests that part of the ETF inflows since launch have been driven by the basis trade. We isolate the impacts of the CME futures basis trade, showing that the growth of non-hedged exposure to BTC ETFs has slowed considerably since early April.

Fundamental signals

Rather than comparing the raw TVL of different chains, we track TVL growth normalized by the price appreciation of their native gas token. Often, native tokens constitute a large portion of TVL within an ecosystem due to collateral or liquidity usage. Adjusting TVL growth by price growth helps to isolate how much TVL growth arises from net new value creation instead of pure price appreciation. 

In aggregate, TVL growth has outpaced total crypto market cap growth by 24% YTD. The top growing chains – TON, Aptos, Sui, and Base can all be considered relatively nascent and benefit from rapid stages of growth. 

We compare each network’s (1) average number of daily active addresses in May to the (2) average daily fees or revenues earned during the same period, both measured in standard deviation terms compared to the previous four months (Jan-Apr). It shows:

• Onchain fees have generally declined in May with the exception of Solana and Tron
• Active addresses have grown tremendously on Ethereum L2s (particularly Arbitrum) as fees have dropped post EIP-4844
• Fees on Cardano and Binance Smart Chain are undershooting the decline in wallet activity

Categorizing the breakdown of fees spent for the top 50 contracts on Ethereum. These contracts together account for more than 55% of total gas spent YTD.

Following the Dencun upgrade in March, spending by rollups has tapered off from 12% of mainnet fees to <1%. MEV (maximal extractable value) driven activity has risen from 8% to 14% of transaction fees, and direct trading fees have risen from 20% to 36%. Although ETH has become inflationary starting in mid-April, we think that a return of market volatility (and high value trading block demand) could counter this trend. 

The TVL in Ethereum L2s has increased by 2.4x YTD, with the total TVL for L2s ending May at US$9.4B. Base currently represents around 19% of total L2 TVL as of early June, third behind Arbitrum (33%) and Blast (24%).

Meanwhile, total transaction fees have dropped significantly following the launch of blob storage in the Dencun upgrade on March 13, even as TVL (and transaction counts on many chains) are at all time highs.

Drops in active BTC supply, which we define as BTC that has moved in the past 3 months, have historically trailed behind local price peaks, indicating a slowdown in market turnover. The active BTC supply reached a local top of 4M BTC in early April – the highest level since 1H21 – before coming down to 3.1M at the start of June. 

At the same time, however, the the inactive supply of BTC, which is the BTC not moved more in more than 1 year, has remained flat YTD. We think this indicates that near term market euphoria has tapered off, though longer-term cyclical investors remain attentive.

Technicals

Bitcoin returns appear moderately correlated to the daily change in some key macroeconomic factors based on a 90-day window. That includes US equities, commodities and the multilateral USD index, although the positive correlation with gold is still relatively weak.

Meanwhile, the correlation between ether and S&P 500 returns (0.37) is near identical to that between bitcoin and S&P500 (0.36). Crypto pairs continue to trade with high correlations to each other compared to across sectors, though BTC/ETH correlations are down slightly to 0.81 from March-April peaks of 0.85

Aggregate average daily spot and futures volumes for BTC and ETH declined by 34% from their March 2024 peak of $111.5B. That said, volumes in May ($74.6B) remain higher than every other month since September 2022, except for March 2023.

Spot bitcoin volumes have also picked up significantly following the approvals of US spot bitcoin ETFs in January, with May’s spot centralized exchange (CEX) bitcoin volume 50% greater than that in December ($7.6B vs $5.1B). Spot bitcoin ETF volumes were $1.2B in May, accounting for 14% of global spot volume.

CME OI has increased 2.2x since the start of 2024 (from $4.5B to $9.7B) and up 8.1x since the start of 2023 (at $1.2B). We believe much of the new flows YTD can be attributed to the basis trade following the approval of spot ETFs. Following their launch, the bitcoin basis trade can now be done fully in the US against traditional securities brokers.

Perps OI have also increased from $9.8B to $16.6B YTD, keeping the proportion of CME OI at ~30% throughout the year (29-32%). That said, CME futures have increased their market share significantly from 16% of OI at the start of 2023, suggesting more onshore US institutional interest.

CME ETH futures OI are near all time high levels. However, ETH OI remains dominated by perpetual futures contracts, which are only available in certain non-US jurisdictions. As of June 1, 85% ($12.1B) of total OI was in perps compared to just 8% ($1.1B) in CME futures.

The impact of endogenous ETH catalysts on OI are often visible, with the last major spike in OI following the approval of spot ETH ETFs (19b-4 filings) in the US. Prior to that, OI peaked on the Dencun upgrade on March 13.

Separately, traditional fixed term futures on centralized exchanges remain popular, with similar amounts of OI to CME futures.

Normalizing the aggregate spot ETF market cap against CME bitcoin OI suggests that much of the spot ETF flows since early April (day 55) can be attributed to the basis trade.

After spot ETFs were approved, BTC custodied by ETFs rose by ~200k BTC through to March 13 (day 43). This suggests directional buying of BTC over that period, which partly explains the price appreciation over that time. Since then, BTC custodied by ETFs have remained range bound between 825-850k, only strongly breaking out of that range in late May.