Rehashed - #29 Crypto Continues to be an Event-Driven Market
Low Volatility Prevails with Limited Reaction to News
The past month has seen cryptocurrencies assume a period of very low volatility. Earlier this year, bitcoin was trading with 90-100% annualized volatility but has since gradually declined to around 30-40%; closer to emulating the volatility profile of equities.
Data retrieved from BitMEX .BVOL Index (based on 30-day TWAP)
This week, crypto-twitter mocked bitcoin for uncharacteristically trading within a very tight range, refusing to break away from the (USD) “$6550 peg.” Turbulence in the equities market, perhaps coupled with concerns over Bitfinex solvency and the precarious position of Noble Bank, broke the mould on Thursday where bitcoin finally departed from its tight trading range and showed weakness alongside global markets.
Until this week, bitcoin and the broader crypto market has remained surprisingly apathetic to any news of significance. The arguably hugely positive news that endowments are entering crypto-investments failed to budge prices. Likewise, serious concerns over the integrity of Tether/Bitfinex and their banking predicament has hardly put the market in a tailspin.
However, in a market climate that sees little action off of non-trivial news, short-term price movements in specific names still remain highly reactive to events and announcements.
Events Still Catalysing Moves in Isolated Names
Although it can be difficult to discern the difference between cause and correlation in price movement, cryptoassets have always been sensitive to events. Market moving events can be anything from upcoming conferences, main net launches, exchange listings or partnership announcements.
Generally, in bull markets, these moves are dramaticized (for example, $XRP increased 15x over a 3-week period on Coinbase listing rumours in January) but remain dampened in bear markets where prices tend to quickly regress/assume the larger trend. This seems to be what we are observing now. This week’s exchange listing announcements of 0x on Coinbase, and Ravencoin on Binance, caused 25% and 60% spikes respectively in each token, which have since settled to up +12% in ZRX and +35% in $RVN. These returns are likely to compress as the news dissipates. If you’re playing the trading game, note that Coinbase indicated back in July, that they would be exploring the addition of $ZEC, $XLM, $BAT and $ADA. It’s highly likely that some of these names are to follow in 0x’s footsteps.
Event-driven moves also suffer from the risk of the old adage “buy the rumour, sell the news,” particularly for more predictable events. Typically, there has been a strong rally following the annual Consensus conference. However, this year, the identification of this trend largely led to the upside of the event already priced in well before the conference began; as a result, the market did not respond, disappointing many. Main net launches also suffer from a similar trend, where tokens generally experience a gradual run-up prior to launch and rather rapidly deflate upon the main net launch taking place. The slew of main net launches this year and corresponding price decrease post-launch depicts such a trend.
Positioning a Portfolio in a Highly Correlated Bear Market
There’s no doubt that events cause short-term price deviation but overall the market remains highly correlated.
90-day correlations matrix, courtesy of SIFR data
An overwhelming majority of crypto-crypto relationships are above 0.5, indicating a strong positive relationship. Considering such high correlations and the obvious bear market, unless one is an active trader, diversification into alt-coins leaves one with all sorts of extra risk. For example, Binance’s recent delisting of four assets caused major crashes in those names. As a long-term investor, it’s best to consolidate and hold no more than a handful of cryptoassets. Cryptocurrencies that have a broad and deep holder base, strong narratives, and hefty market capitalisations, are likely to provide the best protection against the downside. Once a market turnaround is confirmed, diversification back into small-mid cap alt-coins may be a good move. Furthermore, although event-driven trades are likely to provide the most upside under the current climate, unless one has the time and operational capacity to trade short event-driven cycles, it may be best to leave it to the full-time crypto traders, as it requires one to be extremely nimble. As stated earlier, in a bear market, prices tend to quickly correct following an event-driven breakout.
This price correction / bear market, or whatever you want to call it, will start to turn when we see the true decoupling of cryptoassets- I suspect that bitcoin will lead the way. Perhaps we are already observing a flight to quality - albeit a slow one; signals such as bitcoin market dominance rising and price decreases in questionable alt-coins suggest that the market may be savvying up.
In the News
Coin Center Director of Research Peter Van Valkenburgh and economist Nouriel Roubini testified on the crypto ecosystem before the U.S. Senate Committee on Banking, Housing and Urban Affairs on Thursday.
A new study of Bitcoin’s 32 largest holders, commonly called “whales,” suggests that on the whole their trading activity has stabilized the market rather than contributed to price volatility.
Venezuelans will now have to use the nation’s cryptocurrency, the petro, to purchase passports, at a cost of four times the national monthly minimum wage.
26 October - The SEC’s deadline to decide whether to approve nine bitcoin ETFs that were previously rejected on August 22, 2018
29 December - Deadline for VanEck SolidX ETF (can be extended to final deadline of Feb 27, 2019)
As always, thanks for joining - see you next week for Rehashed.
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About the author:
Capital markets to crypto convert. From Christchurch → Boston → New York, Freddie became intrigued by the potential of the digital asset economy after plucking a book on Bitcoin off a New York library bookshelf in 2016. Her parents are thrilled that she is chasing magic money on the internet.
Disclaimer: The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.