The Block Research | 2022 Digital Asset Report Chapter 1: Market Overview
The annual forecast report from research institution The Block Research is divided into eight chapters and spans over 163 pages. Here are some key highlights:
Table of Contents
Chapter 1: Current Market Situation
Note: The data was last captured on 11/30.
Market Performance
2021 has been a record-breaking year, with all projects in the top ten cryptocurrencies by market capitalization, except stablecoins, outperforming Bitcoin. Calculated at $69,000, the annual return exceeded 140%, highlights include:
- BSC, PancakeSwap boosting BNB
- Cardano launching smart contracts
- Avalanche ecosystem continuing to grow
- Dog meme coins series
The dog meme coins series started with Dogecoin (DOGE) supported by Tesla CEO Elon Musk, followed by Shiba Inu (SHIB) which surged over 632,000 times in 2021.
The Block noted that buying $100 of SHIB in January would be worth $63 million at the time of writing this report.
Excluding stablecoins and SHIB, the top ten market value performances are as follows:
Bitcoin's market dominance dropped from 70% to 43%, briefly dipping to 40% in May, mainly due to the growth of other Layer 1 blockchains and their tokens.
Record-breaking on-chain transaction volumes:
- Bitcoin on-chain transaction volume grew by 317% to $4.2 trillion.
- Ethereum on-chain transaction volume surged by 729% to $3.3 trillion.
Bitcoin's on-chain transaction volume was 2.5 times that of Ethereum in 2020, but this year it is only 1.2 times, indicating Ethereum's on-chain economic activity growth is catching up with Bitcoin.
Stablecoins
In 2021, the supply of stablecoins grew by 388%, with the market value increasing from $29 billion to $140 billion. Additionally, cross-chain transactions of stablecoins exceeded $5 trillion in 2021, a growth of over 370% year-on-year.
Mining Data
2021 saw an unprecedented decentralization of mining power away from China due to a series of regulatory crackdowns starting mid-year, including:
- 5/21: CCP's high-level meeting memo mentioning Bitcoin trading and mining activities
- 5/25: Inner Mongolia issued eight new policies to further curtail mining activities
- 6/9: Closure order for mining farms in Xinjiang's Zhundong Economic-Technological Development Park
- 6/18: 26 Bitcoin mining companies in Sichuan ordered to shut down
Bitcoin's hash rate hit an all-time high in April, but the subsequent drop of over 50% in May and June due to Chinese regulations has not been recovered to date, with the hash rate only growing by 19.6% since the beginning of the year.
Ethereum's hash rate also experienced a slight decline in June but then reached a new all-time high, growing by 187% year-to-date.
The Block noted that some Chinese miners retained GPU mining rigs and continued mining, which is why Ethereum's hash rate recovered faster from regulatory hits.
China's mining crackdown reshuffled global hash power, with Foundry USA pool becoming the second-largest globally, accompanied by increased hash power in North America and Kazakhstan.
In October this year, the U.S. officially became the largest Bitcoin mining country.
The Block mentioned that in the second half of 2021, various mining institutions began heavy financing to build more power infrastructure and order more mining machines, aiming to break the previous hash rate peak in North America.
Miner Revenue
Despite concerns about the impact of EIP-1559 on miner income before its launch, Ethereum miners earned a record $16.5 billion in 2021, a 678% year-on-year increase, reaching an all-time high.
This surge is attributed to the rise in coin prices and significant transaction fees generated by activities like NFT trading.
Spot Trading Volume
The year started with record-breaking trading volumes in January surpassing December's volume, reaching $917 billion for the beginning of 2021, with May's trading volume peaking at $2.2 trillion; the latter half of the bull market was in the recovery phase, with November hitting $1.4 trillion.
Binance's spot trading volume accounted for 66%, with its main competitors being:
- Coinbase 12.3%
- FTX 6.6%
- Kraken 3.2%
- LMAX 2.7%
- Bitfinex 2.5%
Highlights of stablecoin spot trading volume:
- USDT dominated with 63% trading volume in August
- In November, USD and BTC trading volumes were 14.8% and 7.5% respectively
Other stablecoin trading volumes did not exceed 10%, with Binance's BUSD being the highest.
Grayscale
Grayscale's GBTC remains the world's largest Bitcoin fund, holding around 646,000 BTC, approximately 3.1% of the total supply as of November.
However, compared to Bitcoin, GBTC has only seen a 42% return since January, as GBTC has been trading at a discount since 2/23, possibly due to the increased popularity of Bitcoin ETFs, such as spot ETFs in Canada. The discount was around 14% as of November.
ETH Ethereum fund (ETHE) faces a similar issue, with a return of only 184% year-to-date, compared to 526% for Ethereum spot, due to the disappearance of the significant premium it previously held.
Bitcoin Derivatives
The cryptocurrency derivatives market has experienced explosive growth in the past year, with Bitcoin futures trading volume across all exchanges at $869 billion in November last year, $2.5 trillion in May this year, and $1.4 trillion in November this year.
While offshore exchanges continue to dominate, traditional futures markets remain an important gauge of "institutional trading interest." For institutions and traditional hedge funds, the Chicago Mercantile Exchange (CME) is the best way to access Bitcoin native products.
Year-to-date, CME's Bitcoin futures open interest has grown from $1.6 billion to $3.9 billion, reaching April levels in October, mainly driven by the approval of three Bitcoin ETFs:
- ProShares
- Valkyrie
- VanEck
These ETFs all operate through CME's Bitcoin futures, and the SEC considers this mechanism the safest as:
- CME is regulated by the U.S. CFTC
- CME has sufficient trading volume to maintain liquidity
- Futures settle in cash, eliminating the need to hold Bitcoin
Below is the ETF application list, where Bitwise announced the withdrawal of their futures ETF application, as they believe investors are more interested in spot ETFs, which Bitwise will continue to pursue.
Deribit continues to dominate the options market, holding around $10.9 billion in Bitcoin options open interest as of 11/30, accounting for approximately 93% of the total.
Ethereum Derivatives
Ethereum futures trading volume hit a record high of $1.7 trillion in May 2021. Unlike Bitcoin, CME launched Ethereum futures in February this year, with CME's Ethereum futures accounting for 18% of the market in November, compared to Bitcoin's 9.8%.
The Block believes that the market's lack of demand for Ethereum ETFs may further reduce the need for CME's Ethereum futures.
Rising Fines by U.S. Regulatory Agencies
The crypto industry is facing increased scrutiny from U.S. regulatory agencies, with SEC fines jumping from $41 million last year to $562 million this year.
CFTC fines surged from $9 million last year to $716 million this year, including fines against masterminds behind large-scale Bitcoin Ponzi schemes and the $100 million fine imposed on BitMEX this year.
Bitcoin 2021 Highlights
Ethereum 2021 Highlights
