Reflexivity Research: August 2024 in Review

August 2024 in Review

Before diving into this month in review, be sure to check out a few recently released reports from our research team:

• Fantom -> Sonic Transition
• NEAR Q2 2024 Overview
• Hedera Q2 2024 Overview
• Jiritsu and Real World Assets
• Avalanche BOOST Overview
• THENA’s ALPHA Derivatives Exchange

Market Landscape

August was an eventful period for the digital asset market. Early in the month, Bitcoin's price dropped below $50,000 for the first time since February 2024, driven by a combination of factors. This decline mirrored significant losses in stock markets across Europe and Asia, indicating broader economic distress and a shift towards risk aversion among investors. The release of disappointing U.S. employment data that week intensified fears of a slowdown in the world’s largest economy, triggering a sell-off in risk-sensitive assets. The situation worsened as global market instability deepened, with Japan’s Nikkei 225 index suffering a historic 12.5% drop and European markets also experiencing declines.

The sharp downturn in digital asset prices led to the liquidation of over 307,000 traders, with total liquidations reaching $1.22 billion on that day alone.

Later in the month, macroeconomic fears began to subside, and optimism returned following Jerome Powell's speech at the Jackson Hole Symposium on August 23rd. During the event, Federal Reserve Chair Powell addressed key aspects of the U.S. economy and monetary policy, indicating that "the time has come" to reduce interest rates, likely beginning in September, to support the labor market and ensure economic stability. He described economic growth as strong and noted that inflation is nearing the Federal Reserve's 2% target. Despite a slowdown in the labor market, Powell reassured that this should not lead to further inflationary pressures. He also emphasised the importance of continuously reassessing monetary policy principles, a lesson underscored by the recent pandemic. While expressing confidence in achieving price stability, Powell remained cautious about the future economic outlook.

According to data from Coinglass, as of August 27th, total liquidations for the month have accumulated to $4.82 billion.

A noteworthy observation is the shift in funding rates. Six months ago, when Bitcoin was priced similarly as it is today funding rates were considerably higher, ranging from 25% to 50%. In comparison, current funding rates are almost neutral.

Additionally, examining Bitcoin's 3-month annualised futures basis—the difference between the spot price and the 3-month quarterly futures contract—reveals a trend similar to that of the funding rates.

These two data points combined suggest a market that is less leveraged and potentially more stable with better growth prospects.

Bitcoin ETFs Overview as of August 28th 2024

The above table illustrates the daily net flows for various spot Bitcoin ETFs from 1st August to 28th August 2024, providing a detailed breakdown of how each ETF performed during this period in millions of USD. Over the month, BlackRock's IBIT ETF recorded the highest total inflows, accumulating $902.4 million, with significant inflows on days such as 8th August ($157.6 million), 19th August ($92.7 million), and 26th August ($224.1 million). These substantial inflows indicate strong investor confidence in BlackRock's offering.

In contrast, Fidelity's FBTC ETF experienced considerable outflows, totaling -$78.4 million for the month. Notable withdrawals occurred on 2nd August (-$104.1 million) and 6th August (-$64.5 million), suggesting a shift in investor sentiment away from this ETF during that period. Similarly, Bitwise's BITB ETF saw net outflows of -$74 million, reflecting challenges in maintaining investor interest despite some positive days.

21Shares' ARKB ETF faced challenges as well, with large outflows on 2nd August (-$87.7 million) and 27th August (-$102 million), leading to a total monthly outflow of -$217.1 million. Other ETFs like VanEck's HODL and Grayscale's GBTC also saw negative flows, contributing to the overall mixed performance across the market.

Conversely, the DEFI ETF stood out with positive inflows totaling $329.9 million, bolstered by strong performances on 26th August ($50.8 million) and 8th August ($191.1 million). This ETF's performance contrasts with the broader market's trend, suggesting that specific themes or strategies may be attracting more investor interest.

The total net flow across all the ETFs amounted to $155.2 million, indicating a slightly positive trend despite the variability in individual ETF performances.

Overall since their inception, Bitcoin ETFs have accumulated a net inflow of 310,000 BTC, with 7,930 BTC added in the past week alone. This brings the total on-chain holdings of Bitcoin ETFs to 930,000 BTC, which is equivalent to $58.7 billion in value. These holdings represent a significant 4.71% of the entire current Bitcoin supply, underscoring the substantial role these ETFs play in the cryptocurrency market.

