Crypto Index Tracker: All Sectors in the Red

Weak earnings reports in the tech sector weighed on crypto markets this week. The S&P 500 and the Nasdaq slumped yesterday after Tesla and Netflix shares plunged following the release of their quarterly earnings. This spilled over to crypto markets, despite bitcoin recently being negatively correlated with macro markets (Chart 4). Moreover, a rebound in the DXY (to which bitcoin is typically negatively correlated) weighed on crypto sentiment after US initial jobless claims fell to 228,000, the lowest since mid-May.

We continue to expect the Federal Reserve (Fed) to hike twice more this year. Dominque believes a 25bp hike this month is a done deal. She will watch out for clarification of the Fed’s reaction function, given there will not be a Summary of Economic Projections (SEP) at the July FOMC meeting. She also expects a November hike based on Powell’s statement that ‘it seems to us to make obvious sense to moderate our rate hikes as we get closer to our destination’, implying a hike every other meeting.

Performance of Our Indices

This week, all five indices are in the red with our Bitcoin and Privacy indices down the most at -5.3% WoW each while our DeFi Index (-1.4% WoW) is down the least.

Our Metaverse Index is most correlated to our Bitcoin Index (+80%) followed by our Smart Contract Index (+77%; Chart 3). The relationship between our Bitcoin Index and our DeFi Index (+56%) and Privacy Index (+43%) has weakened.

Negative macro correlations remain with bitcoin most negatively correlated with Gold (-57%), the S&P 500 (-52%), and the NASDAQ (-49%). Correlations also remain negative with brent crude oil (-14%) and US 10Y yields (-8%; Chart 4).

• Smart Contract Platform Index: The largest gain of the week is found in this index; Chainlink (LINK) has returned +16.5% WoW. Meanwhile, Fantom (FTM; -16.1% WoW) is down the most. Ethereum (ETH) is down -5.6% WoW.
  
• DeFi Index: Maker (MKR; +11.6% WoW) is up the most while Aave (AAVE; -8.2% WoW) is down the most.
  
• Metaverse Index: Gala (GALA; +0.5% WoW) is the only cryptocurrency that is up in this index while Decentraland (MANA; -9.1% WoW) is down the most.
  
• Privacy Index: Monero (XMR; +0.6% WoW) is the only cryptocurrency that is up in this index while Beam (BEAM; -12.1% WoW) is down the most.
  
• Bitcoin Index: this is down -5.3% 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.

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(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.)