Q9 Markets: Pair Skating
4th February 2021
Q9 Capital: www.q9capital.com
- Crypto breaks the correlation trend with equities
- Wormhole rescue shows crypto world can move fast and fix things
- Spotlight on China’s CBDC at Beijing 2022
A disastrous fall of almost -30% year to date… moving so fast you can’t get ahead, and unknown volatility to come? Yes, Meta (Facebook) is very difficult to trade. Have you considered investing in crypto instead?
Crypto markets managed to break the trend of increasing correlation this week. Many major cryptocurrencies posted positive weekly gains for the first time this year, despite equities continuing lower, and the current market cold snap is fittingly punctuated by the arrival of the Beijing Winter Olympic Games in which the spotlight will be shone on the rollout of China’s CBDC.
While many alt-coins posted double digit gains over the week: Ethereum rose +10.6%, Solana +13.2% and Decentraland + 18.4%, Bitcoin traded sideways (0.0% over the week). The crypto benchmark did see some downswings, BTC tumbled over 4% on Wednesday after Meta (the company formerly known as Facebook) posted disastrous quarterly results and nosedived -26% wiping out $200bn of shareholder value. BTC also showed less volatility overall than alts. While it was better to be in crypto than tech this week, 30-day correlation with stocks is the highest since September 2020.
Crypto did find its own reasons to move. At one point Solana tanked -12% following an exploit on Wormhole, a popular bridge between the Solana and Ethereum networks, in which $326mn was hacked. Coins associated with other smart contact blockchains like Polkadot, Avalanche, Terra, Algorand also slipped -10% midweek. However, in what’s typically crypto, but rare elsewhere, that hole was promptly plugged by Wormhole’s major backer Jump Crypto. Not sure if the fix should make one feel net positive given that the only consistent protection for protocols is time. However, it is impressive how quickly crypto often puts their money where their mouth is. It’s not very bear market.
A tradfi stalwart, on the other hand, was much quicker to change their tune. Market strategists at JPMorgan downsized their long-term price prediction for Bitcoin following BTCs decline of 40% in the last three months. In November the bank renewed its $146k long term price prediction but has now revised this to $38k, highlighting BTC’s volatile boom-or-bust nature as a major reason to attracting blue-chip investors. This seems a little histrionic — tech investing is also accompanied with boom and bust cycles and heavy volatility… see what happened to Meta just this Weds… this hasn’t put off large blue-chip investors from investing the sector.
Synchronised Dance
While this week offered a bit of a respite, the relationship between crypto and stocks has tightened as big tradfi traders and wider spread retail enter the market. Prior to the pandemic, BTC and other crypto assets showed low correlations to traditional financial market variables — in effect, crypto behaved as an entirely different ecosystem. But over the last two years its correlation with macro assets has picked up.
This is not surprising given there are more and more links between the worlds of equities and crypto — Bitcoin futures ETFs, MicroStrategy stock, crypto mining stocks, tokenised Tesla, and on and on. But also notice below that the correlation is higher when markets are lower… also not surprising! Which might mean that it’s value as a hedge specifically is what crypto is losing. However these days, what is a hedge? How are your Treasuries doing?
Source: Financial TimesThere is enough recent co-movement between crypto and equities that even the IMF has taken notice in a piece of research titled Cryptic Connections: Spillovers between Crypto and Equity Markets. Their key table below compares, before and after Covid-19, how much volatility sloshed between crypto and equities (BTC is Bitcoin; TTH is the stablecoin Tether; RUS is the Russell 2000):
It means that today BTC volatility explains 16 percentage points more of S&P 500 volatility than before the pandemic. The overall move was from 1 per cent to 17 per cent.
“Our analysis suggests that crypto assets are no longer on the fringe of the financial system. Given their relatively high volatility and valuations, their increased co-movement could soon pose risks to financial stability especially in countries with widespread crypto adoption. It is thus time to adopt a comprehensive, co-ordinated global regulatory framework.”
The data is interesting, but not sure that their conclusion is on the mark. You need to be a big enough market to affect global financial stability even if we get off the tail wagging the dog. However, if this gets regulators to create some more (reasonable) reg frameworks, then great.
Avalanche!
Messari released a detailed report on Avalanche (AVAX), a Proof-of-Stake (PoS) smart contract platform for decentralized applications. The full report can be found here but here are their key takeaways…
- Avalanche recorded all-time highs in active addresses, transactions, TVL, and market capitalization during Q4 fuelled by incentive campaigns and network partnerships.
- The arrival of Aave and Curve sparked a network-wide DeFi boom; the number of contracts deployed and unique contract deployers to the network both reached an all-time high in December.
