March 18, 2022
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This Week
gm –

we’ve got an absolutely jam-packed letter for you today covering markets, russia/ukraine, european crypto regulation, the launch of $APE and BAYC’s acquisition of CryptoPunks, and the successful merge to proof-of-stake on ethereum’s new testnet Kiln.

and more than that, we have two bigger items to share:

  • first, Christine Kim penned the report first in our new series, Do Your Own Research, titled An Introduction to On-Chain Fundamental Analysis. this report is loaded with explanations of common metrics and how to use them in creating valuation analyses, and the report demonstrates several of the most prominent Bitcoin-valuation techniques. it’s a must read.
  • second, we recorded the first episode of our new weekly podcast. this first episode is available only on YouTube, but over the next few weeks it will launch on all the podcast apps. give it a listen! the pod is still unnamed, so reply to us with your best ideas for a name!

have a great friday and weekend. –alex
New Report: An Introduction to On-Chain Fundamental Analysis
This report is the first in an ongoing series about how to value cryptoassets. It offers a comprehensive and generalized overview of how to use on-chain data for the fundamental analysis of cryptoassets. In this introductory report, we present a detailed lexicon for the most popular metrics used in fundamental analysis and offer a framework through which these metrics can offer accurate and nuances conclusions about a cryptoasset’s valuation. Finally, the report offers an exhaustive record of the many iterations and innovations that have been made in this field of study, highlighting how the fundamental analysis of cryptoassets is an evolving science that is becoming more sophisticated as the adoption of cryptoassets grows. 


Key Takeaways

  • When it comes to the fundamental analysis of cryptoassets, there are no standardized or widely accepted models for measuring the intrinsic value of all coins.
  • When a new cryptoasset is onboarded by a blockchain data provider to their existing suite of assets, there are a handful of metrics that are near guaranteed to be made available. They are metrics that track the issuance, transfer, usage, and supply of native cryptoassets.
  • These basic metrics are also the building blocks that have inspired more complex valuation models such as Bitcoin Days Destroyed, Network Value to Transactions, Market Value to Realized Value, and Spent Output Profit Ratio.
  • Methodology is a crucial component of fundamental analysis. Competing methodologies for calculating on-chain metrics are known to change data values by a factor of 10 or more.
  •  Most complex valuation models have been designed for valuing bitcoin and are extremely limited when it comes to their universality and applicability towards other alternative cryptoassets.
  • The effectiveness of fundamental analysis in explaining a cryptoasset’s market value is limited without contextualization from other types of analysis such as social sentiment or technical analysis.
Market Update
The total implied network value (market cap) of the digital assets market stands at $1.79tn, up 6.5% from last week (when it stood at $1.68tn). Bitcoin’s network value is 6.03% of gold’s market cap. Over the last 7 days, BTC is up 3.85%, ETH is up 8.03%, and LUNA is down 14.33%. Bitcoin dominance is 42.9%, down 2 percentage points from last week.
Data current as of 8:31 pm ET on March 17, 2022. Prices and Data via Messari.
The Federal Reserve raised its benchmark federal-funds rate by 25 bps at Wednesday’s FOMC meeting, the first interest rate hike since 2018. The benchmark rate is now between 0.25% and 0.5% and Fed officials signaled there could be six more increases before the end of the year, which would bring the rate to 2%. Markets liked the news, with equities posting their biggest three-day run since November 2020. Crypto was up, with Bitcoin leading the way higher Wednesday with nearly an 8% gain. Commodity prices remain elevated, though, which will continue to put upwards pressure on inflation and could spur more drastic action from central banks going forward. YTD, oil, natural gas, and wheat are all up more than 30%. Soybeans and corn are up 26%, and metals like iron ore, aluminum and nickel are all up more than 15%. Gold is up 6.2% YTD while BTC is down 12% YTD.

