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The Hard Fork – Weekly Market Commentary

This Week’s Topics:
1) Grayscale sees nearly $330 million inflow to its digital currency products
2) Newly launched crypto funds see smaller capital raises in 2018 than those in 2017
3) Ether gas prices fall to near year-to-date lows

 

Indices Round-up

TradeBlock Index Asset1 Price ($) 7d∆2
BCX Bitcoin Cash 569.44 31.06%
LTX Litecoin 54.78 6.49%
XRX Ripple 0.46 1.86%
ETX Ethereum 204.18 1.04%
XBX Bitcoin 6406.01 0.07%
ZCX Zcash 120.45 -0.24%
ECX Ethereum Classic 9.44 -0.59%
1. Underlying Asset sorted in descending order by 7-Day Price Change.
2. 7-Day Price Change monitored from 10/28/2018 16:00 UTC thru 11/04/2018 16:00 UTC.

7 day price movers 
Digital currencies saw elevated price action this past week in comparison to a relatively quiet period over the past several weeks. Among our indexed assets, Bitcoin Cash (BCH) was the largest gainer rising nearly 30% over the week on heightened trading volume. A planned development upgrade in the Bitcoin Cash blockchain is scheduled for November 15, 2018 which could potentially result in two differing chains amid competing visions between the Bitcoin ABC development consortium and NChain, a blockchain group led by Craig Wright. 

The BCH price rally is likely spurred by recent announcements from digital currency exchanges Binance and Coinbase, which have expressed support for the Bitcoin ABC development vision for Bitcoin Cash. Both of these exchanges have stated they will support the fork. The Bitcoin ABC development team originally forked the bitcoin blockchain in August of 2017.

The rest of our indexed assets saw somewhat muted price action with XBT trading modestly up this week while ETC saw the largest decline falling a slight 0.59%.

 

Figure 1: BCH Price Rally

Grayscale sees $330 million of new investment into its digital asset products

This week, Grayscale released its quarterly investment report. Despite a fall in digital currency prices over the year, Grayscale has seen significant capital inflows into its digital currency investment products. For 2018 YTD, the firm has reported an inflow of $329.5 million (a 33% rise in Q3 2018 YoY)–this was the strongest capital flow Grayscale has seen since the inception of its business. Further, there continues to be a positive investment environment for institutional investors as Grayscale reports that capital from hedge funds, VCs, and other institutions has risen to 70% of new flows.

New investments were spread across several digital assets, with investments into bitcoin being the greatest. In figure 2 below, there is a breakdown of capital inflows by Grayscale’s digital currency products since January 2018.

 

Figure 2: Weekly Capital Inflows by Digital Currency Product

Newly launched crypto funds see smaller capital raises in 2018 than in 2017

Reports have indicated that 2018 is on pace to a see a record number of newly launched digital currency investment funds. Crypto Fund Research projects that 220 digital currency investment funds will launch in 2018, up from 198 launched in 2017. To determine how successful these newly launched funds have been at attracting capital compared to their 2017 counterparts, we analyzed SEC filings for newly launched funds in both years.

Using the SEC EDGAR database, we found that US based digital currency funds launched in 2017 reported capital raises in aggregate of more than $181 million during the 2017 fiscal year. This inflow of capital came from a total of 508 investors–including institutions such as fund of funds and individuals. In comparison, we found that newly launched funds in 2018 had attracted in aggregate $61 million from a total of 194 investors–this is on track to underperform last years’ fundraising (see figure 3 below).

The weaker capital raising environment for new funds does not necessarily come as a surprise as digital currency prices have declined significantly from the peak reached in late 2017. Additionally, more established funds, such as Pantera Capital, may be absorbing new capital that is still coming into digital currency funds–in July Pantera had raised more than $70 million according to SEC filings.

 

Figure 3: Capital Raise Comparison for Newly Launched Crypto Funds

Ether gas prices fall to near year to date lows
In order to utilize the computational power of the Ethereum network (including using ETH based dApps), users must pay miners gas in the form of ether in order for their transactions to be confirmed. Gas costs can vary over time as the usage of the Ethereum network changes. When there is greater demand to use the network, and a large backlog of transactions forms, miners can alter their rig settings to only accept transactions with gas prices that meet a certain threshold. As such, participants must then increase the price they are willing to pay in order for their transactions to be confirmed in a timely manner. This process occurs in the opposite manner as demand to utilize the Ethereum network falls.

Given the importance of gas prices, as they influence the cost of utilizing Ethereum based applications, we analyzed how the average gas price to confirm a transaction has changed over time (using TradeBlock’s blockchain explorer tool). While the Ethereum network reached heightened usage in early 2018 and saw gas prices reach near record levels, since that time gas prices have fallen as demand for the network has waned. In the chart below, we diagram the average gas price each month. The most recent period saw a modest bump in ether gas prices yet these levels remain near year-to-date lows.

 

Figure 4: Average Ether Gas Price Over Time

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