The past twelve months have delivered disappointing price performance for major cryptocurrencies. Both Bitcoin and Ethereum have seen their long-term compound annual growth rates (CAGR) decline significantly. On-chain data supports this view, showing a persistent reduction in network demand for both assets.
Following the industry-wide selloff that coincided with the collapse of LUNA and UST, the market entered a consolidation phase. Bitcoin’s price has been oscillating within a relatively narrow range, between a high of $31,300 and a low of $28,713.
Notably, Bitcoin has now charted eight consecutive weeks of losses—the longest bearish streak in its history. This week, we examine the short-term (monthly) and long-term (four-year) returns for both Bitcoin and Ethereum. The analysis reveals that the current drawdown has substantially impacted the overall performance of the entire asset class.
Moreover, an assessment of the derivatives market suggests that further downside remains a primary concern for crypto markets over the next three to six months. On-chain, we observe that demand for block space on both Ethereum and Bitcoin has fallen to multi-year lows. The rate of ETH burning via EIP-1559 has now dropped to its lowest level ever.
Combining weak price action, bearish derivatives pricing, and soft demand for block space, we can infer that the demand side will likely continue facing headwinds.
Are Crypto Returns Diminishing?
It is widely accepted that as market valuations grow, the return profile of Bitcoin is generally expected to decline. This reflects several factors, including but not limited to:
- A larger market size requires more capital to move prices in either direction.
- The introduction of institutional capital, more advanced trading strategies, and derivatives for hedging and capturing volatility.
- Compressed information asymmetry, leading to a better understanding of risks, performance, correlations, and cyclical behavior.
Bitcoin has historically traded in four-year bull/bear cycles, often tied to its halving events. The chart below illustrates Bitcoin’s rolling four-year compound annual growth rate (CAGR).
We can observe a clear downtrend in CAGR, from over 200% in 2015 to less than 50% today. The decline became particularly pronounced following the selloff in May 2021, which many analysts now view as the origin point of the current bear market.
Short-Term Performance Under Pressure
In the short term, Bitcoin’s monthly returns have also been deeply negative, currently around -30%. This implies Bitcoin has been losing about 1% of its market value daily over the past month.
Although this negative return is worse than during the deleveraging event in early December, it is not as severe as the conditions witnessed between May and July. Periods of such depressed monthly returns are relatively rare and almost always associated with high-volatility drawdowns, such as the start or end of bear markets.
Ethereum has shown very similar return patterns recently, though with slightly worse performance at -34.9%. This indicates that despite the fundamental differences between the two assets, their price correlation remains strong.
Long-Term Returns and Convergence
Looking at the long-term, we can also see an interesting coupling between Bitcoin and Ethereum’s CAGR performance, especially during bearish trends. Following the uncertainty after March 2020, and since the beginning of the bear market in May 2021, the CAGRs of both assets have converged. Over time, Ethereum also appears to be experiencing diminishing returns.
During bullish trends, ETH has typically outperformed BTC, but these outperformance periods appear to be weakening. In more bearish trends, ETH’s CAGR tends to fall below that of BTC.
Over the past 12 months, BTC’s four-year CAGR has fallen from 100% per year to 36%, while ETH’s has dropped from around 100% to 28% per year. This highlights the severity of the current bear market.
Market Dominance and Rotation
Although Bitcoin remains the largest digital asset by market cap, it exists within a broader ecosystem of blockchains, coins, protocols, and tokens. Ethereum has long been the second-largest market leader and is often viewed as a gauge of market demand for tokens further out on the risk curve.
A popular tool for tracking this relative performance and sector rotation is the “Bitcoin Dominance” metric. The variant charted below considers only the relative market capitalization performance of Bitcoin versus Ethereum. This helps distill macro “sector rotation” into a specific large-cap relative performance indicator. A few observations emerge:
- Declining BTC dominance divergence (green arrows) is typical of early-to-mid bull markets, as investors begin moving further out on the risk curve.
- Rising BTC dominance divergence (red arrows) is typical of early bear markets, as risk appetite falls and Bitcoin tends to outperform.
In the current market, following the price peak in November, we are seeing a rising BTC dominance divergence. Given the negative impact of the LUNA and UST collapse on the digital asset risk curve, this is a trend worth watching. It is noteworthy that, relative to the 2018 bear market, Ethereum’s dominance has held up more firmly for longer, suggesting improved market valuation with age and maturity.
Derivatives Signal Further Downside Ahead
Turning to derivatives markets, we can see another coupling between BTC and ETH, this time in futures basis and carry yields. Throughout the 2020-2022 cycle, both assets have offered roughly equivalent 3-month rolling yields, with few periods of divergence. This is another data point suggesting traders are capturing any available yield the market allows, wherever liquidity and volume permit.
Currently, the 3-month rolling basis yield for both assets is around 3.1%, which is historically very low. However, it is still above the current US 10-Year Treasury yield of 2.78%, which may start providing a rationale for capital to re-enter the space.
That said, the options market continues to price in near-term uncertainty and downside risk, particularly over the next three to six months. Last week, during the market selloff, implied volatility (IV) spiked significantly. Short-term at-the-money (ATM) option IV more than doubled, rising from 50% to 110%, while 6-month options jumped to 75%. This marks a break from the long period of very low implied volatility levels.
