7 Reasons To Be Bullish Ethereum (ETH)

Hello and welcome to this latest session where I'm going to be talking about cryptocurrency with some guests who I'll introduce in a moment. But more specifically, we're going to talk about 7 metrics that support a bullish outlook for Ethereum. And that's why indeed I've got the guys from the MacroHive team on the call, because it was from their very research that I wanted to get some more information about these 7 Reasons. And very fortunate timing because it's the 9th of November. And overnight, we've seen both Bitcoin and Ethereum hit fresh all-time record highs. The actual crypto market now has hit $3 trillion for the very first time. So really excited to have this conversation at the most optimal timing where people, of course, are very interested in all cryptos, but specifically going to talk about Ethereum. So just by way of introduction, I've got on the call Bilal Hafeez, who's the CEO and editor of MacroHive. And he was also the former head of global research, likes of Deutsche Bank and Nomura. And he's joined by his colleague Dalvir Mandara, who's a quantitative researcher at MacroHive as well. So without further ado, guys, the 7 bullish reasons. I'd love to get a breakdown and hear more about them.

Great. Thank you. Thank you very much. Thank you very much, Anthony. And yeah, welcome everyone on to listen to this YouTube, this video. You know, we at MacroHive traditionally, we tended to focus on more of what I guess now is called trad fi or traditional finance markets. So, you know, bonds, FX, equities, credit, and so on. But in recent months, we really have gone really deeply into the crypto market as well. One reason is it's obviously grown exponentially in recent years. But also, from a technology perspective, there's lots of elements of crypto that tells us that it's here to stay in one form or another. And from a finance perspective, I think we're at an interesting juncture right now where the technology side is still there, but lots of finance people are coming into the crypto space. So there's this interesting mix now. Of finance people thinking about what crypto means. Now, in terms of our work, if you just go to the MacroHive site, we have our normal type of content. But if you click on here on crypto, we publish our pieces on crypto. At the moment, we're focusing primarily on Bitcoin and Ethereum. And I just wanted to show off a bit here, hence going to this page here. But back in a few weeks ago, back on October 21st, We said that Ethereum is likely to hit $5,000 in the coming weeks. And today on November 9th, if I just pull up a Bloomberg screen here of Ethereum, the Ether is trading at close to $4,800. So we're almost at the $5,000 mark. So we're basically trading at close— at all-time highs and close to our target of $5,000. This is Bitcoin. Bitcoin has also risen recently. It had a bit of consolidation beforehand. And again, just to show off again, we published a piece a few weeks ago saying this is not the big Bitcoin correction, where people were getting worried that this consolidation here was the beginning for a move down in Bitcoin. We argued that no, that's not the case. Bitcoin is going to continue to rise. Now, what gives us this level of confidence or conviction around this is that we built a framework to try to understand crypto. And what I find being a relative newcomer to the crypto world is that you tend to find that there's— the research analysis side of crypto is almost like the Wild West, where people have outlandish targets with no real basis. They look at charts, or the second analysis with breakouts, and so on. Which, which has some value, but it's not enough. And so what we try to do at MacroHive is that we try to build some kind of framework on analytics around how to forecast crypto markets. So we use kind of flow positioning information, but also a lot of on-chain analytics, because one of the big advantages of crypto is that all the data is available to the public in one form or another, because everything's on, on the blockchain. And in this, in this video, we're basically going to go through our framework for Ethereum, which is similar to our framework for Bitcoin as well. So the last piece we published on Ethereum, which kind of runs through the framework we published a week or so ago, where we talked about how we think Ethereum is going to outperform Bitcoin. And, you know, we provide some context here, but if I just, you know, jump straight into the framework itself, we essentially look at 7 different factors that we think are most important for trying to understand the future direction of Ethereum and Bitcoin. I mean, before I go on, the one thing I just wanted to add is that I'm not really going to go into whether Ethereum has a future or not, or whether Bitcoin has a future or not. That's for a separate conversation, separate debate. And we've had those debates before. So this is with the assumption that Ethereum is here to stay. Given that, how can we forecast Ethereum or indeed Bitcoin or other cryptocurrencies. So the first factor we like to look at is institutional demand, and this probably has been perhaps the biggest story over the past year, year and a half since the advent of COVID where suddenly the mainstream finance community has gone into crypto. Beforehand, it was really, uh, the technology guys or just people who had a particular interest in crypto. Now suddenly mainstream institutions are investing in crypto as well. And the clearest manifestation of this is the rise of ETFs, ETF product, exchange-traded fund products, which allows the average investor, whether you're a retail investor or whether you're an institutional investor, to get exposure to Ethereum or to Bitcoin through a product that you're allowed to buy. So many institutions are not allowed to hold Ethereum or Bitcoin directly on an exchange, on a crypto exchange. Instead, they are allowed to hold an ETF, which has exposure to the underlying, which is Ethereum or to Bitcoin. And in the case of Ethereum, there's a whole range of ETFs that have been launched. Many of— most of them, there's a whole bunch in Canada, a bunch in Europe. I don't think we have one yet in the US, but I'm sure one is soon to come. We had the first Bitcoin futures ETF was launched a few weeks ago, which has helped the rally in Bitcoin. But nevertheless, there is ways for global investors to get exposure to Ethereum without having to hold Ethereum directly. So we track these ETF flows, and so this chart here shows you the ETF flows into Ethereum ETFs. And so what you can see is in recent weeks there's been a surge of flows into Ethereum ETFs, and for us this is a very bullish signal. So what you were seeing at the, uh, at the end of the summer, uh, or around October time, Ethereum prices started to go up Ether prices started to go up, but there really wasn't much institutional flow supporting that price increase. But since, say, the last, say, 3, 4 weeks, suddenly with this rise in Ether prices, you suddenly see institutional flow starting to come in and it's starting to accelerate. So this metric for us is quite a bullish signal for Ethereum and Ether prices. Going forward. So this tells us that institutions are back in crypto, and they're buying Ethereum through these ETFs. And you've seen something similar on the Bitcoin side as well. So this is one metric.

