Sentiment at lowest levels since correction in May 2021

Markets clock in the second week of the New Year.

The cryptocurrency market looks eager to celebrate the weekend with miraculous rebounds. This follows Bitcoin’s plummet to lows in the region of US$ 39-40K on Tuesday.

Despite the correction, several Layer 1 cryptocurrencies have seemingly broken through their all-time high values—e.g. NEAR Protocol, $NEAR.

What is a Layer 1 Crypto?

Layer 1 refers to the underlying architecture of a blockchain. The Layer 1 blockchain protocols provide security and decentralisation while contributing to the network’s overall scalability.

Layer 1 vs Layer 2: What’s the difference?

With the rapid increases in network activity and higher transaction demand, certain deficiencies in Layer 1 became apparent—specifically, transaction cost and efficiency of the blockchain.

As such, Layer 2 networks aim to better serve the market’s changing needs.

Layer 2 is a network that lies on top of the main blockchain architecture (i.e. Layer 1) that handles complex protocols or the ‘hard work’. For example, Ethereum Mainnet is Layer 1 and Immutable X is the Layer 2 network.

Scalability is a challenge that is addressed by Layer 2 solutions. However, the Scalability Trilemma presented by Ethereum founder Vitalik Buterin still remains a major obstacle to mainstream adoption.

Above: Adaptation of Buterin’s Scalability Trilemma

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Now, returning to the On-Chain review…

Interestingly, other token’s such as Cosmos ($ATOM), Harmony ($ONE) and Fantom ($FTM) all appear to hold steadfast. This Four Musketeer-Esque group of digital currencies have been referred to by the acronym ‘FOAN’.

A coin termed by HsakaTrades.

Hsaka @HsakaTrades

FOAN/BTC continuing to thrive in its safe space. Engulfed yesterdays dump.

Hsaka @HsakaTrades

This is a safe space. Orange coin can't hurt you here. https://t.co/6bLJ5xv4Kl https://t.co/KmG07Pk3WE

6:44 PM ∙ Jan 6, 2022

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677Likes46Retweets

Qluster Data Labs first conducts a check for signs that warrant concern in Bitcoin and Ethereum’s supply metrics.

Bitcoin

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Ethereum

From a macro-level perspective, supply metrics suggest the outlook remains bullish for both Bitcoin and Ethereum at this time.

Following on from coverage in On-Chain Outlook, Edition #20, with regards to the increasing supply on exchanges for Ethereum, this excess supply appears to have been negated with supply falling back to previous lows.

MVRV 7 Day Ratio

The MVRV 7 day ratio for Bitcoin has jumped briefly into the positive, which indicates that buyers who have purchased BTC recently were also in positive.

Definition: MVRV or Market-Value-to-Realised-Value shows the average profit or loss of all digital asset holders based on the price when each token was last moved.

This has now been neutralised during the recent drop from US$ 44.5K to US$ 42.5K that occurred earlier today and alludes to some profit realisation.

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Q’s Conclusion

Despite the choppy downtrend by Bitcoin over the last few months, it is clear that narrative-driven Altcoins appear as strong contenders in the market.

In addition, the Layer 1 and ZK narrative remains strong. Should sentiment remain accomodating, it may be wise to continue to look for opportunities within these coins.

ZK Rollups or Zero-Knowledge Rollups are smart contracts that aim to solve scalability challenges in the Ethereum network.

The ZK Rollup functions by processing a number of individual transactions outside of Layer 1—main blockchain—and ‘rolls’ them up together for validation. Combining the transactions into one allows Rollups to offer users faster and cheaper transactions by reducing the accompanying data burden.

Did you learn something new in tonight’s research? Let us know in the comments 👇

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Further, note the relative strength of ALT/BTC cross pairs.

Considering this relative strength when their respective US dollar pairs undergo corrective action. Referencing both the crypto cross and fiat pairs can complement technical charting principles—such as support (demand) and resistance (supply).

See you again for the next update.

- q

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