Friends:

A week that began with signs of a bitcoin surge and an end to alt season concluded with bitcoin brought back to earth as the Fed signaled a more robust response to inflation. As always, we take the long view in this newsletter. This week's briefing provides metrics that shed light on adoption of Bitcoin and Ethereum in three uses: commerce, speculation and infrastructure for global dollarization.

If you're going back into the office this week and you need something to read on the train, download my colleague Christine Kim's new report on EIP 1559. Ethereum's latest upgrade isn't going to solve all its transaction-fee problems, but it may solve some of the most annoying ones. And it comes with risks that, in worst-case scenarios, could be fatal to the network. Download the report here.

Weekly Wax: CoinDesk will take a day off this Monday, observing Juneteenth, which marks an end to slavery in the U.S., though not an end to economic exclusion for Black Americans. Personally, Bitcoin has inspired me to study economic exclusion and economic paradigm shift. Those two themes intersect in Detroit, where a duo called Drexciya made music that is dreamier than most of what might be called techno. Lately, I've been listening to "Bubble Chamber," a 2020 Drexciya tribute compilation that is sold out, which inspires me to think about another theme relevant to Bitcoin: scarcity.

– Galen Moore, Director of Data & Indexes

Data from services on Bitcoin and Ethereum shows what's real in crypto adoption stories.

It's been a complicated week for bitcoin's adoption story. In particular, Michael Saylor and Elon Musk gave more momentum to the idea that bitcoin can be used in commerce: Musk signaled potential for Tesla's return to accepting bitcoin payments, and Saylor called the Bitcoin network a rail system for the global dollar.

The best bellwether for bitcoin's use in commerce is the Lightning Network. Briefly, Lightning is a commerce-friendly service that sits on top of Bitcoin. It allows parties to transact quickly and cheaply, verifying their transactions periodically in batches via the more trust-minimized Bitcoin network.

As we noted in last week's Chain Links, Lightning has been surging this year. As of this Tuesday, the number of bitcoin available for use on its network had increased by 44% since Dec. 31.

That's something for bitcoin's potential use in commerce. But we'd be remiss not to consider it next to Bitcoin's use on another network that is more associated with finance than with commerce – Ethereum.

Wrapped Bitcoin (WBTC) is an Ethereum-compliant (ERC-20) token that is pegged to the value of bitcoin. The peg is maintained by the custodian BitGo.

The number of bitcoin wrapped on Ethereum has grown faster (67%) over the same period, and it's a couple orders of magnitude greater than the number of bitcoin committed to the Lightning Network: As of this Tuesday, the supply of WBTC was 188,961. Lightning Network's bitcoin capacity was 1,523.

In theory, it's possible that WBTC could be used on commercial applications that accept ERC-20 tokens. In reality, it's used for decentralized finance (DeFi).

The story of these two charts is clear, at least for now: bitcoin is much more like gold, an investment, than it is like the dollar, a medium of exchange.

Michael Saylor went on CoinDesk TV this week and talked about that distinction, describing a world in which citizens of dollarized, bitcoin-adopting countries like El Salvador have digital wallets holding multiple cryptocurrencies: One currency is a stablecoin pegged to the dollar; the other is bitcoin, an investment.

That's where Saylor departed the text. "It'll move on Bitcoin rails," he said, talking about that dollar stablecoin, leading to further dollarization across the world. The possibility of dollarization via stablecoins is real, but as for what rails it will move on, the market has spoken: It's not Bitcoin, it's Ethereum.

The chart above shows the supply of tether (USDT), the largest stablecoin by supply, on three networks that support it. The nearly flat line is tether on Omni, an application-supporting layer that runs on Bitcoin, and tether's original network. The line that goes up and to the right-hand corner of the chart is tether on Ethereum.

Tether and other stablecoins certainly have the potential to facilitate commerce, better than more volatile cryptocurrencies, which are more suited to investment. However, in reality their use is in finance, specifically as a quote currency on cryptocurrency exchanges.

In sum, it's finance, not commerce, that is leading adoption of crypto, and while bitcoin enjoys a unique status as the blue-chip investment in this category, the market is showing a clear preference for rails built on Ethereum.

That brings to mind another bit of thought leadership that went out over crypto's digital TV airwaves this week: Steve Hanke, a Johns Hopkins economist, said El Salvador's new bitcoin policy will make it a hub for criminals looking to launder bitcoin into dollars. (My bitcoin maximalist friends will quickly point out that Amsterdam and Frankfurt have recently served as quite convenient money-laundering hubs.)

