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September 8, 2020

Bitcoin Miners, Ethereum & DeFi 

Crypto Market Roundup 

The bitcoin price has historically met strong resistance at the $12,000 threshold, and last week was no exception. After touching on $12K, the BTC price came up against strong resistance yet again, triggering a sell-off in the broader cryptocurrency market. 

Jesse Proudman, CEO of quant hedge fund Strix Leviathan, told Coinscrum that the bitcoin price needs to not only reattain that level but also hold onto it for a number of days in order for $12,000 to flip from resistance to support. 

Source: TradingView

Bitcoin Miners

With the bitcoin price flirting with the $12,000 threshold, miner revenues are hovering above April levels. Miners are generating between $11 million-$12 million per day, ByteTree CEO James Bennett pointed out on Coinscrum’s latest show. 

Part of the reason for this dynamic is that fees as a percentage of revenue currently hover at 10%. Bennett pointed out that this is a positive trend for the long-term, as it incentivizes miners, but he finds it worrying from a usability perspective, saying: 

“In my view, it’s good to see fees at around 2-5% of total revenues. But when we get to around 10%, it can act as a disincentive to users who might seek other payment networks like Litecoin or Dash in order to send their transactions.”

Bennett also discussed the difficulty mechanism in the bitcoin network, which is automatically adjusted to ensure that block times remain at approximately 10 minutes. The dark blue line in the below chart illustrates how much marginal revenue miners receive each time they mine a block. That amount has been trending higher since the May halving and currently hovers at around $80,000 per block. 

He discussed a virtuous cycle in which marginal revenue attracts more miners to the network, which in turn brings in more compute power and drives the difficulty level higher. Difficulty levels are hitting all-time highs for the third or fourth time year-to-date, Bennett noted. Mining dynamics since July are currently very positive for the Bitcoin network. 

Ethereum & DeFi 

Interestingly, while the bitcoin price tumbled last week, it was the ETH price that fueled the broader market declines. ETH suffered from a great deal of sell-side pressure, which is not totally unexpected in light of its meteoric price appreciation in 2020, the reasons for which have two-pronged, Strix Leviathan’s Proudman explained. First, many market participants are heavily levered to the long side in ETH. Secondly, much of the buying activity over the last couple of months can be attributed to the rise of decentralized finance, or DeFi, on the Ethereum blockchain. 

“There are a lot of folks over their skis at the current price level. A pullback is not totally unexpected,” said Proudman.  
For its part, Strix Leviathan’s fund has remained on the sidelines and has not traded any DeFi assets so far, though they are watching the space extremely closely. They have several concerns, chief among which is the mania and price appreciation over the last 30-90 days feels reminiscent of the 2018 ICO bubble, where lots of capital was directed toward untested ideas, Proudman explained. While the ideas themselves may not be bad, it’s unclear how they will play out. He went on to say: 

“This DeFi movement is the first time we’ve had all these interweaving smart contracts. And nobody really understands the risk factors there, particularly when it comes to Ethereum’s price point.” 

Proudman went onto explain how many of the smart contracts in DeFi use ETH as collateral for their activities, whether it’s lending, borrowing or derivatives offerings. They rely on the ability to liquidate ETH in the event the price falls to cover user balances. But gas prices on ETH are trending extremely high right now, which means it might not be possible for a smart contract to liquidate the holdings quickly enough to offset the material decline in the ETH price. 

Proudman harkened back to the massive market drop in the second week of March, detailing that during the dramatic price decline over a couple of hours, protocols had the ability to liquidate assets, adding that the network is congested because everyone is using it on these protocols. 

“If we see a material impact in price, I think there’s a lot of unknown with what could happen with all of the billions of dollars that are locked up on these lending and derivatives platforms,” he said. 

Meanwhile, Proudman discussed the irony in the fact that most decentralized finance protocols are owned by centralized parties or individuals. He added that it is on-chain, and there are compelling and fascinating elements to it. Gas prices are one of these interesting components, and with prices where they are, you’ve got to move large sums of money to offset the costs of executing contracts. 

Ultimately the network is a work in progress, one whose capacity limitations are not lost on Vitalik Buterin or the Ethereum Foundation. Fortunately, Ethereum 2.0 is right around the corner, whenever that will be. 

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