It has been a challenging year for cryptocurrencies. Terra (LUNA) collapsed, and a crypto credit crunch ensued that saw some of the biggest lenders in the space fall. Then came a slew of hacks, unprecedented rate hikes from the Federal Reserve (Fed) weighing on sentiment, recession fears, and the recent FTX implosion whose contagion is still permeating the cryptocurrency industry.
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It has been a challenging year for cryptocurrencies. Terra (LUNA) collapsed, and a crypto credit crunch ensued that saw some of the biggest lenders in the space fall. Then came a slew of hacks, unprecedented rate hikes from the Federal Reserve (Fed) weighing on sentiment, recession fears, and the recent FTX implosion whose contagion is still permeating the cryptocurrency industry. On the FTX debacle, Sam Bankman-Fried was recently released on a $250mn bond whilst Caroline Ellison, former CEO of Alameda Research, and Garry Wang, an FTX cofounder, have both plead guilty to fraud.
Looking forward with respect to rate hikes, Dominique continues to believe the market is underpricing the terminal and end-2023 federal funds rate (FFR). She also thinks markets are mispricing the February meeting – 30bp priced, Dominique expects 50bp.
With 2022 behind us, this will be our last crypto index tracker update until the new year.
Performance of Our Indices
As for the performance of our crypto indices, they are all in the red. Our Smart Contract (-11% WoW), DeFi (-9% WoW), and Metaverse (-9% WoW) indices fared the worst. Meanwhile, our Privacy index is down 7% and Bitcoin is down 3%.
Our Smart Contract (+90%) index is most correlated to bitcoin, followed by our DeFi Index (+85%; Chart 3). Meanwhile, our Metaverse (+80%) and our Privacy (+77%) indices are least correlated to bitcoin.
On macro markets, bitcoin’s correlation to the S&P 500 (-36%) and the NASDAQ (-38%) became more negative with respect to this time last month (Chart 4). Bitcoins correlation to the two equity indices turned negative on 10 November after Binance pulled out of a potential acquisition of FTX which sent bitcoin to multi-year lows. Meanwhile, its correlation to gold (-45%) is also negative. Bitcoin is currently only positively correlated to 10Y yields (+27%) and oil (+20%).
- Smart Contract Platform Index: All coins are down. Ethereum (ETH) is down the least (-4% WoW) and Solana (SOL) is down the most (-16% WoW).
- DeFi Index: All coins are down. Thorchain (RUNE) is down the least (-4% WoW) and Terra Luna Classic (LUNC) is down the most (-16% WoW).
- Metaverse Index: RedFOX Labs (RFOX) is up the most (+9% WoW) and Gala (GALA) is down the most (-21% WoW).
- Privacy Index: Verge (XVG) is up the most (+3% WoW) and Horizen (ZEN) is down the most (-15% WoW).
- Bitcoin: this is down 3% WoW.
What Are in the Four Indices?
Here are the indices in more detail:
- Bitcoin: the OG of crypto markets deserves its own category and is in many ways the true benchmark for any other crypto market.
- Smart contract platforms: after bitcoin, the big innovation was to have blockchains that were more programmable. These could host smart contracts or decentralised applications and have allowed the emergence of the metaverse and defi. Ethereum (ETH) is the most popular version of a smart contract platform. As well as ethereum, we also include some key competitors. The constituents of this index are: Ethereum (ETH), Cardano (ADA), Avalanche (AVAX), Solana (SOL), Fantom (FTM), VeChain (VET), Terra (LUNA), EOS (EOS), and Chainlink (LINK). We also include Polkadot (DOT) which allows interoperability between blockchains and the use of smart contracts via parachains.
- Metaverse: coins associated with the creation of a virtual space/digital world on the internet using a combination of augmented reality, virtual reality, and social networks. The constituents of this index are Axie Infinity (AXS), The Sandbox (SAND), Decentraland (MANA), Enjin Coin (ENJ), Aavegotchi (GHST), Terra Virtua Kolect (TVK), Ultra (UOS), Phantasma (SOUL), RedFOX Labs (RFOX), and Gala (GALA).
- Decentralised Finance (DeFi): financial services built on top of blockchain networks with no central intermediaries. This can be a broad category, so we narrow this down to platforms that focus on lending/borrowing, yield farming, automated market making and decentralised exchange tokens. The constituents of this index are: Aave (AAVE), Compound (COMP), Uniswap (UNI), Yearn.finance (YFI), Loopring (LRC), PancakeSwap (CAKE), Maker (MKR), 1inch (1INCH), Thorchain (RUNE), and Terra (LUNA).
- Privacy Coins: coins that obscure transactions on the blockchain to maintain the anonymity of its users and their activity. The constituents of this index are Monero (XMR), Zcash (ZEC), Dash (DASH), Verge (XVG), Horizen (ZEN), Beam (BEAM), Secret (SCRT), Decred (DCR), Keep Network (KEEP), and Dusk Network (DUSK).
Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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