Market Update Cryptocurrency Market Update: Analysis and Insights – May 8, 2024

Markets bounced back this week. The price of Bitcoin is up by almost 7%, Ether has risen by 3.6%, and Solana stands out as the best performer, recording a 21% increase this week.

Overall, the Bitcoin market has been swinging without any clear direction for the past two months now, and it is currently hovering around the post-halving price levels, now below $62,500 US dollars.

On the DeFi side, Decentralized Exchange volumes are still holding at around $4.8 billion per day. The sector is hopeful for another 'DeFi summer' akin to the one experienced in 2020. The post-halving era could certainly contribute, but there are also innovations, one of which I feel is worth describing in this session: the Runes protocol, launched on the Bitcoin blockchain.

The launch of the Runes protocol has already benefitted Bitcoin miners post-halving. As a reminder, Bitcoin runes were launched concurrently with the Bitcoin halving event.

So, how does the rune protocol work?

Bitcoin Runes are minted using a runestone. A runestone is essentially a piece of code, a structure with one function for etching the rune and another function for handling the rune’s transfer process from one wallet to another. The etching function essentially mints and sets the properties of the rune. One of the main distinguishing properties is its divisibility: a rune can be divided into a number of units that are completely fungible.

As a reminder, the ordinal BRC-20 protocol involved assigning a unique identifier to a Satoshi. It is the Bitcoin equivalent of Ether's NFTs.

The big advantage of runes over ordinals is their low 'on-chain' footprint compared to ordinals.

Ordinals saw tremendous success, but at the same time, developers were complaining that the Bitcoin network had become overloaded with transactions (the famous 'unspent transaction outputs' that form the backbone of the Bitcoin blockchain, or UTXOs). This graph illustrates the number of unconfirmed transactions in the mempool, where transactions are waiting to be picked up by miners and included in a block.

The BRC-20 Ordinal protocol was launched in January 2023, almost a year and a half ago. A few months later, the number of unconfirmed transactions went somewhat out of control. Most of these transactions were for very low amounts, essentially considered 'garbage', and they were overloading the network.

So, Runes offer a solution to this congestion problem. They facilitate transactions by including only the relevant balance data information in the transaction. Another significant advantage of Runes is their compatibility with the Lightning Network, enabling them to be exchanged on this layer 2 at a lower cost.

The launch of the Runes protocol post-halving injected new capital into the Bitcoin ecosystem and increased revenues for miners on launch day. We can see on this graph that miner revenues peaked just after the halving event before subsequently declining. In fact, miner revenues reached a record high of over $107 million on April 20th.

Recall that revenues were expected to drop as the minting reward was halved after the 19th. However, the Runes protocol caused a final bump in miner revenues. Eventually, miner revenues crashed to a six-month low.

If miners decide to sell part of their Bitcoin inventory to mitigate their deficit, it would certainly exert significant selling pressure on the market. We can monitor the Miner to Exchange Flow provided by CryptoQuant. So far, we've observed one significant uptick in green at the end of April. However, it's not substantial enough to draw any alarmist conclusions.

The uptick might have contributed to the 5% market drop observed that day, and/or the 3.8% drop observed the next day.

However, we're only talking about 614 Bitcoins here, which are worth approximately $34 million. This is significantly lower compared to the $725 million sold by ETFs during these two days.

In fact, we now understand that the market's dynamics have been and are still mostly affected by the ETF flow. The swings in the Bitcoin market coincide with the swings in the ETF supply/demand, particularly when US markets are open during business hours.

According to Farside, a total of $579 million was invested in ETFs over the past three business days.

Reviewing Bitcoin's recent performance:

May 1st: Jerome Powell announces that the Fed won’t be cutting rates anytime soon, reducing the likelihood of a rate cut in June. He also strongly rules out an interest rate increase, a scenario that had been emerging. Consequently, the S&P 500 dips slightly by 40 basis points (-0.4%), and Bitcoin loses 3.8% before rebounding the next day.

May 3rd: Unemployment figures, including the unemployment rate and nonfarm payrolls, return worse than expected, which is viewed positively for combating inflation. The unemployment rate for April stands at 3.9%, compared to 3.8% in March and an expected 3.8%. As a result, the S&P 500 rises by 1.24%, $378 million is injected into Bitcoin ETFs, and Bitcoin itself increases by 6.5% on that day. T

he 30-day correlation between Bitcoin and equities remains positive and high, surpassing 0.55. There's a growing need for more diversification and fundamental drivers to steer Bitcoin's performance and detach it from traditional markets once again. Can runes and future innovations offer a solution?

What's on the horizon?

On May 15th, next Wednesday, the CPI for April will be released - undoubtedly the most anticipated metric across all markets, both traditional and crypto.

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