There’s still a lot of uncertainty in the market, but for now it seems possible markets have seen the worst of tightening-led risk-off sentiment. Russia’s war in Ukraine continues to weigh on markets, though. With Russia’s advances mostly stalled in the face of a staunch Western-backed Ukrainian resistance, frustration in Moscow seems to be growing, as evidenced by a particularly hysterical speech from Putin. While the two sides have been conducting negotiations, it’s hard to see how Putin creates a situation where Ukraine is governable (in the event of a Russian victory), or one where he can save face and declare victory to the Russian people (in the event of a Ukrainian victory). The lack of a way out of the situation could lead to further escalation in the near term.

Positioning in crypto remains light, with basis remaining in the low 3% range and perpetual swap funding mostly negative across major exchanges. Volatility also remains low, though it has increased from 1y lows in early February. Spot volumes also remain consistently low since the beginning of the year, with BTC and ETH posting around $11.5bn in daily trade volume on trusted exchanges since January. That’s about half of Fall 2021’s peak from early December and less than 1/3 the volume BTC and ETH posted around May 2021 highs.

That Bitcoin and Ether are holding up during rate hikes, geopolitical uncertainty, and increasing regulatory and legislative activity speaks volumes about the resiliency of the asset class. Shifting narratives around the global monetary order favor Bitcoin in the long run, and Ethereum’s forthcoming switch to Proof of Stake (expected sometime this summer) should galvanize further interest. Funding in private markets continues at a breakneck pace, although we’ve heard some rumblings that valuations are starting to recede from Q4 2021 highs, which were truly outsized (I wrote about this in our EOY 2021 VC report). Institutional interest in cryptoassets remains strong and many are taking time during this uncertainty to get their ducks in a row. We’ve not seen a decline in institutional interest in digital assets – to the contrary, investors are more educated and interested in the asset class than ever before. Timing is the name of the game, and global turmoil has everyone holding onto their hats and looking for opportunities. -AT
Three Big Stories
💶 EU Rejects Regulation Amendment Banning Proof-of-Work Coins 
The Economics committee of the European Parliament voted to reject an amendment banning trading and offering services for Proof of Work digital assets like Bitcoin but does approve amendment placing Crypto under the EU taxonomy. The European Union (EU) has long recognized cryptocurrency transactions as a legal activity. As early as 2012, the European Central Bank published a paper analyzing the state of “Virtual Currencies.” However, for the most part, the EU has abstained from any regional regulations, leaving nation-states to craft their own rules. Following the massive adoption of cryptocurrencies in 2017, the EU embarked on an effort to to set a region-wide framework for cryptoassets and cryptoasset service providers with the goal of protecting consumers while leaving room for the industry to thrive. From this initiative, the proposed Markets in Crypto-Assets (MiCA) regulation was born to regulate currently “out-of-scope” crypto-assets.

In the days leading up to the committee MiCA draft, there was significant debate on the environmental impact of crypto assets, with particular attention being paid to Bitcoin. The Progressive Alliance of Socialist and Democrats (S&D) and Green MEP parties led a charge to ban Proof of Work (PoW); however, opposing parties rejected it on the grounds of jurisdictional challenges. After a back and forth in the drafting process, lead rapporteur (negotiator) Dr. Stefan Berger submitted an updated draft with one amendment addressing both approaches. In this amendment, cryptoassets and their underlying technologies would be included in a separate EU taxonomy system, a classification system analyzing and regulating economic activities based on their environmental impact. Just before the vote, the S&D party pushed in a last-minute draft containing a new amendment but with more capacious wording. In this new version, crypto assets with environmentally unsustainable consensus mechanisms are barred from being issued, offered, or traded. In the nick of time, the global crypto community mobilized to spread awareness and educate policymakers.

