Digital Currency October Macro Review, Bitcoin Slips Down
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Idea refinement
1. In October, Bitcoin returned 11.5%, while gold, the S&P 500 and the MSCI World Index returned just 2%. The S&P 500 closed the month at a new high and returned 23% year-to-date, which is a decent return for traditional assets but pales in comparison to Bitcoin’s 150% annual return.
2. Macro events are still a factor affecting Bitcoin assets. The congressional hearings held by Facebook caused Bitcoin to fall by 10%, but China's vigorous promotion of blockchain technology pushed Bitcoin up by 40%.
3. Baidu Trends found that the search volume of the words "blockchain" and "bitcoin" has risen sharply, but the ratio of the search volume of blockchain to the search volume of bitcoin is 10:1
4. News from Japan and China dominates, so trading volume has increased in the most recent week. Total contracts on the CME for October were less than $200 million, the lowest since January 2018, but open interest remains relatively healthy.
Bakkt Bitcoin futures got off to a slow start in May and October, but volume and open interest continued to grow. On October 31, open interest closed at a high of $900,000.
6. The amount invested in institutional beta products (such as the Grayscale trust product line) tripled from the previous quarter.
7. From April to August, Bitcoin ranked first among the top ten assets, but after the recovery of altcoins in September, its ranking slipped to the bottom three. In October, driven by TRX (+36%) and BNB (+25%), it rose again, and Bitcoin was in the middle of the top ten.
8. Bitcoin experienced a death cross in late October, but it’s worth noting that the last two parabolic rallies in 2012-2013 and 2016-2017 were preceded by the same false breakout
9. Bitcoin volatility closed at a 2.5-month high, but remains 10% below its long-term average of 82%.
10. The monthly price of Bitcoin has been lower than 40% for three consecutive months. In the range of several months, there are usually fluctuations of more than 80%. Historically, the fourth quarter has been the best in terms of the asset’s performance, and coupled with an upward trend in volatility, it should be an interesting year for the “flagship” cryptocurrency.
11. The trading volume of the spot market increased slightly, among which the trading volume of Bitcoin on Binance increased by 15% month-on-month. Coinbase’s Bitcoin trading volume increased by -5% month-on-month, marking the fourth consecutive month of volume declines.
12. The combined trading volume of the top five assets peaked at $54 billion in June this year, but is still a far cry from the $63 billion in January 2018. Apart from Bitcoin, Ripple (XRP) is the only one of the top 5 digital currencies to see positive growth.
13. The lending market continued to grow, and the lending volume increased by 38% compared to the previous quarter, of which US dollar or cash equivalent loans accounted for 31% of the total loans, which was only 14% at the beginning of this year.
14. The network transaction volume of BTC and ETH has increased significantly, and the decline for several months ended in October. Both BTC and ETH prices are well below their respective all-time highs, with BTC down 14.4% from its May high and ETH down 37% from its January 2018 high.
market Overview
market Overview
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China bets on blockchain
Baidu’s search trends for “blockchain” outnumber searches for “Bitcoin” by a ratio of 10:1
After Facebook’s congressional hearing on Libra led to a 10% drop in BTC, President Xi’s announcement of support for blockchain technology pushed the crypto asset up 40% in a short period of time. His press release significantly strengthened countries' stance on blockchain, saying China should seize the opportunity to adopt the emerging technology. After his remarks, China Central Television released a public message. CCTV's news about blockchain lasted about 5 minutes. Chinese state media urged investors to be rational and confirmed that "the rise of blockchain technology With the rise of cryptocurrencies, but the innovation of blockchain technology does not mean that we should speculate in virtual currencies.”
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Institutionalization: Derivatives and Futures
Increasing competition among traditional financial institutions, and the development of counterparties such as Binance and Deribit, will continue to accelerate the exponential growth of bitcoin institutionalization.
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CME Group (CME)
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Bakkt
Binance
Binance
Trust products
Trust products
Grayscale, which has been the dominant force in its "non-ETF" trusts, saw record inflows in the third quarter, according to a report from the firm. This quarter, they received a total of $255 million in inflows (triple the previous quarter), most of which ($171.7 million) went into their flagship Bitcoin Trust. They noted that 84% of the interest came from institutional investors (mainly hedge funds), and a surprising 80% of Q3 inflows were in-kind, meaning they accepted deposits in cryptocurrencies, rather than cash. We're not sure why established hedge funds would rather pay Grayscale a 2% management fee to hold their crypto holdings than use free custody or an established exchange like Coinbase. We think there are two reasons behind this: one is that investors pay for “convenience” when adopting other institutional products; the other is that Grayscale, whether it is a public version or a private version, is very familiar to institutional investors. Second, there are still considerable arbitrage opportunities between public and private versions. At the time of writing, the Grayscale Bitcoin Trust (GBTC) is trading at a premium of 24% on the open market, while the Grayscale Ethereum Trust (ETHE) is trading at a whopping 89% premium on the public market. Grayscale has become a significant player and one of the well-known institutional traders in the cryptocurrency space.
