The Wolf Den #300 - This Is Sparta!
Diving Into EIP-1559 - IntoTheBlock
In this report, we bring to you the latest in on-chain cryptocurrency analysis. We look at the blockchain directly and analyze balances, transactions, and the overall activity of market participants. This gives us a unique insight into the future of the market.
This section is written in conjunction with IntoTheBlock (ITB). ITB is an intelligence company that leverages machine learning and advanced statistics to extract intelligent signals tailored to crypto-assets. IntoTheBlock tackles one of the hardest problems in crypto: to provide investors with a view of a crypto asset that goes beyond price and volume data.
The Wolf Den research team uses IntoTheBlock to dig deeper and get the most important insights about the crypto market.
Diving into EIP-1559
Progress and conviction in Ethereum continue to grow as demonstrated by on-chain activity in anticipation of the London hard fork. As the hard fork is fast approaching, on-chain data is showing signs of strength
The London hard fork includes the implementation of five Ethereum Improvement Proposals (EIPs), EIP-1559 being the most prominent of these. The awaited EIP is set to restructure fees on Ethereum by introducing a base fee. In contrast to existing transaction fees, the base fee is burnt, meaning that the ETH paid for it is effectively removed from circulation.
Like existing fees, the base fee also adjusts dynamically based on demand. With EIP-1559 the base fee adapts along with the block size, targeting a specific level of gas usage close to the gas limit.
When gas usage is below the target, the base fee decreases to encourage demand; when gas usage is above the target, the base fee (and the amount of ETH being burnt) increases. This aims to make gas fees more predictable, while also having Ethereum holders benefit from spikes in fees.
Ethereum fees have been notoriously high in the first half of 2021, eclipsing fees seen during the 2017 bubble.
As of August 4, 2021 using IntoTheBlock’s Ethereum Fees Stats
Sudden spikes in fees — like the one seen in May 2021 amidst the dog token mania — should become less frequent following the implementation of EIP-1559. Additionally, since the burning of the base fee effectively reduces Ether’s supply, ETH has the potential to become deflationary if the amount being burnt surpasses proof of stake issuance.
This, in particular, is what has many Ether holders awaiting the implementation of the London hard fork. This anticipation is apparent in on-chain activity, which is displaying strong signs of conviction.
On-chain signs of conviction
Following a drop of over 50% in price, Ethereum long-term holders remain unfazed. The number of hodlers — addresses that have been holding for over one year — continues to grow in spite of the volatility.
As of August 4, 2021 using IntoTheBlock’s Ethereum Ownership by Time Held Indicators
Approaching 36 million addresses, the number of ETH hodlers has managed to grow consistently regardless of price action. This shows high conviction from long-term players, not panicking in volatile times and likely increasing in anticipation of the upcoming protocol upgrades.
Similarly, on-chain flows suggest bullish activity picking up, particularly relating to funds flowing out of centralized exchanges. Exchange flows have become an important tool to gauge investor positioning for a particular crypto-asset. This is the case as inflows into exchanges tend to increase prior to or during price crashes, a signal that holders may be depositing with the intention to sell.
Conversely, outflows from centralized exchanges suggest buying activity. This is the case as holders wish to have their crypto-assets stored safely in a hard wallet or into a decentralized application where they can earn a yield on top of their assets.
Netflows are the difference between inflows minus outflows. Therefore, negative netflows point to a high amount of outflows relative to inflows. In Ethereum’s case, netflows recently hit a new record low.
A net amount of $1.3 billion worth of ETH left centralized exchanges on July 2nd. This drop can be interpreted as bullish, suggesting that holders are leaving exchanges for more secure or yield-generating locations.
Lastly, EIP-1559 is likely to play a key role in the way the relationship between Bitcoin and Ethereum advances. Being the first step towards decreasing Ether’s inflation, it is feasible to believe that more and more investors will start seeing its potential as a store of value. Ultimately, this would influence the way Ethereum is valued and bring forth higher chances for the flippening.
Bitcoin Thoughts And Analysis
MONTHLY CHART
I have shared this monthly chart numerous times, with the clear flip of the EQ (equilibrium, center dashed line) resistance to support on the past two months once again.
