The past 12 months have been challenging for cryptocurrency investors. Bitcoin and Ethereum have seen sluggish price performance, and their long-term compounded annual growth rates (CAGR) have declined significantly. On-chain data supports this view, showing reduced demand for both Bitcoin and Ethereum blockchain space.
Following the collapse of LUNA and UST, the market experienced a broad sell-off, leading to a consolidation phase. Bitcoin’s price has been oscillating within a relatively narrow range between $31,300 and $28,713. Notably, Bitcoin has recorded eight consecutive weeks of negative performance—the longest bearish streak in its history.
In this analysis, we examine the short-term (monthly) and long-term (4-year) returns of Bitcoin and Ethereum. The current market correction has significantly impacted the performance of the entire asset class. Additionally, derivatives market indicators suggest that further downside remains a primary concern for the next three to six months.
On-chain metrics reveal that demand for block space on both Ethereum and Bitcoin has dropped to multi-year lows. The rate of ETH burning via EIP1559 has also reached a historical low. Combined with weak price action, pessimistic derivatives pricing, and reduced on-chain activity, these factors indicate that market demand may continue to face headwinds.
Are Bitcoin and Ethereum Returns Diminishing?
It is widely accepted that as market valuations grow, the returns of Bitcoin are expected to decrease. This trend can be attributed to several factors:
- Larger market size requires more capital to influence price direction.
- Increased institutional participation introduces advanced trading strategies and derivatives for hedging and capturing volatility.
- Reduced information asymmetry leads to better understanding of risks, performance, correlations, and cyclical behavior.
Bitcoin has historically followed 4-year bull/bear cycles, often correlated with halving events. The chart below illustrates Bitcoin’s rolling 4-year compounded annual growth rate (CAGR).
Since 2015, Bitcoin’s 4-year CAGR has declined from over 200% to less than 50% today. The most significant drop occurred after the sell-off in May 2021, which many analysts consider the starting point of the current bear market.
In the short term, Bitcoin’s monthly returns have also been disappointing, with a recent performance of -30%. This means Bitcoin lost 1% of its market value daily over the past month. Such prolonged negative returns are rare and typically associated with high-volatility downturn events, such as the beginning or end of a bear market.
Ethereum has shown a similar trend, with monthly returns at -34.9%. Despite fundamental differences between the two assets, their performance remains strongly correlated.
Moreover, the 4-year CAGR of both Bitcoin and Ethereum has converged during bearish trends, such as the uncertainty following March 2020 and the ongoing downturn since May 2021. Ethereum also appears to be experiencing diminishing returns over time.
During bullish trends, Ethereum has historically outperformed Bitcoin, but these divergences have weakened over time. In bearish trends, Ethereum’s CAGR tends to fall below Bitcoin’s.
Over the past 12 months, Bitcoin’s 4-year CAGR dropped from 100% to 36%, while Ethereum’s fell from around 100% to 28%. This highlights the severity of the current bear market.
Market Dominance and Sector Rotation
Bitcoin remains the largest digital asset by market capitalization, but it exists within a rapidly evolving ecosystem of blockchains, coins, protocols, and tokens. Ethereum has long been the second-largest asset and is often viewed as a barometer for risk appetite beyond Bitcoin.
A popular tool for tracking relative performance and sector rotation is the “Bitcoin dominance” metric. The variant below focuses specifically on the relative market performance of Bitcoin and Ethereum, providing insights into macro-level sector rotation.
Key observations include:
- Declining BTC dominance divergence (green arrows) often signals the early stages of a bull market, as investors move further out on the risk curve.
- Rising BTC dominance divergence (red arrows) typically indicates the early phase of a bear market, with reduced risk appetite and Bitcoin outperforming other assets.
Following the peak in November, we observed a divergence in BTC dominance. Given the negative impact of the LUNA and UST collapse on the digital asset risk curve, this trend is worth monitoring. Notably, Ethereum has maintained stronger dominance over a longer period compared to the 2018 bear market, suggesting improved market valuation with age and maturity.
Derivatives Market Points to Further Downside
The derivatives market reveals another coupling between Bitcoin and Ethereum, this time in futures basis and arbitrage yields. Throughout the 2020-2022 cycle, both assets offered roughly equivalent 3-month rolling yields, with few periods of divergence. This indicates that traders are capitalizing on available yields wherever liquidity and trading volume permit.
Currently, the 3-month rolling basis yield for both assets is approximately 3.1%—historically low but still above the US 10-year Treasury yield of 2.78%. This differential may eventually attract capital back into the crypto space.
However, the options market continues to price in near-term uncertainty and downside risk, particularly over the next three to six months. Implied volatility (IV) surged during last week’s market sell-off. Short-term at-the-money (ATM) option IV more than doubled from 50% to 110%, while 6-month options jumped to 75%. This marks a significant breakout from long-term low IV levels.
Given the poor price performance, it is unsurprising that the market shows a clear preference for put options. The put/call open interest ratio has risen from 50% to 70% over the past two weeks as investors seek to hedge against further downside.