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Top 10 Cryptocurrency Price Trends
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Bitcoin's death cross
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fluctuation
In late October, Bitcoin experienced two standard deviation price swings: Bitcoin closed down 7% on Oct. 23 due to the Facebook hearings, followed by headlines on Oct. 25 as China pushes into blockchain technology. It rose 16%. This 16% one-day move is Bitcoin's 12th largest one-day move (two-way move) since 2015 and the second largest one-day move this year. As noted in Forbes magazine, these major daily swings have seen Bitcoin’s 30-day volatility spike, closing the month at 73%, a two-and-a-half-month high. Bitcoin volatility is currently around 10% below its long-term average of 82%. After a few months of volatile cycles, Bitcoin volatility looks set to enter an upcycle as 2019 winds down.
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Spot Market Volume
XRP is the only top 5 cryptocurrency other than Bitcoin to see positive trading volume growth, up 27% month-on-month
After three straight months of declines on Coinbase and Binance, bitcoin volumes finally picked up in October, though the first three weeks of October were modest, with monthly volumes on both exchanges down about 20%. Surprisingly, Binance’s trading volume statistics were up, with a 15% month-on-month increase, while Coinbase’s volumes fell for the fourth month in a row, down 5% month-on-month. Both exchanges are well off their midsummer highs, with Coinbase down 60% from this year’s peak and Binance doing slightly better, 45% off its record high of $9 billion set in July.
borrow money
borrow money
Throughout 2019, the crypto lending market has seen considerable growth. While many companies in the lending space have risk controls in place, each one needs to be carefully vetted due to the escrow nature of these counterparties. In order to participate in the lending market, one needs to deposit collateral into the appropriate wallet/bank to receive the service. Given the emerging nature and changing environment of this asset class, the location of “deposits”—whether on a decentralized platform or an institutional counterparty—should be carefully considered. We believe that there are many counterparties that are doing well in the lending market, but there are counterparties that don't have proper balance sheets and don't have proper risk controls, adding huge potential risk to yields of 3 - 10%. We fear that this massive growth in the lending market has largely contributed to a potential "black swan event". At the end of the day, banks are too big to get to the bottom of it, but crypto counterparties are not.
Genesis recently released its third-quarter loan origination report, and the results were shocking. Loan originations rose 38% in the third quarter and about 165% from the beginning of the year. As of September 30, new loans totaled $3.1 billion. The most striking statistic in this report is the conversion of loan issuances denominated in Bitcoin to USD or its equivalent. At the end of 2018, Bitcoin loans accounted for 63% of the loans issued by Genesis. That figure fell to 50% as of Sept. 30, largely due to an increase in U.S. dollar or equivalent-value loans, which accounted for 31% of banks' loans, compared with 14% at the end of last year. We believe this is both due to the massive growth in lending across the board and the fact that the price of Bitcoin has increased by 200-300% since its bottom in December.
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Blockchain Network Health
Online transactions remain a healthy barometer of interest in cryptocurrencies, with BTC and ETH volumes both up in October, up 1.3% and 2.5%, respectively. Bitcoin set a new record 11.5 million network transactions in May, but is now 14.4% off its recent high. ETH hit a yearly high of 25.7 million transactions in June, but volume through October is 17% below its year-to-date high and 37% below its all-time high set in January 2018.
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looking forward to november
In October, Bitcoin experienced an infamous crossover where its 50-day moving average fell below its 200-day moving average, usually a negative sign, a false breakout before two recent notable rallies would have been Things to watch as we close out the year. The fourth quarter has historically been the asset's best quarter from a value perspective, and with heightened volatility and positive news from China advancing blockchain technology, it's not hard to imagine the asset going through a choppy year-end And (hopefully) an upward trajectory. Various “altcoins” have experienced a resurgence since Bitcoin has outperformed other top crypto assets for several months. We will be watching Bitcoin’s network transactions as they reversed their downtrend in October. Institutionalization remains a key factor to watch, and we hope November will bring more information on Bakkt’s launch of options trading.