One thing that I never noticed before was that this has never happened in either direction without price visiting the top or bottom of the channel. Every time price has hit the top, it has flipped the EQ to resistance and traveled to the bottom. Every time it has hit the bottom, it has flipped the EQ of the channel to support and visited the top.
If that trend continues, price should eventually target the channel highs, which is 6 figure Bitcoin.
DAILY CHART
My idea about Bollinger Bands is still playing out beautifully. The 3 vertical lines show the 3 times that the bands were this tight, preceding major volatility. The fact that price broke up means that this trend should continue. Price was outside of the upper bands for a few days like December, which usually leads to a reversion back inside the bands before continuation in the direction of the breakout. I am looking for a similar move as December, which would mean we are warming up here.
Price continues to retest the descending channel as support, as well as the 200 EMA (not an indicator I generally use). As you can see, 42K continues to be the line that matters most. Anything below that is still just ranging!
4-HOUR CHART
Here is the red range. There's little to discuss on a macro level while price continues to trade in this area. 4-Hour RSI went from it's highest levels of 2021 to nearly oversold on this move, so I would not be surprised to see a bit more downside to tap that area. Daily RSI did hit overbought on this move as well.
Bottom line: 42-43K is major resistance.
Altcoin Charts
Altcoins are still risky for the moment, but the ADA and RUNE trades from Monday have played out well, ETH is still on the path and the DOT setup is still relevant. The market looks largely flat, not much to see today. Here is one setup I have been watching.
UTK/USDT
I have been a UTrust holder for a long time, have had the CEO on my podcast and have been working with them to integrate crypto payments into the newsletter. I am always watching the chart, and drew the idea above a few days ago.
We do not have confirmation yet, but I am looking for a flip of .251 to support, or for a lower entry if for some reason the market drops (lower circle). Volume is increasing over the past few days, and my alarm went off today on the break of the blue line.
For now, price is at resistance and struggling at that point, so there's no trade here. A clean close above with a retest as support is the signal that I would be watching for.
Legacy Markets
COIN (COINBASE)
I have had quite a few requests for Coinbase stock, as many of us are exposed to the asset. I am personally underwater, with my cost basis around $260 at this point after buying multiple dips. I believe that CB is an important company (even though I don't like the product) that will continue to grow, so I view this as a very long term investment. I am not trading it, I am holding for years.
That said, for traders, it is very clear that this asset is simply ranging sideways after the initial drop from the direct listing. A break above or below the red range would be the likely trade signal, if you are looking for one. Everything in the range is noise, so you could theoretically scalp long at support and shorts at resistance until the range breaks.
Very little to see here for the moment.
Gary Gensler Speaks Out About Crypto Regulation
The Aspen Security Forum is an annual conference (happening now) designed for global leaders to speak on modern-day national security issues ranging from finance, trade, and international relations. One of the designated speakers was Gary Gensler, who prepared a highly detailed response to the rise of cryptocurrencies and their role within government frameworks. A lot of mixed reviews surfaced on his speech, ranging from positive praise to harsh criticism. I read through the speech carefully and picked out some of the most important segments below. At the bottom of the clipped segments are my final thoughts. I highly suggest you take the time to read his full speech. It is one of the clearest insights we currently have into the mind of the SEC, which will largely dictate the path cryptocurrencies take moving forward.
“In that work, I came to believe that, though there was a lot of hype masquerading as reality in the crypto field, Nakamoto’s innovation is real. Further, it has been and could continue to be a catalyst for change in the fields of finance and money.”
“The SEC has a three-part mission — to protect investors, facilitate capital formation, and maintain fair, orderly, and efficient markets in between them. We focus on financial stability as well. But at our core, we’re about investor protection.”
“Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West.”
“This asset class is rife with fraud, scams, and abuse in certain applications. There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced, and complete information.”
“First, many of these tokens are offered and sold as securities.”
“I think former SEC Chairman Jay Clayton said it well when he testified in 2018: “To the extent that digital assets like [initial coin offerings, or ICOs] are securities — and I believe every ICO I have seen is a security — we have jurisdiction, and our federal securities laws apply.”