Looking toward the end of Q2, put open interest is concentrated at strike prices of $25,000, $20,000, and $15,000. Call open interest is significantly lower, with the majority clustered around the $40,000 strike. This indicates a strong preference for hedging or speculating on further downside through mid-year.
In contrast, year-end options open interest appears more constructive. There is a clear preference for call options, with strikes主要集中在 between $70,000 and $100,000. Put open interest is dominated by the $25,000 and $30,000 strikes—higher than mid-year levels.
Thus, the options market appears highly uncertain about the near-term (2-3 months) outlook. However, traders are leveraging low implied volatility to take a more constructive view toward year-end.
The On-Chain "Mirage"
Perhaps closely related to the short-term concerns expressed in the derivatives market, on-chain activity for Bitcoin and Ethereum remains unimpressive. High demand for block space and network utilization typically manifests as network congestion and soaring transaction fees. Although total fees paid on the Bitcoin network increased twofold during recent volatility, they have hovered around 10-12 BTC daily since May 2021.
While nuances such as improved scalability solutions contribute to lower fees, lack of demand for block space remains the primary driver.
Ethereum, despite hosting a vibrant ecosystem of decentralized applications, has also seen a significant decline in block space demand. Gas prices have fallen structurally since December and currently stand at just 26.2 Gwei. Apart from sporadic spikes during high-profile NFT mints and routine exchange activity, gas prices have trended downward consistently.
This downturn in gas prices aligns with previous lows observed in May-July 2021 and the post-March 2020 uncertainty period.
One consequence of reduced demand for Ethereum block space is a net decrease in the amount of ETH burned via the EIP1559 mechanism. After reaching a peak of 38,940 ETH burned daily during the BAYC “Otherside” NFT mint, the burn rate has now hit a historical low.
This week, only 2,370 ETH were burned—a 50% decline from early May. This represents just 18.4% of the total ETH minted, meaning 81.6% of new ETH is entering circulation. While a positive burn rate is better than none, the additional supply may act as a headwind during periods of weak demand.
To gauge the relative demand for Ethereum block space, we can examine on-chain activity associated with popular DeFi tokens such as AAVE, COMP, UNI, and YFI. The chart below shows the number of active addresses interacting with these tokens and the USD-denominated transaction volume for each.
There is a strong correlation between on-chain activity and DeFi token price performance. Currently, both metrics are underwhelming across the board. Although activity saw a slight uptick last week, it remains unclear whether this signals a trend reversal or is merely a temporary anomaly.
Frequently Asked Questions
What is compounded annual growth rate (CAGR)?
CAGR is a measure of the mean annual growth rate of an investment over a specified period longer than one year. It represents one of the most accurate ways to calculate and determine returns for individual assets or investment portfolios.
How does EIP1559 affect Ethereum’s supply?
EIP1559 introduced a fee-burning mechanism that removes a portion of transaction fees from circulation. This reduces Ethereum’s net inflation and can make the asset more deflationary during periods of high network activity.
Why are derivatives important for crypto markets?
Derivatives like futures and options provide insights into market sentiment, allowing traders to hedge risk or speculate on price movements. They also contribute to liquidity and price discovery.
What does Bitcoin dominance mean?
Bitcoin dominance refers to the percentage of the total cryptocurrency market capitalization contributed by Bitcoin. A higher dominance often indicates that investors are favoring Bitcoin over altcoins.
How can on-chain activity predict market trends?
On-chain metrics such as transaction volume, active addresses, and fee pressure provide real-time data about network usage. Declining activity often correlates with reduced demand and bearish price action.
Are bear markets normal in cryptocurrency?
Yes, bear markets are a natural part of market cycles. They often follow periods of excessive optimism and can create opportunities for long-term investors to accumulate assets at lower prices.
Conclusion
Bear markets can be destructive, and the current one is no exception. Short-term conditions often worsen before sustained bottom formation occurs. Our analysis presents a cohesive narrative of poor price performance, declining long-term returns, bearish derivatives pricing, and lethargic on-chain activity.
This impact is relatively universal across the digital asset market, with Bitcoin and Ethereum experiencing significantly lower utilization and demand compared to bull market conditions. The situation is even more pronounced for DeFi tokens. There are signs of internal capital rotation toward Bitcoin, possibly intensified by the recent LUNA and UST collapse. This rotation is a historical characteristic of bear markets, as investors shift toward perceived safe-haven assets.
That said, the industry’s price performance over the past 12 months remains disappointing, and this bear market has delivered a significant blow to long-term returns.
Nevertheless, bear markets do eventually end—even if not immediately. As the saying goes, “bear markets write the script for the next bull run.” For those looking to explore more strategies during these challenging times, understanding market cycles and on-chain indicators can provide valuable insights. Additionally, traders may consider tools to view real-time analytics and better navigate volatility.
Source: Glassnode Insights, original author Checkmate. Adapted for clarity and context.