Crypto Index Tracker: Metaverse Leads Gains

The Federal Reserve (Fed) is almost certain to raise interest rates by 50bps at the FOMC meeting next week (14 December), in line with Dominique’s expectations. Despite Chair Powell indicating that the terminal rate will be revised higher in the December SEP, Dominique believes they will increase the SEP 2023 dot from 4.6% to 5.4%, markets are still implying a terminal rate below 5%. November’s strong non-farm payrolls (NFP) report, with 263,000 jobs added against expectations of 200,000 only, adds fuel to the fire strengthening the case for a hawkish stance within the FOMC. However, yesterday’s jobless claims figures, which rose by 4,000 to 230,000 in line with estimates, appear to have supported risk assets, with the S&P 500 and the Nasdaq Composite trading higher. Crypto markets have followed suit.

We continue to believe market consensus underestimates the terminal Fed funds rate (FFR). And even with the pace of hikes likely slowing to 50bp in December, we continue to expect a terminal rate closer to 8%.

Turning to market moves, bitcoin is currently trading at c.$17,200 (+1.5% WoW) and ethereum is currently trading at c.$1,300 (+0.6% WoW). Over the past 24 hours, ethereum (+4.5%) has outperformed bitcoin (+2.6%) as ethereum developers set a tentative deadline of March 2023 for ethereum’s next upgrade (the Shanghai upgrade) yesterday. After the Shanghai upgrade, stakers/validators will be able to withdraw their funds and any associated staking rewards.

Performance of Our Indices

Changes in our crypto indices were small over the past week. Our Smart Contract (+1.9% WoW) and Bitcoin (1.5% WoW) indices are up the most while our Privacy index (-1% WoW) is down the most (Charts 1 and 2).

Our Smart Contract (+97%) and Metaverse (+96%) indices are correlated most to bitcoin, while our Privacy (+95%) and DeFi (+93%) indices are least correlated to bitcoin (Chart 3).

On macro markets, bitcoin’s correlation to the S&P 500 (-35%) and the NASDAQ (-41%) 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 (-42%) is also negative. Bitcoin is currently only positively correlated to 10Y yields (+33%) and oil (+25%).

• Smart Contract Platform Index: Eos (EOS) is up the most (+7% WoW) and Chainlink (LINK) is down the most (-9% WoW). Ethereum is up +0.6% WoW.
• DeFi Index: Thorchain (RUNE) is up the most (+8% WoW) and 1Inch (1INCH) is down the most (-13% WoW).
• Metaverse Index: Axie Infinity (AXS) is up the most (+21% WoW) and RedFOX Labs (RFOX) is down the most (-10% WoW).
• Privacy Index: Monero (XMR) is up the most (+2% WoW) and Beam (BEAM) is down the most (-6% WoW).
• Bitcoin: this is up +1.5% 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.)