Crypto Index Tracker: Institutional Interest Drives Crypto Rally

Crypto markets have rallied this week, fuelled by well-known institutional players including BlackRock, Invesco, and Wisdom filing for spot Bitcoin ETF’s.

Institutional interest on the rise? Outside of the ETF filings, institutional interest in crypto has increased as EDX markets, a digital asset platform which is backed by financial heavyweights including Charles Schwab, Fidelity Digital Assets, Citadel Securities, and Sequoia Capital, officially started trading. The EDX exchange allows trading in bitcoin, ethereum, litecoin, and bitcoin cash. Crucially, none of these foundational cryptocurrencies have been categorised as ‘securities’ by the SEC in their latest actions against Binance and Coinbase.

Markets continue to underprice the Federal Reserve (Fed). Markets are becoming more convinced that the Federal Reserve will hike in July,in line with our expectations. However, they are under-pricing the Fed for the remainder of the year. In the short term, the strong underlying inflation dynamics suggest the Fed is highly unlikely to cut rates in 2023 and instead is likely to implement the two additional 2023 hikes of the June SEP. Meanwhile, markets are pricing only one hike up to November and a cut afterwards.

Performance of Our Indices

This week, all indices are in the green with our Bitcoin Index (+17.1% WoW) up the most. All other indices are up between +8.7% and +12.4% WoW (Charts 1 and 2).

Our DeFi Index is most correlated to our Bitcoin Index (+80%). Our Smart Contract Index (+79%) and Metaverse Index (+78%) trail behind. Meanwhile, our Privacy Index is correlated the least (+74%, Chart 3).

Macro correlations are all negative (Chart 4), with bitcoin now negatively correlated to 10Y yields (-26%, last month: +41%), S&P 500 (-35%, last month: +40%), Nasdaq (-34%, last month: +36%), oil (-8%, last month: +19%), and gold (-10%, last month: +5%).

• Smart Contract Platform Index: Solana (SOL; +12.9% WoW) is up the most while Terra Luna Classic (LUNC; -2.8% WoW) is the only cryptocurrency in this index to experience a decline. Ethereum (ETH) is up +12.6% WoW.
  
• DeFi Index: 1Inch (1INCH; +16.5% WoW) is up the most while Terra Luna Classic (LUNC; -2.8% WoW) is the only cryptocurrency in this index to experience a decline.
  
• Metaverse Index: All cryptocurrencies in this index are up with RedFOX Labs (RFOX; +18% WoW) up the most while The Virtua Kolect (TVK; +9.9% WoW) is up the least.
  
• Privacy Index: All cryptocurrencies in this index are also up with Dusk Network (DUSK; +17.9% WoW) up the most while Decred (DCR; +0.5% WoW) is up the least.
  
• Bitcoin Index: this is up 17.1% 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.

Photo Credit: depositphotos.com

(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.)