Is there any way for— sorry about that. Is there any question on this? For a regular person, let's say, to access the type of outflow/inflow data for this type of— to obtain this sort of metric, where would they go to do that?

That's a good question. I mean, in terms of getting this data, in theory you could basically go to the ETF provider's sites, and I think they would— each individual website would have the flow data that you can get. So you, you could kind of do it in a very manual basis. Otherwise, data providers, whether it's Bloomberg or Finitiv, would have that data as well. I'm sure there's other cheaper, lower-cost data providers that may have this data as well. On top of that, MacroHive, what we're doing is we're publishing these charts on a weekly or biweekly basis. So you could just come to the site and then you'll just see what the flows are. So that's another way as well. So there are different ways, you know, some are more manual, you know, so there's kind of a range of different ways you can get access to that data. Okay, now the— so that's the first one, you know, trying to track institutional demand. And for us, the proxy, the best way of tracking institutional demand is ETFs. The second one is this whole idea of liquidity. And this is a bit more for the crypto geeks out there, which is the idea that if people who hold Ethereum— so this is the people who actually hold the Ethereum coins directly. So these are not people who use ETFs. So these are a bit more of the crypto native crowd. One measure of bullishness is how much liquidity do the people who hold Ethereum wants. Now, so if you're very bullish, if I'm a holder of Ethereum and I'm very bullish on Ethereum, I probably don't care. I probably don't mind if I hold my Ethereum in a very illiquid form. So by illiquid form, what that means is that it's not easy for me to quickly buy and sell it. Now, if I'm very worried about Ethereum, I'll want to hold it in a format which is very easy for me to quickly sell it. In the crypto world, to simplify it, the liquid form would be to hold it at an exchange. So there's lots of exchanges, whether it's Coinbase, Kraken, and so on. There's a whole bunch of exchanges which you can use to buy Ethereum. If you leave it at the exchange, it's very easy then to have a balance at the exchange. Your Ethereum's held there. If you want to sell it, you can quickly just sell it because it's still on the exchange. So the balance is at the exchange. Alternatively, if I'm— If I'm very bullish and I don't really want my Ethereum to be held by a third party, I can hold it in my private wallet. So I could have my special USB stick or version of it, which is a private wallet and just hold it on there. And for me to kind of access that, I need my really long code to be able to access that wallet. Or I could hold it in a custodian, a third-party custodian. But in either way, it's held in a way which makes it harder for me to easily sell it. So if I'm holding in that form, that means I'm actually quite bullish. So I'll go to an exchange to buy Ethereum, then I take it off the exchange and put it into a format that's illiquid, which tells me, which tells us, the outsider who's tracking these flows, that actually this person's very bullish. So what we do is we track flows onto and off exchanges. And the idea is that if there's flows out of exchanges, that means that holders of Ethereum are very bullish. They're basically taking off the exchange into a form that's illiquid. And so this is a chart which shows you exchange flows over the course of this year, over 2021. And so you see, in general, it's mainly orange lines down. So basically, in general, people go onto an exchange, they buy the Ethereum, and then they take it off. So that means, in general, people who buy Ethereum tend to be quite bullish. There are occasions though where they push their Ethereum back onto the exchange. And so you see here, around May time this year, you suddenly saw some spikes of flows back onto exchanges around this time. And this was the time where Ethereum had a big rise and then fall. There's a big correction here. And then over September or so, when Ethereum was falling, you saw flows back onto the exchange. There's a level of bearishness. Now more recently, there's only been outflows. It's been one way. So this tells you that the people who are buying Ethereum are basically taking it off exchange and they're comfortable having it in illiquid form, which means that they're bullish on Ethereum. So that's the second measure we like to look at. So this is using exchange data, a bit more crypto native, you could say. The third one is to look at the futures activity. So we know there's a whole bunch of futures been launched that, uh, that track Ethereum and also Bitcoin as well. And, um, we, we basically like to look at, uh, um, uh, the amount of open interest, the amount of contracts long and short together that are being used to trade Ethereum. So we don't care so much about positioning because in the end the positioning nets to zero. What we care about is just the size of that market. And the exchanges that have futures include Binance, FTX, Bybit, and there's a bunch of others as well. But Binance is the largest within the ones we show here in terms of the crypto native exchanges. But the overall open interest, the blue line here, shows you that since, since around October— we're tracking this on a shorter time period— there's been a big increase in open interest. Which is a bullish sign. Then if we look at CME, a traditional exchange which has very large volumes in Ethereum and Bitcoin futures, you see something similar as well, where there's been a big increase in open interest as well. So this tells us that there's a lot of volumes, or the amount of contracts on the exchanges are increasing. And so this, this kind of tells you that there's a lot of interest in the market, probably by institutions, as well as more crypto-native investors. And again, this is a bullish signal for Ethereum. Now the fourth one, and I'll talk about this before I hand off to Dalvir, who'll talk about the other remaining factors we look at, is hodler behavior. So hodler is just kind of a slang, almost like a slang term to refer to crypto investors who tend to be buy and hold, the long-term investors. So it's basically another way of saying the long-term investors. So what we like to do is we like to track the behavior of HODLers who have held Ethereum for different periods of time to get a sense of, are people churning their portfolios a lot? Are they just buying and selling crypto a lot, or are they just holding on to their Ethereum, which is more of a bullish signal. So the ones we care a lot about is we look a lot at the people who have held Ethereum for between 6 months and 1 year. So these are people who bought Ethereum 6 months ago, between 6 months ago to a year ago. So these would be people who are relatively new to the crypto world. They've enjoyed some gains, and are they still holding on to their crypto, and are they making up a large portion of their crypto market. And what we find is that is indeed the case. 6 months to 1 year hodlers are becoming a larger share of the overall Ethereum community, and that's a very bullish signal. You know, we know that people who've held it for 1 year or 5 years or more, you know, are a fairly significant portion of the Ethereum markets. And they, you know, 5-year-plus people are holding around 5-6%. The, the 1-year-plus community are holding around 15% to 20%, the 1- to 2-year mark. But what's interesting for us is the more recent entrants to Ethereum, are they still holding on? And they are. Our data shows they are holding on to Ethereum. And this for us is a bullish signal because what you don't want is you don't want just the long-term guys to be holding because they're the original kind of guys. If the newbies come into crypto or Ethereum and they're not holding on to Ethereum, then that's a bearish signal. But in this case, it's a bullish signal, which is constructive for Ethereum. So this is something we track. And this is based on also on-chain analytics. You can get hold of this data. I think what I'll do now is I'll hand it off now to Dalvir. Dalvir, do you want me to control the screen or do you want to control the screen?

You can control the screen if you want. I'm going to try and scroll down if that's easier.

OK, yeah, great. OK, let's do that.