With bearish momentum so strong and price performance so poor, it is unsurprising that the market shows a clear preference for put options. The put/call ratio for open interest has risen from 50% to 70% over the past two weeks as the market seeks to hedge further downside risk.
Looking toward the end of Q2, we can see a clear preference for put options, with major strikes at $25,000, $20,000, and $15,000. The open interest call pool is significantly lower, with concentration around the $40,000 strike.
This indicates that, at least until mid-year, the market has a strong preference for hedging risk and/or speculating on further downside price movement.
However, looking further out, the open interest for year-end expiry options is noticeably more constructive. There is a clear preference for call options, concentrated around the $70,000 to $100,000 strike prices. Additionally, the dominant put strikes are at $25,000 and $30,000, which are higher than the mid-year strikes.
Thus, based on the options open interest spread, the market appears very uncertain about the near-term (2-3 months). Yet, speculators seem to be taking advantage of lower implied volatility and adopting a more constructive view toward the end of the year.
👉 Explore real-time options data and market trends
The On-Chain "Mirage"
Perhaps closely related to the short-term concerns expressed in derivatives markets, on-chain activity for both Bitcoin and Ethereum remains unimpressive. Ultimately, high demand for block space and network utilization typically manifests as network congestion and soaring transaction fees. Although the total fees paid on Bitcoin did increase 2x during last week’s volatility, it has been hovering around 10-12 BTC per day since May 2021.
Note that we have previously discussed the nuances behind lower on-chain fees for Bitcoin, though a lack of demand for block space remains the primary driver.
Despite Ethereum’s vibrant ecosystem of dApps and financial protocols, demand for block space has also dried up considerably. While the network hosts a vast array of applications, this has not prevented Ethereum’s gas price from falling to just 26.2 Gwei.
Aside from a few spikes during high-profile NFT mints and regular exchange activity, Ethereum gas prices have been in a structural downtrend since December. This low average gas price aligns with the lows seen in May-July 2021 and the post-March 2020 uncertainty period.
One effect of reduced demand for Ethereum block space is a net decrease in the amount of ETH burned via the EIP-1559 protocol. After reaching a peak of 38,940 ETH burned per day during the BAYC "Otherside" NFT mint, the burn rate is now at an all-time low.
This week, 2,370 ETH were burned, a 50% reduction from early May, representing just 18.4% of the minted supply (meaning 81.6% of minted ETH is entering circulation). While burning 18.4% is better than 0%, the additional coins entering supply may act as a headwind to price during periods of weak demand.
To conclude on the relative demand for Ethereum block space, we can look at the on-chain activity associated with popular DeFi tokens: AAVE, COMP, UNI, and YFI. The chart below shows the number of active addresses interacting with these tokens, alongside the USD-denominated volume for each. These are relatively simple metrics, but the relationship with price performance is clear.
What we see is a strong correlation between on-chain activity and DeFi token price performance—both of which are currently quite uninspiring across the board. Activity saw a slight uptick last week, but it remains to be seen whether this is a trend reversal or merely a temporary bounce.
Frequently Asked Questions
What is compound annual growth rate (CAGR) in crypto?
CAGR measures the mean annual growth rate of an investment over a specified period longer than one year. In crypto, it helps smooth out volatility to evaluate long-term performance trends for assets like Bitcoin and Ethereum.
Why are diminishing returns expected as a market matures?
As markets grow in size and sophistication, larger capital inflows are required to move prices. Increased institutional participation, better risk understanding, and advanced financial instruments like derivatives often reduce volatility and compress returns over time.
How does on-chain activity reflect market health?
High demand for block space typically indicates strong network usage, often driving transaction fees higher. Conversely, low activity suggests reduced interest or utility, which can signal bearish market conditions and potential price stagnation.
What does the put/call ratio indicate?
The put/call ratio measures the volume or open interest of put options relative to call options. A high ratio suggests traders are hedging against or betting on downside price movement, indicating bearish sentiment. A low ratio implies bullish expectations.
Can Ethereum’ burn mechanism counteract sell pressure?
The EIP-1559 fee burn mechanism removes ETH from circulation during periods of high network usage. However, when activity is low, more ETH is minted than burned, potentially increasing net supply and adding sell pressure during weak demand.
How might sector rotation impact crypto markets?
During bear markets, investors often rotate capital toward perceived safer assets like Bitcoin, increasing its market dominance. In bull markets, capital tends to flow toward higher-risk assets like altcoins and DeFi tokens, reducing Bitcoin’s dominance.
Conclusion
Bear markets can be destructive, and this one has been particularly so. Short-term conditions often worsen before sustained bottoms are found. What we have observed is a relatively cohesive narrative: poor price performance, declining long-term returns, concerns priced into short-term derivatives, and lackluster on-chain activity.
This impact has been relatively universal across digital assets, with both Bitcoin and Ethereum seeing much lower utilization and demand than during bull markets. The situation is even more pronounced for DeFi tokens. There are signs that internal capital rotation is favoring BTC, a trend possibly intensified by last week’s LUNA and UST collapse. Such rotation is a historical feature of bear markets, as investors shift toward perceived safer assets.
That said, the sector’s price performance over the past 12 months remains deeply negative, 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 story for the coming bull.”