On Monday, March 14th, the ECON committee voted against the amendment by a margin of 30-23. Instead, the committee approved Dr. Bergers’ amendment, placing cryptoasset mining activities under the purview of EU taxonomy. Although there is one remaining vector for the S&D party to push the discussion further, it is unlikely to maintain its merit in the plenary of the parliament. The newly approved MiCA draft will be debated by the EU Commission & Parliament, followed by a final approval and entry into law.
OUR TAKE: Environmental sustainability is at the forefront of debate in the European Parliament. It has become the lens through which many EU policymakers legislate. However, the narrative is frequently weaponized to stifle innovation and blur the facts, as exemplified by the S&D and Green MEP parties, who launched a two-front attack on Bitcoin and the underlying consensus mechanism (PoW). Recently, S&D treasurer Eero Heinaluoma stated, “The Carbon Footprint of a single Bitcoin Transaction equals a…flight from London to New York.” Not only is this factually untrue, but it is also subtly misleading. Carbon footprint represents the energy source utilized, not a measure of the energy needed. Fossil fuels and coal are sources of high carbon intensity, but renewable energies have low to zero-carbon intensity. Proof of work does use a significant amount of electricity, but it is estimated that more than 55% of bitcoin mining is done with sustainable energy, which makes bitcoin mining the industry with the smallest carbon footprint worldwide.

In Mr. Heinaluomas’s backyard, Europe’s largest PoW mining operation utilizes 100% carbon-neutral energy. Northern Data is a pioneer in green mining and data centers, with sites in Norway, Sweden, Netherlands, and Germany. The fate of proof work firms like Northern Data is not sealed yet, due to the approval of the European Union taxonomy amendment, and proof of work is likely to fall under data centers as an economic activity, with EU data center regulation expected in the next two years.

The manner by which policymakers attack Bitcoin and PoW shows an alarming lack of understanding of the technical details. Sincere ignorance is a dangerous attribute, especially when legislating for 27 nations with a population of more than 447 million people. Proof of work does not require carbon-intensive energy; it is irrational to ban an underlying technology for the delayed progress of energy infrastructure. Mining firms should and will continue to push towards utilizing clean energy sources, and hunting for cheaper energy is a key driver in the PoW mining industry. According to the World Economic Forum, “Renewables are now significantly undercutting fossil fuels as the world’s cheapest energy source.” -LM
🦍Bored Apes Yacht Club Creators Launche $APE Token Days After Acquiring CryptoPunks and Meebits
Yuga Labs, creator of the Bored Apes Yacht Club (BAYC) NFT collection, cements its status as the lone NFT juggernaut. For the longest time, CryptoPunks and BAYC were Coke and Pepsi — two dominant forces in the NFT landscape that were viewed both as OGs and as the gold-standard for profile picture (PFP) NFTs. Many copycats have emerged from these collections as they sought to mimic both the artistic style (Punk copies have popped up on every other Layer 1 blockchain) and the community engagement these collections embodied (BAYC popularized airdropping NFTs to existing holders).
Punks and Apes are perhaps the only NFT collections with true “evergreen” brand appeal, an especially crucial consideration in an industry constantly evolving with new trends in the marketplace. The impact of unifying these two hallmark NFT collections (and to a lesser extent Meebits) is massive. Yuga Labs now owns three of the most valuable NFT collections on the planet, with the longest collective track records to boot. This is best evidenced by the respective volumes of these collections: CryptoPunks has done $2.2 billion in volume, BAYC has done $1 billion in volume, and Meetbits has done $227 million in volume (according to OpenSea).

Yuga Labs’ primary goal with this acquisition is to emancipate owners of CryptoPunks and Meebits from the onerous restrictions of the NFT License. Under Yuga Labs’ ownership, licensing rights for CryptoPunks and Meebits will be transferred fully to the NFT owners at the NFT-level. In other words, CryptoPunks and Meebits owners will be able to monetize their respective NFTs with little-to-no restrictions. We will soon see (an, in-fact, already have!) CryptoPunk and Meebit merchandise, artwork, and branded products in a manner similar to what has been possible with BAYC owners for some time now.