As the above chart shows, there is no shortage of demand for dollar-pegged stablecoins. The crypto exchanges offering liquid bitcoin-tether crosses are many, and some of them, I suspect, do not have the most stringent KYC/AML. Crypto-to-dollar pairs are fewer, and if a world like Saylor describes truly comes to pass, the regulatory challenges at the ramps between crypto and commerce will extend far beyond the borders of one Central American nation-state.

The week opened with reports of ETH fund outflows and Paul Tudor Jones talking a 5% target crypto allocation for inflation trade. TAKEAWAY: Bull or bear market, tea leaves point to an expiration date on "alt season."

Altcoin trading volume on Binance began to climb in January and peaked on May 10, right before the market crash. TAKEAWAY: Coin Metrics notes a big part of the altcoin surge was due to dogecoin trading, which peaked in May, briefly surpassing volumes in bitcoin- and ether-base pairs, just before the volume peaks in BTC and ETH, and a ways before the crash.

During the recent sell-off, the number of active Bitcoin addresses fell 18%. TAKEAWAY: That's about half the reduction seen in the 2018 crash, Glassnode observes, concluding that while activity has slowed, more demand exists than after previous cycle tops.

Bitcoin hashrate dropped to its lowest level since mid-November, when the price was around $18,000 USD. New mining regulations in China are thought to be the cause. TAKEAWAY: Hashrate is a measure of the competition between miners to supply network security. Are miners doubting that the bitcoin price can rise back to all-time highs, or will we see new growth in miners outside of China? The speed of hashrate recovery will be telling.

The gas price, the fee per unit of computing power on Ethereum, is at a low ebb. TAKEAWAY: Waning enthusiasm for DeFi amid a bearish turn in the market is likely the culprit. DeFi drove the recent run-up in Ethereum fees, and ether deposited in DeFi contracts remains depressed. There's little evidence that since the May crash it's fleeing to competing chains like Binance Smart Chain. (This report from CrossTower has a pre-crash view of DeFi growth there versus Ethereum.) And, while transaction growth on DeFi-focused layer 2 networks like Polygon has no doubt had an effect, it's easy to grow transactions when they cost near-zero (less than one-tenth of a penny in a sample I took here on Saturday).

Ethereum is set to undergo a hard fork that includes an upgrade known as EIP 1559, ahead of its transition to Ethereum 2.0. EIP 1559 won't necessarily reduce Ethereum fees, but it is designed to reduce transaction times and remove fee-market uncertainty, as well as add a bitcoin-like narrative of limited supply. Read a thorough analysis of its implications for investors in the latest report from CoinDesk Research's Christine Kim. TAKEAWAY: Risks are real, including the threat of miner defection or revolt in the months ahead of Ethereum's transition to proof-of-stake (PoS).

Goldman Sachs' consumer and wealth management division issued a report concluding cryptocurrencies are "not a viable investment" for diversified portfolios, citing energy consumption, regulatory risk and the risk of quantum computing breaking cryptography. TAKEAWAY: These risks are real, and any investor or operator active in crypto should have a Plan B. Also, bitcoin is up 4X since the last time Goldman said crypto isn't "suitable" for its clients.

The U.S. Federal Reserve put a chill into stock markets with a statement showing concern about long-term inflation and a plan to potentially raise interest rates in 2023. BTC followed suit, dropping 5% as of Friday morning, after Wednesday's rate guidance. TAKEAWAY: It's noteworthy that BTC price moved with the stock market around the news from the Fed, but don't get too excited. Bitcoin's stock correlation is still basically zero.

Glassnode analyst Luke Posey assesses the risk-adjusted performance of active and passive strategies in DeFi versus holding ether at spot market value. TAKEAWAY: A simple buy and hold of DeFi governance tokens (the DeFi Pulse Index) significantly underperforms returns from a buy and hold of ether over a period beginning March 1. However, the opposite is true for many active DeFi token trading strategies over other cherry-picked time periods.

Broadridge, a fintech company, reports a blockchain-based repurchase agreement (repo) platform it introduced this month is handling $31 billion in daily trading volume. TAKEAWAY: Private blockchains are notching up some real-world examples of usefulness, but it remains to be seen whether this technology can ever live up to the blockchain-not-bitcoin hype of the pre-2017 cryptocurrency era.

The Bitcoin Mining Council opened more like a Rotary club than like OPEC this week, offering little in the way of concrete steps. TAKEAWAY: The council will be useful if it finds a way to provide audited data on sources of bitcoin mining energy.

Scammers are sending Ledger users fake hardware wallets, using email addresses exposed in a 2020 data breach. TAKEAWAY: In the before time, hardware wallets were a popular item for swag giveaways at crypto conferences. What a terrible idea. If anyone ever gives you one of these, put it through the hard-drive shredder.