- Several patches were introduced at the network level to combat spiking transaction fees.
Cross-Country Payments
Central bank digital currencies (CBDCs) will get some international limelight over the next couple of weeks as China plans to test its digital yuan at the Beijing Winter Olympics. It’s been in pilot for two years and nearly $14bn of transactions have been made using the e-CNY. International visitors (of which there aren’t many) will be allowed to use the currency for the first time during the event.
80 other countries are testing their own versions. India revealed on Tuesday that it would be launching a digital rupee to be issued between 2022–2023. However, the Chinese central bank is way ahead of its global peers.
The countries tech giants have jumped on board to boost the distribution. Food delivery giant Meituan has become the latest tech firm to integrate CBDC payments for its services. Tencent recently announced that its WeChat messaging app would support the digital yuan. WeChat has over 1 billion users and is integral to daily life in China. Alipay and e-commerce giant JD.com have also pinned themselves as a partners for the digital yuan.
For the foreseeable future, even if there is an uptick at the Winter Olympics, the transaction turnover rate of the central bank digital RMB is likely to be very tiny in comparison to popular payment platforms WeChat Pay and Alipay. However, over time, there may be some niche areas where the digital RMB could see greater use, such as paying certain types of government related bills, or for things like transportation, particularly if the central bank offers incentives like red envelopes and other inducements.
China’s cyberspace regulator issued a notice on Sunday in which it called on provincial-level regulators to “give full play to the role of blockchain” in areas such as data sharing, optimizing business processes and reduce operating costs. All the pilot units should “give priority to adopting blockchain software and hardware technologies,” the notice said.
Qualifying Heats
The increased correlation between crypto and equities isn’t shocking — its expected. The entrance of large financial participants into the market is one of the key reasons why Bitcoin is now acting more like a traditional risky asset. A growing number of hedge funds now bet on crypto; Wall Street banks are offering their clients services like crypto lending and custody; high-frequency trading firms are increasingly active in the space. Regulation and potential shifts in financial rules across major economies have also acted as strong drivers of BTC’s price — all of this points to crypto being accepted, legitimised and more entrants in the market.
On the flip side, BTC has long been penned as a portfolio diversifier, an inflation hedge, a digital gold, an asset outside the traditional financial system. At the moment there is empirical evidence that Bitcoin can act as a diversifier to equity risk. JPMorgan’s prior $150,000 target assumed a convergence of Bitcoin volatility to that of gold, an equalisation of Bitcoin allocations to that of gold in investor portfolios, and it remaining uncorrelated with securities. However, BTC and crypto as an alternative was never really about daily correlations (especially to crypto people). It’s about creating an alternative to a financial system that has been a champion growth engine for 50 years but is showing significant age in recent competition. Crypto is still in the qualifying rounds and there’s definitely a long way to the main event but the promise of the technology remains enormous and everybody’s now watching.
In the News…
- Hong Kong gives banks, brokers the crypto go-ahead
- SFC and HKMA joint circular on crypto regulation
- FTX valuation passes Coinbase after raising $400m
- Thailand drops 15% capital gains tax plan on crypto
- OpenSea reveals +80% of its free NFT mints were plagiarized, spam or fake
- Crime and NFTs: Chainalysis detects significant wash trading and some money laundering
- Electricity consumption in Siberian region rises fourfold due to crypto mining
- Video: This state is becoming America’s crypto capital
- State Senator introduces bill to make Bitcoin legal tender in Arizona
- Coinbase, Genesis highlight massive institutional growth at MicroStrategy conference
- Fidelity plots crypto industry, metaverse ETFs
- Ethereum beats Bitcoin as most donated crypto in 2021
- Messari State of Compound: Q4 2021
- Coachella will sell lifetime festival passes as NFTs
Legacy Markets
Oil futures rose +3.1% while the SPX advanced 3.5% week-on-week. 10-year US treasury yields rose 3bps, the US Dollar index fell -2% and the Gold & Silver index rose +1.6%.
Crypto Markets
- BTC/USD was unchanged while ETH/USD gained +10.6% (vs previous week). The total market cap of the overall crypto universe hovered around $1.7tln and Bitcoins dominance stayed around 41%
- Among other majors SOL/USD rallied +13.2%, MANA and CRV rose +18.4% and +11.4% respectively
- Annualised volatility in crypto markets stayed low: -61% for BTC and 78% for ETH this week
Flows
- Two-way flow on client pad slightly skewed towards buying (1.2x buyers vs sellers) on muted volumes during last week
- Net buyers in BTC and SOL with an even sided flow in ETH
- Buying in AXS, DOGE & MATIC in modest volumes
Q9 Capital: www.q9capital.com