Aside from broadening licensing rights, Larva Labs’ co-founders Matt Hall and John Watkinson were comfortable with transferring ownership of these culturally-important NFT collections because of Yuga Labs’ track record for continually pushing the NFT landscape forward. This has not been a strong suit for Larva Labs historically as John Watkinson had previously come under fire for publicly criticizing V1 CryptoPunks days after selling all of his V1 punks to the public (V1 Punks were the original version of CryptoPunks that launched with a bug in the smart contract. Functionally, they look and behave the same as CryptoPunks, but there are only 1,000 of them total and they are not considered part of the “official” CryptoPunks collection). Regardless, Watkinson’s remarks, days after he sold all of his V1 Punk holdings, caused the price of these V1 punks to plummet. This understandably infuriated the community that had purchased the 40 V1 Punks from him for a tidy sum of 200 ETH. Conversely, Yuga Labs is much more adept at creating a continually-evolving ecosystem that benefits all stakeholders involved. One of the manners in which Yuga has once-again pushed-the-envelope in this regard is with their newly-launched $APE token.

Although the $APE token was originally announced last October, it finally made its debut today as an airdrop available for current BAYC NFT holders. In a tweet from the official $APE account, the purpose of the $APE token is to “promote culture gaming and commerce and empower decentralized community building at the forefront web3”. The $APE token is managed by ApeCoinDAO, which is a separate entity from Yuga Labs and Bored Apes Yacht Club. The ApeCoinDAO allows its token holders to vote on the allocations of its treasury while also giving them a say in future partnerships and governance. The only requirement to be considered a member of ApeCoinDAO is having the affiliated $APE tokens.

One added layer of complexity here is that there is also an Ape Foundation. This entity can be seen as a foundational layer upon which both token holders and the associated DAO can build. The foundation is financed by a separate ecosystem fund managed by the ApeCoinDAO. In addition, the Ape Foundation will be incubated with a board that will serve to create new DAO proposals and draft an initial vision for what the ApeCoinDAO should focus on. Board members will start with a six-month term and ApeCoinDAO token holders will vote-in new members on an annual basis. The council currently consists of: Dean Steinbeck (president/general counsel, Horizen Labs), Amy Wu (head of ventures/gaming, FTX) Alexis Ohanian (co-founder, Reddit; general partner, Seven Seven Six), Yat Siu (executive chairman, Animoca Brands), and Maaria Bajwa (principal, Sound Ventures).

The $APE token itself has a total supply of 1bn with 15% of which going to BAYC and MAYC NFT owners and 47% going to the DAO's ecosystem fund - the remaining 38% is then allocated to the Yuga Labs team (16%), the BAYC project founders (separate from Yuga Labs; 8%), and launch partners and investors (14%). $APE was listed across many of the largest exchanges and as much as 30% of supply may be in circulation on launch day. Airdrop amounts are based on the rarity of the NFT and the 15k eligible addresses have 90 days to claim, though over half of had quickly claimed their airdrops within 3 hours of launch. On its first day of trading, the token has been very volatile, falling 80% from a high of $39.40 to a low of $6.48. It has since settled into the ~$9 range.
OUR TAKE: Yuga Labs’ acquisition of CryptoPunks and Meebits is a prominent example of consolidation in the NFT space at the collection-level. With this proverbial domino falling, we wouldn’t be surprised to see consolidation accelerate as NFT creators vie for market share over an increasingly crowded, competitive, and mainstream landscape.
 
However, the most interesting takeaway from this acquisition is the unlocking of IP for CryptoPunks and Meebits owners. The obvious conclusion here is that the floor price of CryptoPunks will go up since the IP gap that once existed between BAYC and CryptoPunks has finally been closed. We are already seeing this play out in a number of ways as prominent NFT influencer Gmoney published a game that leverages his Punk 8219 likeness in a remake of Brick Breaker. It will only be a matter of time before more CryptoPunk games and branded merchandise gets released by individual owners of these digital assets. Importantly, many of these owners are simultaneously wealthy enough to bootstrap entrepreneurial ventures by virtue of being able to afford these expensive NFTs in the first place. We are also seeing creative use-cases of BAYC’s IP play out. One Ape owner is opening a BAYC-themed restaurant using his Ape’s likeness. While it is unclear if either of these early attempts at monetizing NFT IP will be successful, it is abundantly clear that NFTs are unlocking a brand-new relationship between digital asset ownership and capitalism. As popularity and brand awareness for CryptoPunks and BAYC continues to grow, the individual holders of these NFTs will accrue most of the economic benefits for themselves (if they choose to do so). Said differently, IP itself is becoming decentralized. This is BIG, and it is perhaps the best definition of what NFTs truly embody and why they matter.
 
