In this document, we’ll analyze the velocity — meaning the rate at which money moves between wallets — of the Ethereum money supply in a way similar to how monetary velocity of nation-state currencies is analyzed. The goal of such analysis will be to assess the degree to which Ethereum is used as a transactional currency or as a store of value: if velocity is high, this would suggest Ether is functioning as a transactional currency; if velocity is falling, this suggests Ether is a store of value being held as an investment of sorts, or is simply dying. We will also hone in on the actions of the largest Ethereum wallets — the Ethereum “whales” — as the activity of whales can help point the way to what the strongest hands in the market are doing, and thus what price may end up doing as a result.
As we continue to monitor the velocity metrics we outline in this document over time, we hope to be able to spot key changes in the behavior of Ethereum wallets that may reveal key trends in overall changes to the currency’s velocity, and thus, its value proposition to holders.
Methodology For Counting Transactional Ether
Our methodology for analyzing the velocity of the Ethereum money supply is as follows:
- First, we observed only wallets on the blockchain that had recorded at least one incoming or outgoing transfer of coins; in other words, we observed only wallets that engaged in at least one external transaction.
- As such, all smart contract addresses — whose transactions are always internal ones — were excluded from this analysis of the Ethereum money supply. We took this step because inclusion of internal transactions adds substantial complexity to the analysis, and we felt that external transactions were of greater significance in understanding monetary velocity and thus should be the primary focus of the analysis. Properly incorporating internal transactions is something we hope to do in future iterations of our money supply analysis.
- We excluded wallets showing a negative balance (which can result from internal transactions, which we are excluded). .
- We tallied the sum of incoming external transactions for each non-smart contract wallet and subtracted the sum of outgoing external transactions for that respective wallet to calculate the net amount of external transactions for each wallet.
The result is a list of just over 40.5 million wallets that meet the aforementioned criteria, whose collective value is 97,269,018 Ether. At the time of this writing, the total outstanding supply of Ethereum is reported to be 103,520,190.91. In sum, SixJupiter’s Ethereum Transactional Money Supply Analysis accounts for 93.96% of the total Ether.
Creating Monetary Aggregates to Understand Velocity
To understand velocity, we classified each of the 40,506,865 wallets observed into one of three cohorts: M1, M2, and M3. This terminology and its meaning is borrowed from the existing jargon to describe the money supply of nation-state currencies.
M1: If a wallet engaged in an external transaction in the past 30 days, it fell into the M1 cohort. M1 constitutes wallets that are actively engaged in external transactions; as such, Ether in this wallet is likely to be readily available.
M2: If a wallet engaged in an external transaction between 30 and 365 days, it was classified as an M2 wallet. These wallets are in a middle ground of sorts, in that they do not appear to be used with a high degree of frequency — but have not been dormant long enough to declare deeply immobile.
M3: If a wallet has not engaged in an external transaction recorded on the blockchain in more than a year, it is classified as a part of the M3 money supply. These wallets have not interacted during the peak up and down moments of the Ethereum bubble of 2017-2018, so there is some evidence to suggest money in these wallets is relatively immobile.
Finding: M2 is Largest Monetary Cohort
The chart below shows how much Ether are in M1, M2, and M3. We see that M2 is the largest monetary cohort, which means that of Ethereum’s transactional money supply, wallets that have not moved their coins in 30 – 365 days constitute a majority.
In terms of number of wallets, M2 is the winner again — and this time, by a substantially larger margin. Over 75% of wallets observed in this analysis of Ethereum’s transactional money supply are in the M2 cohort. It should be noted, however, M1 had by far the largest average wallet size — 14.11 Ether, relative to 1.49 for M2 and 1.84 for M3 — presumably due to the fact that all of the large exchanges and other service providers have multiple wallets that will write external transactions to the blockchain on a regular basis. The chart below illustrates this data.
Will a temporary relative top in M1 precipitate a major change in direction of price, as it will constitute a majority of wallets taking action? Or will a sustained rise in M1 reveal utility demand for Ether? Either way, the relationship between the aforementioned monetary aggregates and the price of Ether is something we plan to observe and study.
Where do the Whales Live?
Where the Ethereum whales — meaning wallets with a large amount of Ether — reside in the transactional monetary spectrum defined here is of particular interest, as “whale watching” may be a worthwhile activity for understanding how price could change over time. In other words, whales, given their large position, have a greater ability to influence price; thus, if whales are start selling, it may be something that the “small fish” may at least wish to observe. We define whales as those in the top .01% of balances out of the accounts we are observing. This amounts to 4,051 wallets, with an average balance of 16.621.26 Ether (which translates to approximately $1.91 million USD, based on today’s conversion rates). Many of these wallets will naturally be exchanges, service providers, investment funds, and more. We find that the majority of whales, like the majority of all wallets, live in M2. However, whales do not have an overwhelming majority in M2: they constitute 52.60% of all whales, and even more critically, the balance of M2 whales is approximately 13% less than that of M1 whales. The chart below illustrates.
Nonetheless, M2 and M3 whales may be more interesting to watch, as they are less likely to be owned by professional businesses who interact with the blockchain on a regular basis as part of their routine business operations. If an M2 or M3 whale records an external transaction, it may thus be a more meaningful activity — especially if they do so on en masse.
Understanding the Relationship Over Time
Going forward, SixJupiter will be monitoring the Ethereum transactional money supply to understand how it can help forecast price and understand changes going in the Ethereum monetary network. Click here to subscribe to our reports on the Ethereum transactional money supply. For specific questions you think would be worth exploring, contact us on Twitter (@SixJupiterAI) or via email at email@example.com.