JPMorgan Chase Research Report: Why is the ETH market performing surprisingly well?

1. The Bitcoin and Ethereum markets experienced a certain degree of liquidity shock in early April. In the following days, the Bitcoin and Ethereum derivatives markets began to deleverage…

2. However, the depth of the Ethereum spot market seems to have a faster recovery speed, and the liquidity status of some exchanges is even better than that at the beginning of the month.

3. The basic price of high-frequency cash/futures shows that the Ethereum market has not been greatly affected, although the net liquidation amount is almost the same; in addition, it is found through the open position data that it is easier to find market demand for Ethereum futures trading.

4. The transaction volume on the Ethereum blockchain is currently getting higher and higher, and the part of the ETH token transaction volume that is significantly higher can be considered to be highly liquid, thereby further weakening the influence of futures settlement on ETH .

5. That is to say, compared to Bitcoin, the valuation of Ethereum is less dependent on the demand for leverage. With further breakthroughs in blockchain technology, Ethereum should have more room for development.

Why does Ethereum’s market perform so well?

In recent days, an interesting phenomenon has appeared in the cryptocurrency market. Compared with other cryptocurrencies, Ethereum (ETH) has performed better. Of course, the current price level of the ETH/BTC trading pair is still lower than the peak value in 2017/2018, which is about 30% of the “peak price” (as shown in Figure 1).

In fact, the narratives of the two cryptocurrencies, Ethereum and Bitcoin, are fundamentally different-Bitcoin is more like an crypto commodity, competing with gold, and is a store of value; while Ethereum is the backbone of the original crypto economy. More to be seen as a medium of exchange.

In theory, in a sense, the potential value of Ethereum is greater, and in the long run it should be able to surpass Bitcoin. However, even with explosive growth in the DeFi market last year, the price of Ethereum still does not seem to have risen much, and Bitcoin still dominates the cryptocurrency market. If this trend does not change, the total value of locked positions in DeFi contracts It may slow down in recent months.


Chart 1: Ethereum has performed better in recent days, and its relative market value with Bitcoin has reached the highest level of the market peak in 2017/2018. (The ratio of the market value of Bitcoin to Ethereum, %)


Chart 2: In the past few days, the Ethereum and Bitcoin spot markets have experienced relatively considerable liquidity shocks, and they have now recovered.

More directly, at least more than a week ago, the microstructure of the two markets of Bitcoin and Ethereum was more or less affected by liquidity shocks.

For example, in the Bitcoin and Ethereum spot markets, the market depth has declined compared to the average level several weeks ago, both in terms of total trading volume and on every major spot cryptocurrency exchange ( As shown in Figure 2).

According to the latest analysis, the liquidity shocks in the Ethereum and Bitcoin spot markets mainly originated in the derivatives market and led to the emergence of large-scale liquidation (for details, please refer to Joshua Younger’s specific analysis on April 21, 2021).

It can be said that Bitcoin seems to be more susceptible to futures trading. For example, a week ago, the total net long liquidation of Bitcoin accounted for 23% of the ex-ante open interest, followed by Ethereum. The total net long liquidation accounted for 17% of the prior open positions. In this context, the dramatic recovery of the depth of the Ethereum market is even more interesting (on some cryptocurrency exchanges, the recent liquidity shock is much greater than before).

But at the same time, this does raise another question. After the initial liquidity shock of a certain “comparable” (comparable), compared with Bitcoin, why can the liquidity of ETH recover more quickly?

We again believe that the root of this difference may come from the derivatives market, and there are reasons to believe that the liquidity balance of Ethereum and Bitcoin is basically the same: hedge funds and other speculative investors use cash/futures based positions to move towards small Institutional and retail participants lending (for details, please refer to Joshua Younger’s article “Why the Bitcoin Futures Curve Is So Steep?” on April 9, 2021. Although there are some “important warnings” attached, you will find that if you analyze CME Group’s futures positions according to the type of investors, you will find that the analysis results are consistent with the conclusion that the liquidity of Ethereum can recover more quickly, because leveraged funds are mainly It’s a short position, while “unreported investors”—in this case usually retail investors and small and medium-sized institutional investors—have chosen long positions (as shown in Exhibit 3).


