With the start of the bear market in crypto coinciding with the Terra crash the value of understanding market metrics is even more apparent. What’s long dogged analytics is the question of how accurate on-chain data is for assessing the overall picture, with leading analytics company Chainalysis noting the issue of fake exchange volumes back in 2019 for example. At the same time more recent a study of the drivers for crypto market movements from the World Bank highlighted that total off-chain volumes appeared to be significantly larger than on-chain transactions. Some industry estimates indicate a roughly 6:1 off-chain to on-chain volume ratio. The total off-chain volume in the first half of 2021 was approximately $16 trillion, compared to $2.8 trillion on-chain volume. This means the report does not include purchases of crypto-assets with fiat currency, sales of crypto-assets for fiat currency and swaps between crypto-assets.
But is this lack of precise crypto data such much of a problem, apart from the researchers at the World Bank, surely on-chain data is sufficient to provide investors and traders what they need to know? Certainly, a good case in point is what the use of on-chain data to understand the Terra collapse, employed by Nansen’s research team. Through analysis of open data on the blockchain they discovered that a small number of players identified vulnerabilities early intro the UST de-peg, particularly in terms of the shallow liquidity of the Curve pools securing Terra to other stablecoins. In simple terms, the data showed these players withdrew UST funds from Anchor to Terra, bridged these funds from Terra to Ethereum, swapped large amounts of UST to other stablecoins in Curves liquidity pools, and during the de-pegging arbitraged inefficiencies between pricing sources from Curve to centralized exchanges. As a result, Nansen’s team were able to disprove the popular ‘attacker’ thesis supported by Terra themselves up until the present with the launch of Luna V2. And instead, it concluded in more objective terms that the collapse “could instead have resulted from the investment decisions of several well-funded entities”.
The question of the Bitcoin reserves is explored in a recent Forbes piece on the rise of off-chain metrics. What is clear from Glassnode is that of the 80,394 accumulated by Luna Foundation Guard (LFG) was emptied between May 9 and May 10, “with 52,189 BTC were sent to Gemini via over-the-counter desks, which were then deployed elsewhere, including Binance, and 28,205 BTC were transferred to Binance directly.” While this may sound like an aberration bear in mind that tracking Bitcoin as held on exchanges has been decline for some time, with these internal market trades already on the rise. As touched on in the World Bank report the rise of Bitcoin ETFs and ETPs could account for an additional 7% of circulating supply. From this perspective Bitcoin’s 17.3% decline in April was partly down to ETPs and ETFs and funds selling 15,000 Bitcoin. In other words, it marks the rise of trading activity off exchanges which makes understanding the range of data from on-chain to off-chain more important going forward. In addition, as shown in the World Bank report, the attitude the big institutional players take in the global Bitcoin market are far less sensitive to local intra-country economic factors. “For example, they may provide trading, exchange, market making, and custody services and may have diversified operations across countries which may make them less susceptible to local macro-economic conditions in individual countries,” the report found, whilst also admitting that “country factors also matter little for crypto volumes associated with smaller transactions. We leave deeper analysis to future research.”
Consider the thesis put forward by Arthur Hayes, co-founder of 100x, that the collapse of Terra was down to VCs that looked to cash out their Luna positions with “minimal market impact.” Because of the public nature of the blockchain key investors cashing out their Luna positions would be easily detected. However, due to the design of the protocol, which allowed in a 1:1 peg for Luna holders to redeem their holdings for the stablecoin UST, in principle with no impact on that peg and the value of Luna (which at its peak was $118). Therefore, rather than going through the more public channel of exchanges and instead using Over-The-Counter (OTC) involving direct trading between two parties the argument is that after converting Luan to UST the VCs then swapped for other stablecoins with no market impact: “My boy estimates that close to $5 billion of these flows took place. The start to the TerraUSD meltdown occurred when the peg broke slightly on Curve. This happened as too much UST was supplied relative to other stables like USDT and USDC. Once the peg begins to break slightly, and confidence in a quick reversion wanes, the negative convexity of the algo stable coin design takes over and creates an unstoppable downward force,” added Hayes in detailing the process of the $50 billion ‘death spiral’.
Back to on-chain metrics for another view of the current rash in the price of Bitcoin, bearing in mind the importance of also considering the off chain data such as wider macro-economic trends (the Fed’s moves on interest rates being an obvious example). Raghu Yarlagadda, CEO of FalconX, said regarding the value of on chain metrics, “the on chain analysis is still very relevant – it’s like if Apple were to report its quarterly earnings, however, instead of waiting 90 days to receive this information, you get it in real-time.” Indeed, backing up the pivot back to the focus on tried and tested in chain metrics for tracking the value of Bitcoin is the observation that some $53K made their way into exchanges on May 9, the single-highest inflow since November 2017. The main source? The Bitcoin from the LFG, which led to it crashing to its lowest level since late 2020 at just over $25K.
I believed that in the current crypto market it was worth investors and traders considering both on-chain and off-chain data. “The case of Terra’s crash shows it pays to see what the bigger players such as VCs are up to, as well as the day to day on chain price of Bitcoin. It’s also important for all exchanges to be honest about their own off-chain data in the form of trading volumes, to help rebuild trust in the crypto markets right now. That’s going to be particularly important in the near future as regulators are emboldened by the Terra crash to move forward with new restrictions.” Lian added that a controversial May 6 Reuters report using outdated information, in detailing alleged criminal transactions amounting to $2.35 billion by Binance, further underlined the value of accurate data to all stakeholders within the crypto industry.’