OK, thanks, Phil. So the next— I'll go through the next 3 metrics we look at. And one of the first ones is that we look at the investor P&L that we're seeing in the crypto markets. So one of the benefits of the crypto markets is that we can track transactions much more easily than, you know, traditional finance because everything is publicly available. So with that being said, we look at 3 different metrics, and they vary between sort of looking at unrealized profits and realized profits. So the first metric is called the percentage supply in profit. So if you scroll down a little bit below— yeah, so this is chart 11 here. So this is basically just showing you the percentage of all of the circulating Ethereum supply that's in profit. And, you know, naturally, as the price rallies, you would expect this, this value to go up. And, you know, right now, you know, it's touching almost 100% with the new all-time highs, which is something you kind of do expect. Um, the next thing we look at is the size of these unrealized profits. So Chart 12 shows you the unrealized profit as a percentage of market cap. So right now it's around 70-ish percent, or, you know, this time as of when when the article was published. So what that's telling us is that we've got 100% of the coins almost circulating in profit, but the actual value of those unrealized profits are around 70% of market cap. Again, when the price rallies, naturally you would expect these ratios to increase. And then— scroll down a bit— and then Chart 13, this is a little bit more interesting. It's looking at realized profits. So it's the realized value divided by the value at creation, or More simply, it's just a price sold divided by the price paid. So this is called the spent output profit ratio, or SOPR for short. And a couple of interesting things about SOPR is that, you know, when, when the market is bullish and SOPR is increasing, it's telling us— so if it's above 1, it's telling us that investors are realizing profits. If it's below 1, it's telling us that they're realizing losses. Now, naturally, if you look at the sort of the May bull run, when prices registered to then all-time highs, SOPR was increasing quite a lot with the price. That's telling you that investors are realizing profits at the new highs. If you look at the most recent bull run, so from October onwards, there's been spikes in SOPR, but it's bouncing between a low-ish level of about 1.04 and a highest level of 1.16, which is relatively compared to the high seen in the May run of around 1.26. That's a much more muted increase. So what we're way looking into that is, is that, well, this is a bullish signal in the sense that investors are not realizing profits at the new all-time highs as much as they were before. So, um, you know, logically that suggests that investors are reluctant to realize profits at these highs because they feel that the price will increase further. Um, so that's one thing about SOPR. The other thing is that historically, looking at where this level crosses 1, um, in a bull market, as it touches 1 or retests 1, historically that's been a good time to buy. And equally on the flip side, in a bear market, as it retests 1, you fade, and it's been a good time to sell. So these ratios, naturally, all 3 of them will increase as the Ethereum price increases. But I think it gives a bit more of a context splitting out unrealized and realized in this way. So yeah, these 3 are giving very bullish signals at the moment. So onto that sort of different side of things, what we also like to look at, what's unique about sort of cryptocurrency is that there's this concept of mining and hash rates and things like this, which is different to traditional finance. And perhaps I'll provide a bit of context about what mining actually is before talking about these charts. So Ethereum currently works on something called a proof of work consensus protocol. It's constructive for me to say right now that this is going to transition to something called proof of stake going forward. But perhaps that's a conversation for another time. But just to give a bit of idea of what proof of work means, the proof of work consensus protocol basically is a way of allowing the Ethereum network to come to a consensus about things like balance, transaction orders. It stops people from spending their coins twice. Offers resistance to attacks and makes the Ethereum network very maintainable. Now, proof of work, the idea of proof of work is it just sets the rules for the work