Crypto markets have had a volatile week. Bitcoin began Monday at around $20,000 before plummeting to lows of around $18,500 on Wednesday. Since then, it has been rallying – it is currently trading at around $20,100. However, ethereum has been outperforming. It is currently trading at around $1,700, up 14% from Wednesday lows compared to 11% for bitcoin.
The Merge
Ethereum’s outperformance is due to the euphoria surrounding the merge. Supporting the rally, we find that futures trading volume for ethereum outpaces that of bitcoin, whales are accumulating, and investors are betting on higher yields on staked ETH (see our latest ethereum update for the details).
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Crypto markets have had a volatile week. Bitcoin began Monday at around $20,000 before plummeting to lows of around $18,500 on Wednesday. Since then, it has been rallying – it is currently trading at around $20,100. However, ethereum has been outperforming. It is currently trading at around $1,700, up 14% from Wednesday lows compared to 11% for bitcoin.
The Merge
Ethereum’s outperformance is due to the euphoria surrounding the merge. Supporting the rally, we find that futures trading volume for ethereum outpaces that of bitcoin, whales are accumulating, and investors are betting on higher yields on staked ETH (see our latest ethereum update for the details).
A Hawkish Fed
That said, hawkish Fed sentiment continues, with Chair Jerome Powell speaking at Cato Institute’s Monetary Conference yesterday. The key takeaways were that Powell wants the labour market to cool off to ease services inflation (services make up 75% of the CPI weights) and that inflation was a global phenomenon. We think 75bps is likely at the next Fed meeting.
Regulation
More regulatory headwinds have also entered the mix. The White House Office of Science and Technology cited the electricity usage of (proof-of-work) digital currencies as contributing to additional pollution in a recent report. It called for the development of ‘evidence-based environmental performance standards for the responsible design, development, and use of environmentally responsible crypto-asset technologies’ to help reduce environmental impact.
But importantly, if such measures fail, ‘Congress might consider legislation, to limit or eliminate the use of high energy intensity consensus mechanisms for crypto-asset mining.’ Ethereum is about to shift away from the energy-intensive proof-of-work consensus to proof-of-stake (which is more efficient), so this puts bitcoin (the largest and original cryptocurrency) in the firing line.
Performance of Our Indices
As for our various indices, performance is mixed. Our Smart Contract (+17% WoW) and DeFi (+13% WoW) indices are up most. Their outperformance is heavily influenced by the ongoing rally in Terra Luna Classic (LUNC, the original token of the Terra blockchain), which is up 90% over the past seven days. The latest stimulus for the LUNC rally is the community approval of a 1.2% tax on every transaction on the blockchain which will be burned to bring down the hyperinflated supply. Lastly, our Metaverse and Privacy indices are flat while Bitcoin (-4% WoW) is down.
Our Privacy (94%) and Metaverse (90%) indices are correlated most to bitcoin while our Smart Contract (82%) and DeFi (82%) indices are now correlated least to bitcoin (chart 3). On macro markets, bitcoin’s correlation to tech decreased but remains elevated while the correlation with 10Y yields (negative) and Gold (positive) jumped (Chart 4).
- Smart Contract Platform Index: all coins are up except for Fantom (FTM), Avalanche (AVAX), and VeChain (VET). Terra Luna Classic (LUNC) is up the most at 90% and Fantom (FTM) is down the most at 7%. Ethereum (ETH) is up 3%.
- DeFi Index: half of the coins are up, and half of the coins are down. Terra Luna Classic (LUNC) is up the most at 90% and Thorchain (RUNE) is down the most at 5%.
- Metaverse Index: performance is mixed with Ultra (UOS) up the most at 10% and The Virtua Kolect (TVK) down the most at 7%.
- Privacy Index: performance is mixed with Beam (BEAM) up the most at 6% and Dusk Network (DUSK) down the most at 7%.
- Bitcoin: this is down 4%.
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.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.