Crypto Index Tracker: Crypto Sectors Take a Dive as Fed Keeps Hawks Flying

Crypto markets rallied as November inflation (7.1% YoY) printed lower than expected (7.3% YoY). Bitcoin hit highs of around $18,400 on Wednesday while ethereum breached $1,300.

However, the positive momentum proved short lived. Most gains were given back after the hawkish Federal Reserve (Fed) presser. Chair Powell did not rule out a further increase in the terminal federal funds rate (FFR) or another 50bp hike in February. He also made it clear that it will take more evidence than the lower CPI prints in October and November ‘to give confidence that inflation is on a sustained downward path’. And on the 50bp hike itself, he said ‘50 basis points is still a historically large increase and we still have some ways to go’. Dominque expects another 50bp hike at the February meeting.

Performance of Our Indices

As for the performance of our crypto indices, our Bitcoin Index (+0.6% WoW) is the only to have registered a positive return (Charts 1 and 2). Our Metaverse and Privacy indices are down 3% and 0.6% each, respectively.  Meanwhile, our DeFi (-5% WoW) and our Smart Contract (-4% WoW) indices fared worst.

Our Smart Contract (+89%) index is most correlated to bitcoin, followed by our DeFi Index (+81%; Chart 3). Meanwhile, our Metaverse (+74%) and our Privacy (+66%) indices are least correlated to bitcoin.

On macro markets, bitcoin’s correlation to the S&P 500 (-40%) and the NASDAQ (-40%) became more negative (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 (-40%) is also negative. Bitcoin is currently only positively correlated to 10Y yields (+42%) and oil (+22%).

• Smart Contract Platform Index: Solana (SOL) is the only coin that is up (+2% WoW) in this index. Chainlink (LINK) is down the most (-8% WoW). Ethereum is down (-2% WoW).
• DeFi Index: Compound (COMP) is up the most (+2% WoW) and Yearn.finance (YFI) is down the most (-11% WoW).
• Metaverse Index: The Virtua Kolect (TVK) is up the most (+9% WoW) and Axie Infinity (AXS) is down the most (-10% WoW).
• Privacy Index: Verge (XVG) is up the most (+5% WoW) and Secret (SCRT) is down the most (-14% WoW).
• Bitcoin: this is up +0.6% 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.)