“You see, generally, folks buying these tokens are anticipating profits, and there’s a small group of entrepreneurs and technologists standing up and nurturing the projects. I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight.”
“A typical trading platform has more than 50 tokens on it. In fact, many have well in excess of 100 tokens. While each token’s legal status depends on its own facts and circumstances, the probability is quite remote that, with 50 or 100 tokens, any given platform has zero securities.”
“Given these important protections, I look forward to the staff’s review of such filings, particularly if those are limited to these CME-traded Bitcoin futures.
“Certain rules related to crypto assets are well-settled. The test to determine whether a crypto asset is a security is clear.”
“At the heart of finance is trust. And at the heart of trust in markets is investor protection. If this field is going to continue, or reach any of its potential to be a catalyst for change, we better bring it into public policy frameworks.”
Let’s start with the good. Gary Gensler supports Bitcoin. He spent years teaching about it at MIT and is a proponent of both the technology and financial mission of the asset. That being said, we forget that he has a job to accomplish, which is to protect investors. From Gensler’s perspective as the head of the SEC, most assets begin to look like risky securities, which is what he clearly noted in his speech. As he clearly states, the SEC’s core job is,“investor protection.”
Gensler’s job is not to foster innovation, or create friendly laws. He serves us by protecting us, whether we want that protection of not. Gensler is right to point out there is a lot of risk in the crypto market, which is why I stress over and over again that if you plan on investing in crypto, the majority of your allocation should be in Bitcoin and Ethereum, the two largest tokens with the most clarity (they also happen to be the only two not classified as securities).
Gensler clearly believes the space is filled with securities, and this is coming from someone who DOES understand blockchain, Bitcoin, cryptocurrencies, and DeFi at their core. If you aren't convinced that he knows what he is talking about, there are over 20 hours of free high-level course material from Gensler teaching about the space. If the SEC does not entertain the idea of editing security laws or their stance on cryptocurrencies, this could be bad for a lot of altcoins. That being said, I don't believe a hammer will drop overnight. If and when the hammer falls, it will be slowly and steadily, giving us time to react and adjust. A lot of tokens could die once this label comes, but those that survive will probably have defeated the final boss of regulation. My takeaway from the speech is that the market is still very much intact, an ETF will eventually come, and holding the majority of your investments in Bitcoin and Ethereum is probably your safest play. Choose your other investments wisely.
Ethereum Rainbow Chart
The Bitcoin Rainbow chart by Über Holger is one of the most popular Bitcoin predictive models in the crypto space. Less known is his new Ethereum rainbow chart. There are 9 separate categories ascribed to each color of the rainbow, ranging from “Fire” and “Undervalued” to “Go back to BTC” and “Maximum bubble territory.” I like the model because it does not tell you where Ethereum is headed. Rather, it portrays the current price as a color and the spectrum of where it could land in the future. When Ethereum begins to rage upwards, use this tool to gauge how overbought we are. If Ethereum reaches the top of the chart around January of 2022, the price could be between $14,000 and $15,000 per token according to the model. Play around with the chart - the possibility and reasonability of the predicted figures may surprise you.
Crypto Ads Return To Google
One of the major recent negative stories in the crypto space was Google’s decision to ban cryptocurrency advertisements, including compliant and regulated entities. Since that move, Google has stepped back and revoked some of the harsh requirements ,now allowing “business not pertaining to the purchase, holding, or exchange of cryptocurrencies, subject to other Google Ads policies” and “Cryptocurrency Exchanges and Wallets.” If you were confused by the above statement like me, it seems that miner hardware, legal services, security services, etc. are now allowed, along with exchanges and wallets. This rule change began just yesterday, but still requires compliance on the end of interested advertisers. If anyone is going to jump on this opportunity, I wouldn't be surprised to see Sam Bankman-Fried and FTX be the first in line to push the limits of the new rules.
China's CBDC Is Spreading
China continues to push their digital currency, now integrating it fully into the Beijing subway system. It is clear that they intend to eventually pivot completely to e-CNY (digital yuan) in the future as they ramp up towards mass adoption. This is the first true test of a Central Bank Digital Currency, so all eyes should be on China.
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The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.