First Mover Americas: As Bitcoin and Ether Slide, Investors Bet on Ethereum Fork

·7 min read
  • Price Point: As bitcoin and ether trade lower Tuesday, investors and analysts are focused on the upcoming Merge and the potential of a forked proof-of-work ETH.

  • Market Moves: A report from Coinbase said layer 2 blockchains could siphon revenue away from Ethereum. The future of layer 2s could be a “zero-sum game” because the layer 2 that houses the majority of dapps could “power the entirety of the Ethereum ecosystem,” the report said.

  • Chart of The Day: Bitcoin's correlation with Nasdaq hits its lowest since January.

This article originally appeared in First Mover, CoinDesk’s daily newsletter putting the latest moves in crypto markets in context. Subscribe to get it in your inbox every day.

Price point

Bitcoin (BTC) and ether (ETH) were down 3% on the day, while U.S. stock futures inched lower as investors waited for the release of U.S. consumer price data on Wednesday. The dollar extended a decline.

The consumer price data could set expectations for how the Federal Reserve will approach monetary policy and whether it will continue to raise rates aggressively.

According to Matteo Bottacini, a trader at Crypto Finance AG, volatility won't spike before or after the economic data is released.

“As a consequence, I see risky assets inching higher,” Bottacini wrote in a morning note to investors. “Then again, geopolitical tensions coupled with the released earnings might weigh on equities – and, consequently, on crypto.”

Eth, Eth, Eth

Bottacini pointed out that the hot topic now is the upcoming Merge on the Ethereum network. The basis (the spread between futures price and spot price) for ether widened with September futures on crypto exchange FTX at a $10 discount, and in December at a $40 discount.

“This is the consequence of many stories and rumors about the possibility of having a forked proof-of-work ETH and a proof-of-stake coin,” Bottacini said. “Traders are buying the spot ETH and selling the longer-term future to take advantage of this possibility. Therefore, holding ETH will let you receive the forked asset that might be quite valuable.”

On Monday, JPMorgan analyst Ken Worthington said anticipation of the Merge helped drive ether's big move higher in July and boosted crypto in general.

After two tests were completed ahead of the event, ether's price jumped 70% in July, compared with bitcoin's 27% increase.

Tron founder Justin Sun said in an interview with CoinDesk TV that he supports the post-Merge Ethereum fork, saying he thinks the proof-of-work way of operating is an "essential" component of Ethereum.

CoinDesk’s Daniel Kuhn reported that Ethereum fees are at their lowest level in two years. The average cost for a transaction is under 12.5 gwei. A gwei is a unit of account that represents a fraction of an ETH used to measure the transaction fees needed to run Ethereum. That’s less than half the gwei needed to use Ethereum at the end of July.

As for the rest of the crypto market, altcoins took a hit Tuesday with filecoin (FIL) down 11%, Uniswap’s UNI down 8% and Avalanche (AVAX) down 6.5%. On Monday, Robinhood Markets announced that customers can now buy and sell AVAX through Robinhood Crypto.

In the news

Cryptocurrency exchange Zipmex will release ether to users' wallets on Friday with bitcoin following a week later. The platform blocked customers from taking direct custody of their coins last month.

Crypto-focused data analytics platform Messari plans to raise fresh financing at a $300 million valuation, according to The Block. Messari founder and CEO Ryan Selkis declined to comment on the funding, but tweeted: "I don’t comment on market rumors related to Messari, but… We’ve scaled to 130 people on zero net operating burn, had a record July, and are hiring $35mm worth of developers to help bring transparency and institutional-grade data tool to the crypto market."

And finally, Singapore-based Amber Group, which provides liquidity and market-making services mostly in Asia, has expanded its retail trading operation to Brazil. Called WhaleFin, the retail platform – which allows users to buy and sell crypto as well as take out loans – has been operating in Brazil since June.

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Market Moves

Ethereum Layer 2s Could Take Revenue From the Blockchain as They Become More Competitive: Coinbase

By Will Canny

The Ethereum blockchain needs layer 2 systems to help deal with its “shortcomings on cost and throughput,” though those same scaling products could leech revenue from the network as they become “competitive rather than complementary,” crypto exchange Coinbase (COIN) said in a research report Monday.

“It's feasible that layer 2s could become the application layers hosting the bulk of economic activity while Ethereum exists exclusively to store transaction data,” David Duong, head of institutional research at Coinbase, wrote in the report.

A layer 1 network is the base layer, or the underlying infrastructure of a blockchain. Layer 2 refers to a set of off-chain systems or separate blockchains built on top of layer 1s. A decentralized application (dapp) is a digital app that uses blockchain technology to keep users’ data out of the hands of the organizations behind it.

The future of layer 2s could be a “zero-sum game” because the layer 2 that houses the majority of dapps could “power the entirety of the Ethereum ecosystem,” the report said. There is about $68.9 billion in total value locked on Ethereum, compared with $5.2 billion across layer 2s, the report said.

While the TVL in layer 2s is relatively small, the implementation of zero knowledge Ethereum Virtual Machines (zkEVM) is looking more achievable and could lead to “major traction” in layer 2 growth, the note said.

Coinbase says that if more user activity moves to layer 2s and those blockchains need their own tokens to enable transactions, that could reduce the staking yields to Ethereum validators , cutting their revenue. That could reduce staking on the platform and increase the amount of ether (ETH) circulating, potentially damaging the cryptocurrency’s price. A decline in validators could also have a negative impact on the overall security of the network, the report said.

For the time being, transacting on Ethereum's main network will provide a solution for users who need or value “security over speed,” the report said, noting that losses on cross-chain bridge exploits have reached $2 billion this year.

More activity accumulating to an application on layer 2 would reduce congestion and fees on the layer 1 and that could result in better price discovery for ETH, the note said.

Chart of the Day: Bitcoin's Correlation With Nasdaq the Lowest Since January

By Omkar Godbole

The bitcoin/U.S. dollar daily chart, along with the 90-day correlation coefficient between bitcoin and the tech-heavy Nasdaq Composite Index (TradingView)
The bitcoin/U.S. dollar daily chart, along with the 90-day correlation coefficient between bitcoin and the tech-heavy Nasdaq Composite Index (TradingView)
  • Bitcoin seems to be decoupling from traditional markets amid the optimism stemming from Ethereum's impending Merge.

  • The 90-day correlation co-efficient between bitcoin and the tech-heavy Nasdaq Composite Index has dropped to 0.37, the lowest since January, according to data provided by charting platform TradingView.

  • In other words, the positive correlation between the two is at its weakest level in seven months, and the leading cryptocurrency is now relatively less sensitive to equity markets and perhaps macro factors than it was early this year.

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