As for the $APE token, it's rare to see a token having this much success at launch. The success was partly due to the existing traction of the BAYC collection and the prominent council members of the ApeCoin DAO, which may have been helpful in getting listed at most major exchanges at launch—including Coinbase, Gemini, FTX, Binance, Huobi, OKX, and more. This is basically unheard of for a new token project and it made the token accessible to many users. That said, $APE saw large price volatility that may have harmed some new users who bought as the high value of the airdrop (averaging ~6 figures for eligible addresses) led to some quick profit taking along with the lack of a staking program to incentivize airdrop receivers to hold (but a proposal for one is in the works with AIP-4). Airdrops, which are essentially free tokens for those users who qualify, have a tendency to decline in value sharply during in initial trading sessions when early liquidity is low and only sophisticated airdrop claimers are holding.
 
One wrinkle with the $APE token’s launch manifested in the form of an MEV attack on the $APE airdrop mechanics and NFTX. According to parsec.finance founder Will Sheehan, the attacker was able to atomically rinse all of NFTX’s Bored Apes of their claims on the $APE token airdrop for a profit of 60k $APE tokens (worth ~$540,000). This was accomplished by purchasing the vault’s token, redeeming the entire pool of available Apes on NFTX, claiming the airdrop using these Apes before anyone else could, then resupplying the pool of its Apes, redeeming the initial investment of NFTX vault tokens back. MEV continues to be a sour spot for many in crypto, but we expect to continue seeing it plague NFTs as more money flows into the space. You can learn more about MEV in our recent report here. -SQ, CY
🧱 Ethereum Spins Up Its Last Testnet for the Merge Upgrade  
On Tuesday, March 15, Ethereum protocol developers spun up one final test network, dubbed Kiln, for piloting the Merge upgrade. As background, the Merge refers to Ethereum’s transition to a fully proof-of-stake protocol that will reduce the energy consumption of the network by over 99%. Kiln is expected to be the last merge testnet before existing public testnets for Ethereum are upgraded. The launch of Kiln has already highlighted some crucial fixes that need to be made by Ethereum software clients such as Prysm in their code implementation of the Merge upgrade. In the following weeks, barring any other unexpected errors in client software, developers are likely to schedule upgrades for Ethereum’s existing testnets such as Goerli and Ropsten throughout April and May in preparation for a hopeful mainnet launch of the Merge in June.

Any delays to this timeline would require developers to initiate an emergency hard fork activating another delay to the network’s difficulty bomb. The Ethereum difficulty bomb is a mechanism to encourage the deprecation of proof-of-work mining by progressively making it harder for miners on the network to produce any blocks. Back in December 2021, developers released their fifth delay to the activation of the bomb and estimated at the time that the Merge would be ready for activation by June. In light of the recent Kiln testnet launch, developers' estimations about Merge activation on mainnet have not changed and remain on track for a potential release in roughly three months' time. According to the Kiln block explorer, more than 70,000 blocks and 500,000 test transactions have successfully finalized on the latest public Merge testnet.
OUR TAKE: The Kiln testnet is yet another major milestone in Ethereum’s long and hard-fought journey to becoming a PoS blockchain. At the genesis of Ethereum in 2015, developers anticipated that this transition would take an estimated two years to complete and also that it would be the last and final phase of Ethereum’s development. Not only has it taken an additional five years to complete, but the Merge upgrade also no longer represents the final form of Ethereum’s development. In fact, the Merge is one of many significant upgrades still to come on the network.
 