Moreover, the data includes a projection over the past 14 days, indicating that if the recent trend continues, Bitcoin ETFs could absorb Bitcoin at an annualised rate of 1.14% of the total supply. This means that, based on the recent activity, ETFs are on track to acquire a further 1.14% of the total Bitcoin supply annually, highlighting the growing demand and influence of these financial instruments on the broader Bitcoin ecosystem.

Ethereum ETF Overview as of Aug 28, 2024

Following on from Bitcoin, the above table presents the daily net flows for various spot Ethereum ETFs from 1st August to 28th August 2024, summarising their performance over the month in millions of USD. BlackRock’s ETHA ETF saw the highest total inflows, amassing $389.4 million, with significant gains on days such as 6th August ($109.9 million) and 13th August ($49.1 million).

In contrast, the ETHE ETF managed by Grayscale suffered the most significant outflows, totalling -$577.9 million, with particularly large withdrawals on 1st August (-$78 million) and 15th August (-$42.5 million).

The FETH ETF also experienced considerable inflows, accumulating $113.5 million, with notable daily inflows on 6th August ($22.5 million) and 22nd August ($14.3 million). However, some ETFs like ETHW and QETH had more modest performances, ending the month with $29.6 million and $11.9 million in inflows, respectively.

Other ETFs, such as EZET, saw minimal movement, closing the month with only $0.8 million in inflows. Overall, despite the large outflows from ETHE, the total net flow across all these Ethereum ETFs was slightly positive, at $7.9 million.

Amidst what may be at present less than favourable ETF flows for Ethereum, Vitalik made a divergence from his usual philosophical posts. He did so by sharing a humorous "bull post," featuring an image of a bull with the caption "Ethereum is good." Buterin's message aimed to highlight Ethereum's overall strengths, including its ecosystem and future applications, despite facing criticism for lagging behind competitors like Solana in terms of price performance.

The table below summarises some additional recent strengths of Ethereum that Vitalik mentioned:

Overall since their inception, Ethereum ETFs have experienced a net outflow of 148,800 ETH. This is majority composed of Grayscale’s trust outflows. The total on-chain holdings for Ethereum ETFs stand at 2.80 million ETH, valued at approximately $7.24 billion, which accounts for 2.29% of the current total Ethereum supply. However, over the past seven days, the annualised rate of Ethereum supply absorption by these ETFs is projected to be negative, at -0.1%. This indicates that, on a net basis, these ETFs are currently reducing their holdings rather than accumulating more Ethereum, reflecting a cautious or bearish sentiment among investors at this current point in time.

Top Gainers and Losers as of August 29th, 2024

Tron Launches “Sunpump”

Some select assets have performed well this month despite the broader volatility amongst majors. One such asset is Tron ($TRX) which has increased by 17% this month. One of the primary catalysts was the launch of the SunPump platform, which is dedicated to the creation and trading of meme coins on the Tron blockchain. This platform significantly boosted on-chain activity, with over 58,900 meme coins launched since its debut.

The influx of these tokens not only increased TRX demand but also led to higher transaction volumes, further propelling the token’s price.

The platform’s unique features, such as a liquidity and token burn mechanism, have helped maintain market integrity by reducing the circulating supply of TRX, which in turn contributed to the price rally. Additionally, the increased activity on the Tron network, fueled by the meme coin frenzy, positioned Tron as a significant player in the highly speculative meme coin market.

Aave Generates $22 Million during August

During the month of August, Aave has generated over $22 million. This revenue was primarily generated via liquidation fees as a result of the broader market liquidation events.

It is also noteworthy that in July Aave posted a governance proposal titled AAVEnomics update. The update proposal aims to create a clear path for redistributing Aave's excess protocol revenue and enhancing its security model. Key points include:

1. New "Umbrella" Security System: Replacing the current Safety Module, this system will offer more efficient coverage and potential monetization beyond just the Aave protocol.
2. "Buy & Distribute" Program: Using excess protocol revenue to purchase and distribute AAVE tokens to key ecosystem participants, such as stakers and GHO users.
3. Staking Module Upgrade: Allowing staking of multiple assets beyond just AAVE tokens.
4. Phased Implementation Approach: Launching the first phase immediately, with subsequent phases dependent on reaching specific growth and revenue milestones.
5. Linking Protocol Development to AAVE Token Value: Introducing buybacks and cash flow income for holders to tie protocol development more closely to the AAVE token value.