that the underlying miners do. Now, work in this context is just mining. And mining is just a process of adding new blocks onto the blockchain. And without getting too into the technical details of it, The more work that's done implies more mining that's done, which means more— it increases the length of the blockchain. And we can track this information. So one way to track mining activity is to look at the compute power that's associated with the network. So mining requires compute power and a lot of compute power to facilitate it. So what we look at is the hash rate on the network. Hash rate is basically just a measure of compute power, of average compute power on the network. As of the time the article was published, it was around 736 terahashes per second. Currently, latest numbers as of today, it's closer to around 786. So it's increasing. And more importantly, since bottoming out in late June after China cracked down on crypto activity, it's had an upward trend ever since. And it's been consistently registering new all-time highs. Now, from a perspective of markets, this means that the network has more security, so it's less prone to attacks. It's able to facilitate more transactions inherently because there's more computing power on the network. And we view this as a bullish sign. And in tandem with hash rates, we look at something called miner revenue. Just to give a bit of context about miner revenue, The process of mining Bitcoin, as we spoke about earlier, and facilitating transactions requires compute power. Miners need to be compensated for investing in that compute power to facilitate transactions on the network and to allow the network to be maintainable. So what we look at is the comparison between Ethereum mining revenue and Bitcoin mining revenue. So we split it out. We consider it together, but there's two types of revenues on a broader level. So there's fees that miners are paid for facilitating transactions. And then there's minted coins. So when a miner adds a new block to the blockchain, they're rewarded with freshly minted coins. And these together form the total miner revenue. And what's interesting about the comparison between Bitcoin and Ethereum is that ever since around August, Ethereum has been pretty largely outperforming Bitcoin. Performing Bitcoin in terms of mining revenue. And even in the latest bull runs that we've seen in both of them, Ethereum's seen a big jump. And whilst Bitcoin's been increasing, it's at a much more muted level than what we're seeing in Ethereum. So we view this as a bullish sign for Ethereum, again. So if you scroll down a bit more. And then the last metric we look at, which is kind of specific to Ethereum in this context, is the DeFi markets. So DeFi stands for decentralized finance. And the key metric that we look at is called total value locked. So the total value locked in DeFi is just the total sum of deposits of coins in decentralized finance protocols. So it could be in lending or other financial products, such as on decentralized exchanges and things of that nature. Now, what's important for us is that the DeFi space is rapidly expanding. So here, the blue line is showing you the total value locked, which is across all protocols. So there's a bunch of protocols holds in a bunch of different coins in this space. It's not just Ethereum. And as of the time of publishing the article, it was around $250 billion. The latest number as of today, it's closer to $284 billion. And that just shows you just how fast this market is increasing. So what we look at is, well, how much of this booming DeFi space is coming from Ethereum? Now, what you'll notice is that since the beginning of the year, the share of the DeFi space that's coming from Ethereum has been decreasing. And this is almost natural because of the fact that there's so many different protocols entering the space. But by and large, Ethereum is still the biggest player in this space. Right now, it's currently around $184 billion of the $284 billion is coming from Ethereum. So that puts it around a 66% to 67% dominance. And just to give you an idea of how far above the rest that is, the next biggest protocol in the space, Binance, contributes around $21 billion to that space, which is only around 6% or 7%. So it's almost 60 percentage points higher. And we view this, again, as a bullish sign for Ethereum. So as the total value locked increases and proportion of that coming from Ethereum is still dominating we again view as a bullish sign for Ethereum.

