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This episode was hosted by Noelle Acheson. “Markets Daily” is executive produced by Jared Schwartz and produced and edited by Eleanor Pahl. All original music by Doc Blust and Colin Mealey.
Audio Transcript: This transcript has not been edited and may contain errors.
It’s Monday, November 6th, 2023 and this is Markets Daily from CoinDesk. My name is Noelle Acheson, CoinDesk collaborator and author of the Crypto is Macro Now newsletter on Substack. On today’s show we’re talking about trading volumes, layer 2 blockchains, business activity and more. Be sure to follow the podcast on your platform of choice and turn on notifications so you don't miss an episode. And just a reminder, CoinDesk is a news source and does not provide investment advice. Now, a markets roundup.
Crypto markets had a relatively quiet yet positive weekend. According to CoinDesk Indices, at 9 a.m. Eastern time today, bitcoin was trading at 35,066 dollars, up four tenths over the past 24 hours. Ether was trading at 1,904, up 1.5%. Elsewhere, Ripple’s XRP token is up more than 13%. Uniswap and Stellar are up more than 7%. AVAX and Filecoin are up over 5%. A more optimistic sentiment does seem to be consolidating, and when it comes to bitcoin, the gentle upward slope of the price trajectory over the past couple of weeks suggests that the increases are from a steady inflow of new demand. This is more organic, as opposed to the sharp moves that we have seen recently, many of which were triggered by derivatives-related repositioning. Hopefully this also means the trend is more sustainable than other upward moves we’ve seen so far this year.
In macro indicators, we need to look at a data point from Friday that was somewhat overshadowed in the excitement about the soft employment report. We need to talk about the U.S. Purchasing Managers’ Index, or PMI, specifically that for services. There are a few PMI series published, but one of the main ones comes from the Institute for Supply Management, which measures business activity on a monthly basis via an index that reflects responses from purchasing managers as to whether market conditions are expanding, staying the same, or contracting. Anything above 50 is expansion, below 50 is contraction.
On Friday, we got the Institute for Supply Management’s PMI for the services industry. Services PMI is especially interesting given that services contribute almost 80% of U.S. GDP, and it is services-related inflation that has proven particularly hard to bring down.
Well, in October, according to the index, services activity in the U.S. declined for the second consecutive month. It is still expanding, but at its weakest pace in five months, and notably less than economists had forecast.
It’s too soon to say this deceleration will last. A separate gauge of new orders increased in October, after a sizeable drop in September, so we could see activity pick up again next month. The reading does highlight that the economy is looking a bit choppy, though. And it makes the next few monthly PMI readings all the more relevant.
In stocks, as expected, the U.S. indices continued their upward march as softer-than-expected jobs data brought forward expectations of a rate cut, and pushed bond yields down further. The U.S. 10-year yield on Friday almost touched 4.5% for the first time since September, having been at 5% just a few days earlier. The S&P 500 was up almost 1 percent, the Nasdaq closed up 1.4%, and the Dow Jones rose two thirds of a percent. Futures this morning are pointing to a mixed opening.
In Europe, stocks were largely mixed to flat on Friday, but closed out a strong week with the German DAX and the broader Eurostoxx 600 posting their strongest weekly gains since March. The FTSE 100 showed some weakness, closing four tenths of a percent lower, but still breaking a two-week losing streak. So far this morning, sentiment is still looking mixed.
In Asia, sentiment in today’s trading was decidedly bullish. Japan’s Nikkei index jumped 2.4%, the Hang Seng closed up 1.7%, and even the recently beleaguered Shanghai Composite rose almost one percent.
In commodities, oil prices settled more than 2% lower on Friday as supply concerns eased. This morning, the Brent crude benchmark was recovering slightly, trading up half a percent at 86 dollars and 50 cents a barrel. Gold is again holding steady, trading at 1,986 dollars an ounce.
Stay with us – after the break we’re going to take a closer look at some intriguing insights in Coinbase’s Q3 earnings.
Welcome back!
Crypto exchange Coinbase released its Q3 earnings last week. Now that I’ve had a chance to go through them, there are a few things worth highlighting: Revenue fell by almost 5% from the previous quarter, a smaller drop than most analysts were expecting. And the net loss shrunk from almost $100 million in Q2 to around $2 million in Q3. Unsurprisingly, most of the revenue drop was due to a decline in transaction fees which of course accompanies a drop in trading volumes. According to Coinbase, global spot volumes were down 24% in the third quarter, which is, you know, ouch.
Coinbase’s volumes fell by less – retail trading volume was down by 21%, and institutional trading volume was down by 17%. Nevertheless, this obviously hurt, but less than many other crypto trading businesses, since trading revenue accounts for less than half of the company’s income.
An interesting insight is that it’s not just trading volumes that impact exchange revenues – it’s also crypto asset volatility. With higher volatility, traders trade more. According to Coinbase, in Q3 crypto asset volatility reached its lowest point since 2016.
Well, if you’ve been following the bitcoin price recently, you’ll have noticed that it has picked up. According to data from The Block, 30-day historical volatility for bitcoin is roughly three times what it was at August’s low point.
This is good news for exchanges, especially since spot volumes should follow volatility up. Together, they should increase overall liquidity, which would be very good news as that could encourage more new large investors to enter the market.
Next, beyond the Coinbase numbers, I want to mention something Coinbase CEO Brian Armstrong said in the earnings call. He opened with what he himself acknowledged was a provocative statement about the future of blockchain development. I quote: “Onchain is the new online.” End quote. He goes on to elaborate how blockchains are extending the impact of the internet on the way we interact by bringing back the decentralization that was the original part of the internet manifesto. But not only that – they also introduce the concept of ownership, which the internet was missing.
But how can blockchains become as ubiquitous and flexible as the internet?
According to Armstrong, it’s through layer 2s, which are scalable blockchains that anchor to layer 1 security. Layer 1 in this case refers to base layer blockchains such as Bitcoin and Ethereum. Further on in his earnings call remarks, Armstrong has this to say about layer 2s. I quote: “The transition from Layer 1 networks to Layer 2 networks can be likened to the transition from dial-up internet to broadband.”
That’s an evocative comparison for sure. Some could accuse it of being somewhat commercial, since Coinbase launched a layer 2 network this summer. Called Base, it anchors to Ethereum, and aims to provide a fast and reliable platform for developers to work on practically any type of app. Activity has declined since the initial hype, but Base is still doing pretty well. According to DefiLlama, total value locked, which is the amount stored in smart contracts on the network, is around $300 million, with roughly 55,000 daily active addresses. For context, that’s slightly less than half the number of daily active addresses on Arbitrum, the largest layer 2 in terms of value locked. But we should remember that Base has only been open to the public for a couple of months.
However, rather than dismiss the comparison of layer 2s to the advent of broadband as a self-serving framework, we can look at the investment in Base as an extension of a loftier goal: to rethink what we want the internet to be. Here we have an exchange focusing on more than trading volumes. And while Coinbase will earn revenue on its layer 2 through sequencer fees, there are no plans to issue a token that could centralize the monetization of network growth.
Will layer 2s become the new internet, only with greater decentralization and a new concept of digital ownership? Obviously, I hope so – there’s a long way to go in terms of usability. And there’s a danger we end up with what we have now: a concentration of power and dubious monetization strategies. A big difference is the transparency of layer 2 development. And there’s a lot of us watching and rooting for it to succeed.