Chart 3: According to the US Commodity Futures Trading Commission (CFTC) data, the liquidity balance in the emerging onshore ETH futures market is similar to the net positions of Ethereum and Bitcoin futures listed on CME Group (data time as of April 2021 On the 20th, the percentage of open positions, %)


Chart 4: Ethereum cash/futures basics have performed better in recent days, and the price difference between exchanges is smaller, which shows that ETH has better ex-ante positioning, longer leverage base, and liquidity Recovery performance is also better.

However, high-frequency basis pricing reveals significant differences in the market performance of the two cryptocurrencies, Bitcoin and Ethereum, and also highlights some interesting potential differences.

At the height of the stress, the cash/futures prices of these two mainstream cryptocurrencies both fell sharply, but this decline obviously has a much smaller impact on ETH (see Exhibit 4). In addition, the price difference of similar contracts between major cryptocurrency exchanges has also decreased, and has maintained a certain degree of convergence for most of the past week, which indicates that arbitrage opportunities have decreased, and conversely, it also shows that the initial market price shock After that, the overall market performance of Ethereum was also better (the recovery status of Ethereum network computing power was also better).

So, how do we understand the impact of the derivatives market on the spot prices of Bitcoin and Ethereum? All the data show that, compared with Bitcoin, the recovery of the spot price of Ethereum is better and more resilient. The overall size of each futures market and the relative changes in net liquidation are consistent: for Bitcoin, compared to the ex-ante level, open positions have dropped by 26%, and net liquidation has dropped by 23%; For Ethereum, the liquidation position has fallen by less than 4% and the net liquidation has fallen by 17% compared to the previous level. In addition, some cryptocurrency exchanges (such as FTX, CME, etc.) have held Ethereum futures positions higher than the level before the liquidity shock at the beginning of this month, but Bitcoin futures positions are still falling across the board. This shows that the Ethereum futures market can better find the clearing demand side, thereby reducing the impact on the spot price and recovering liquidity more quickly.

On the other hand, the “foundations” of the two public chains of Ethereum and Bitcoin are also different, and the clearing mechanism is therefore different. Compared to Bitcoin, the Ethereum network pays more attention to “transactions” (as shown in Figure 5). This is because Ethereum provides support for DeFi and other transaction types, and the number of these transaction activities is also increasing. As a result, the liquidity of ETH tokens is higher than that of BTC (in the past month, the liquidity ratio of BTC was about 4%, while the liquidity ratio of ETH was about 11%). In this case, Ethereum is less affected by the reduction in open positions in futures, and its performance is even better than those of crypto tokens that are often in circulation (as shown in Figure 6). In a market with significantly higher spot trading volume, it is possible that the basic basis of long-term exposure is less dependent on leverage in the form of futures and swaps. In a market with significantly higher spot trading volume, ETH bullish exposure does not seem to rely so much on leveraged futures and swaps.


Chart 5: The growth of DeFi has significantly increased the level of transaction activity on the Ethereum network (the average daily transaction volume of Ethereum and Bitcoin)


Exhibit 6: As part of the highly liquid tokens, the liquidation scale of ETH futures is relatively small, and the changes in open positions of BTC and ETH futures from April 17 to April 26, 2021

To some extent, the topic we are discussing today seems to have nothing to do with the relative valuation between the two major cryptocurrencies. What happened in the past week or so may soon be forgotten, especially with the current increase in cryptocurrency prices.

However, as always, the microstructure performance of the cryptocurrency market is instructive, and it also allows us to further understand the medium-term risks and make a better balance.

As far as the relationship between ETH and BTC is concerned, at least for now, there is at least evidence that ETH is more flexible in liquidity, less dependent on the transfer risk and “storage” risk of the derivatives market, and can better respond to changes in market demand. As DeFi and other components of Ethereum’s ecological economy continue to grow, Ethereum should have more room for development relative to Bitcoin.

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