Crypto Index Tracker: SEC Takes Aim at Crypto

It has been a volatile week for crypto markets following back-to-back SEC litigations against Binance and Coinbase – two of the largest cryptocurrency exchanges in the world by trading volume.

On Monday, the SEC filed charges against Binance and Binance CEO Chengpeng Zhao, alleging that they blatantly disregarded federal securities laws and ‘enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk.’

Coinbase was not spared either. The SEC filed a lawsuit against Coinbase on Tuesday (a day after filing charges against Binance), alleging ‘Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities.’

We expect the Federal Reserve (Fed) to pause next week despite no progress on disinflation and no evidence of a macro impact of a credit crunch since the April FOMC meeting., highlighting the fact that the Fed’s reaction function has become more dovish. Markets are pricing around an 80% chance of a 25bp hike between the June and the July meetings and while we believe that this is currently overpriced, we do still expect two hikes by end-2023 based on no expectation of significant disinflation over the remainder of the year.

Performance of Our Indices

This week, all indices are in the red with our Bitcoin Index (-1.2% WoW) down the least and our Privacy Index (-9.3% WoW) down the most.

Our Smart Contract Index remains most correlated to our Bitcoin Index (+88%). Our DeFi Index trails behind (+87%). Meanwhile, our Privacy Index and Metaverse Index are correlated the least (+78% and +80%, respectively; Chart 3).

Bitcoin is now negatively correlated with oil (-20%) compared to +14% last month. Similarly, it is also negatively correlated with 10Y yields (-13%, last month: +22%).  Equity correlations have come down slightly with our Bitcoin Index now +33% correlated to the Nasdaq (last month: +42%) and +21% correlated to the S&P 500 (last month: +39%, Chart 4). Elsewhere, it’s correlation to gold (+3%) is negligible.

• Smart Contract Platform Index: Terra Luna Classic (LUNC; +17.6% WoW) gained the most while Cardano (ADA; -11.5% WoW) extended losses. Ethereum (ETH) is down -0.8% WoW.
• DeFi Index: Terra Luna Classic (LUNC; +17.6% WoW) gained the most while 1inch continued to struggle (1INCH; -12.7% WoW).
• Metaverse Index: RedFOX Labs (RFOX) was the only cryptocurrency that made gains in this index (a staggering +56.7% WoW) while Gala (GALA; -12.6% WoW) fared the worst.
• Privacy Index: All cryptocurrencies in this index experienced declines with Monero (XMR; -2.6% WoW) down the least and Beam (BEAM; -15.3% WoW) down the most.
• Bitcoin Index: is down -1.2% 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.)