The "Quarterly Review 2021" by CoinDesk Research looks at driving trends in crypto markets, focusing on Bitcoin, Ethereum, stablecoins, NFTs, DeFi and more.

While the industry growth of Q4 2020 was driven largely by institutional participation in the asset markets and infrastructure, Q1 2021 told a more nuanced story. Activity from institutional investors seems to be slowing down but they are still key, and several of the quarter’s milestones point to that continuing for the next few months at least. However, certain metrics show that interest from retail investors and traders is picking up, bringing in new flows and investment patterns.  

Let’s look at some of the details:

First, bitcoin’s market cap crossed $1 trillion in Q1. This is significant in that many institutional investors will not even consider an asset group until it is of sufficient size to merit the attention, and $1 trillion is a strong psychological level. So, institutional investors are more likely to dedicate resources to investigating and learning about bitcoin than they were in 2020.

They’re not doing so en masse just yet, though. The surge in trading volume from exchanges the institutions would typically use (LMAX Digital, Coinbase and others) trailed off in Q1, with declines across most.

BTC futures trading volumes was more or less flat in Q1, with occasional spikes. Open interest, however, continued to grow, pointing to increasing leverage which can be taken as a sign of increasing trading (rather than investing) activity.

It can also be seen in the shifting ranking of the Chicago Mercantile Exchange in terms of open interest (OI). In January, it reached position #1, with the highest OI in the market. Its OI has continued to grow, but more retail-focused exchanges with higher leverage such as Binance and Bybit have since accelerated and overtaken it.

Another metric backing this up is the ratio of spot to futures volumes. Institutional and long-term investors tend to favor spot exchanges, so when this ratio starts to decline, it can be taken as another point of evidence that traders are starting to account for more market activity.

Moving to on-chain data, the Q4 surge in transaction count and total value transferred on the Bitcoin blockchain trailed off in Q1, hinting at greater holding behavior. The growth in average transaction size in USD leveled off, even in the face of continued price increases, indicating more small-holder participation.

The increased participation of small investors can also be seen in the growth in bitcoin addresses. The number of non-zero addresses continued to soar in Q1, while those holding over 1,000 BTC fell, showing that the bulk of the growth was from small holdings. The number of active addresses (those sending and/or receiving in any given day) held relatively constant over the quarter, hinting that most of the new entrants are buying to hold.

The tendency to hold bitcoin rather than trade or transact is also seen in the resumed decline of bitcoin’s velocity, defined as the trailing 12-month transaction volume divided by the current supply.