After the Merge is complete, developers must prioritize an ever-expanding list of roughly 20 different Ethereum Improvement Proposals (EIPs) to include in the next hard fork upgrade, dubbed Shanghai. Thereafter, Ethereum developers will continue fleshing out long-term agendas and roadmaps for improving scalability, state growth, Ethereum’s Virtual Machine, and the user experience. PoS is no longer the endgame for Ethereum. The goal post for when Ethereum 1.0 becomes 2.0, meaning when the network transitions from being an experimental project requiring frequent iteration to a production-ready network only requiring light maintenance, has shifted and it remains unclear what exactly Ethereum 2.0 will look like in the future.
 
Here’s one thing we do know for certain: when Ethereum does successfully transition to PoS later this year, whenever it may be, the security budget of the network will shrink. This matters because when the issuance of ETH drops, the annualized inflation and supply growth of the cryptoasset will also decline and make the asset scarcer, possibly driving up its value in the short-term. According to developer activity on Github, developers have targeted roughly 32 million ETH-at-stake over the long-term after the Merge for optimal network security levels, which is 27% of total ETH supply as of March 17, and an annualized inflation rate of 1%, not factoring in any coin burns. A low annualized inflation, that may even during times of high network congestion become deflationary through coin burns, is one of the immediate impacts from the Merge upgrade that could impact the ETH holdings of users and investors in the months ahead. -CK
Other News
  • Decentralized lending protocol Aave launches a third iteration of its software that enables cross-chain asset swaps.
  • U.S. Senator Elizabeth Warren (D-Mass.) announces a sanctions compliance bill targetted at cryptocurrrency companies.
  • Terraform Labs donates 12 million LUNA to Luna Foundation Guard.
  • Cryptocurrency exchange Coinbase unveils a new Chrome browser extension for making web3 purchases called Coinbase Pay.
  • Ethereum-focused venture studio house Consensys raises $450 mn in a Series D funding round at a $7bn valuation.
  • Protocol developers behind one of the longest-running decentralized finance protocols MakerDAO consider a new roadmap to enable loan collateralization with real world assets. 
From the Desk
Access our research on the Bloomberg Terminal with ERH GXY <GO>
An Introduction to On-Chain Fundamental Analysis
In this major report, GDR's Christine Kim offers a comprehensive and generalized overview of how to use on-chain data for the fundamental analysis of cryptoassets.
Galaxy Digital Research Podcast
In the first episode of our new weekly podcast, we discuss Russia's invasion of Ukraine and what it means for the global monetary order, European crypto regulation, and Apes buying Punks. Available on YouTube this week, everywhere next week.
Charts of the Week
A significant portion of bitcoin supply has now moved on-chain when BTC traded between $38,439 and $41,870—more than 12% of total supply. 29% of coin supply last moved at prices higher than now (~$40.5k). (Note, the below chart removes coins not moved since BTC price ranged $0-$686 to exclude the supply held in illiquid addresses, e.g., the addresses of pseudonymous creator of Bitcoin Satoshi Nakamoto.)
At a combined market cap of more than $130bn, USDC & Tether now comprise more than 8% of the total crypto market cap. Both their market cap and share has grown as the crypto market cap has receded from all-time-highs in Fall '21 as investors move into stables but not fully out of the crypto economy.
Bitcoin network transaction fees are essentially at all-time lows. Below is one of the most perplexing charts in all of crypto--every other run up in price has been coupled with a spike in on-chain transaction fees, but fees have flatlined since June '21 despite reaching two new all-time highs in the Fall. This is the subject of a forthcoming report, in which Alex will examine the reasons why fees are so suppressed, and what it means for users and network participants going forward.
Thank you!
Thanks for reading this week. Have a great weekend.

Please feel free to contact us at research@galaxydigital.io with any questions or comments.
Alex Thorn
Head of Firmwide Research
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