Thanks a lot. Yeah, thanks a lot, Dalbir. And just to summarize the main points here, so at the end we kind of summarize this, but essentially we look at 7 different factors. All of them currently are bullish for Ethereum. We look at institutional demand, and the way we do that is we look at flows into ETFs. And that is showing increasing flows. Which is bullish. We look at liquidity demand. Are crypto investors willing to hold Ethereum in an illiquid form, for example, in a private wallet? And that is indeed the case. People are taking money off exchanges into their private wallets, which is bullish for ETFs, bullish for Ether, Ethereum. Number 3, we look at futures activity. Is open interest— is there more activity on these exchanges, whether it's crypto exchanges or traditional exchanges, and that is indeed the case. It's increasing. We look at hodler behavior, factor number 4, and we're finding that the key cohort, the 6-month to 1-year people who bought it more recently, the newbies, are indeed holding crypto, Ethereum, which is bullish. We look at the P&L of investors, and we're finding that investors have either realized or unrealized profits, which is quite constructive for them to continue continue to hold Ethereum. We look at mining activity and we find that revenues of Ethereum miners and the hash rate compute power dedicated to Ethereum is very high, which tells you that there's a lot of robustness to the overall system. And then finally, we look at decentralized finance space and we find that there's a lot of Ethereum that is being taken out of supply to be locked up to underwrite the decentralized finance space, the DeFi space, which means that there's less supply of Ethereum in for investors, which then actually boosts up the Ethereum price. So these are the 7 factors. We track this on a regular basis. For updates, if you just come to the site, you'll see the regular updates. We do this for Bitcoin as well. And hopefully it provides a good framework and add some rigor to crypto markets in a way that you don't really find elsewhere. And I'm a researcher, so I kind of like to have frameworks. And I think this is something that's quite useful as a way to kind of feel a bit more confident about your holdings or your investments in crypto space. Cool.

Thank you guys for the rundown. And what I'll do is if we drop a comment below, if you have any questions at all, I'm sure the three of us be more than willing to pick them up. So just ask a question if you have one. What I'll do as well is I'm just going to— Bilal has kindly said that because of this kind of one-off video that we've done today, that he's happy that if you go to the MacroHive website and you just use the code AMPLIFY50, all one word, at the checkout, and you'll get a 50% discount on your subscription for your Prime plan. So for one, I for sure— I mean, I, my job is try tracking news, but I don't have time to go to the granularity that these guys do, and I lean on them to do that. And so, you know, that's— they're the masters of that craft, and I for one definitely use that resource for the purpose that they've just discussed. So I'd highly, highly recommend it. But thank you for watching. Thank you to you both for attending. And I've got another episode coming out where I'm talking to a specialist in fintech, about the metaverse, which will be coming out as well later on this week, which has a nice tie-in to some of the discussions that we've had here as well. So, so stay tuned. But Bilal, uh, Dvir, thank you very much.

Great, thanks for having us.

Thank you.