The proposal aims to mature Aave's economic model while ensuring long-term sustainability. It is currently in the "temperature check" stage for community feedback before moving to formal governance votes.

Optimism Progresses their Superchain

As of August 2024, Optimism is making significant strides in its development of a native interoperability system for its Layer 2 chains, collectively known as the Superchain. This initiative is crucial for addressing the fragmentation of assets and users across different Layer 2 networks, which have traditionally relied on Ethereum's mainnet for secure communication and asset transfers.

Key Components of the Interoperability System

• Cross-Chain Message Passing Protocol: This protocol will facilitate seamless communication between different chains within the Superchain, allowing for efficient and secure data transfer across the ecosystem.
• SuperchainERC20 Token: A standardised token that will ensure consistent handling of bridged assets, simplifying transactions and improving liquidity across the various chains in the Superchain.
• Interoperable Chain Set: This component will ensure that all OP Stack rollup chains can interact smoothly, allowing developers and users to operate across different chains as if they were a single cohesive network.
• Shared Interop Fault-Proof System: Optimism is introducing a fault-proof system to enhance the security of asset transfers between chains, which is critical for maintaining the integrity and reliability of the ecosystem.

Goals and Benefits

The primary objective is to create a unified, seamless experience for users, developers, and assets across the Optimism ecosystem. By enabling native interoperability, Optimism aims to make the Superchain function as a single, integrated blockchain, thereby improving user experience and significantly enhancing liquidity.

This initiative is particularly important as the Optimism ecosystem now includes 29 OP Stack chains, such as Base, Zora, and the upcoming Worldcoin Layer 2. By unifying these chains under a single interoperability framework, Optimism is positioning itself to lead the Layer 2 space on Ethereum, offering a more streamlined and user-friendly environment for blockchain interactions​

Celestia Introduces Lemongrass Upgrade with Key Enhancements

In other news this month, Celestia has rolled out its first major upgrade, named 'Lemongrass,' marking a significant milestone for the protocol. This upgrade introduced several key changes to the consensus layer and modified the Data Availability (DA) layer with notable features, including blob data pruning (CIP-4) and the introduction of Shwap (CIP-19), a new messaging framework for DA and sampling.

The Lemongrass hard fork went live on the Arabica Devnet in August 2024, with subsequent deployment on the Mocha Testnet and Celestia Mainnet Beta by early to mid-September.

This upgrade represented a major advancement for Celestia, enhancing the network's interoperability, efficiency, and scalability.

Pavel Durov, Founder of TON was Arrested

The final major piece of news for August was in relation to Toncoin. Pavel Durov, the founder and CEO of Telegram, was arrested at Le Bourget airport near Paris on August 24, 2024, after arriving from Azerbaijan. The arrest was made under a French warrant concerning allegations of inadequate moderation on Telegram, which has been linked to criminal activities. At the time, reports suggested that Durov may have faced charges related to money laundering and other crimes. Durov holds dual citizenship in France and the UAE. The latest developments indicate that Durov has been placed on supervised release and must not leave France.

In the aftermath of Durov's arrest, $TON faced significant market turbulence. The token's value fell by over 20%, erasing nearly $3 billion from its market capitalization. As of August 29th, Toncoin is trading around $5.67, reflecting a 14.80% decline over the past week. In response to these developments, TON updated its branding to symbolise resistance against censorship, while the community rallied strongly behind Durov.

Conclusion

In conclusion, August 2024 was a pivotal month for the digital asset market, marked by significant volatility and key developments across various sectors. The initial economic turmoil, driven by disappointing U.S. employment data and global market instability, resulted in substantial liquidations and a sharp decline in Bitcoin's value. However, the market showed resilience as optimism returned following Jerome Powell's announcement of potential interest rate cuts. Bitcoin ETFs continued to play a crucial role, with mixed performance among different funds, while Ethereum ETFs faced challenges, reflecting a cautious investor sentiment. Notably, select assets like Tron and Aave managed to thrive despite broader market downturns, highlighting the ongoing innovation and dynamism within the blockchain space. The arrest of Pavel Durov and the subsequent impact on Toncoin underscored the potential for external events to dramatically affect digital asset prices. Overall, August demonstrated the complexities and opportunities in the evolving landscape of digital assets.

Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.