September Cryptocurrency Macro Commentary

Key Highlights

• Bitcoin closed out the month of September on a negative note, falling 14.4% for the month, the third consecutive month of negative performance. Global asset class performance was book-ended by bitcoin and gold, with gold being the best performing major asset for the third quarter, up 4.5%, while bitcoin was down 23.8%.
• Bitcoin had its 3rd worst quarter since 2012, down 23.8%. Historically, the 4th quarter provides the most upside for cryptocurrency so there may be a rally into year end.
• Trading volumes on the CME were down in 3Q vs 2Q, but open interest remained the same, a positive sign, especially with the pending options launch in Q1 2020.
• The institutionalization of the asset class is happening, albeit slower than most people would like. Bakkt’s long-awaited launch was slow out of the gate, with 754 contracts traded from September 23–30.
• In September, bitcoin volatility fell to its lowest point since April 1st, hitting 36% — the next day bitcoin dropped 11% and volatility starting picking back up toward month-end.
• Bitcoin is usually the least volatile of the top 10 digital assets by market capitalization but spent the early part of the quarter with the highest volatility reading relative to its peers. As volatility faded for the quarter until the last few days of September, bitcoin receded to the lower part of the volatility band.
• In the third quarter, top 10 coins averaged a 44% loss. Ethereum was the only top 10 asset to post a positive gain in September, up 4%
• Bitcoin is still the second-best performing asset (+124%), trailing only Binance coin’s (BNB) 160% return for the year. However, BNB has not fared well as of late, down 51% in the quarter versus bitcoin’s 24% drawback, but it still leads due to its early-year performance.
• While bitcoin spot market volumes for the first three quarters of 2019 are 27% ahead of where they were in 2018, the monthly volume is down 58% on Coinbase and 48% on Binance from their peak year-to-date values. The three sequential months of lackluster volumes are the longest stretch since the first half of 2018 in which all six months had declining month-over-month volume
• Binance’s US exchange launch saw similar results as Bakkt’s institutional rollout. In the first seven days post-launch, 610 bitcoins were traded, approximately $4.5 million, versus Bakkt trading 754 bitcoin.
• Hash rates continue to hit new highs for bitcoin, but have plateaued for Ethereum.
• Bitcoin network transactions declined for the fourth straight month, down 15% from May’s high but are up 20% since the beginning of the year. Ethereum’s network transactions follow a similar trajectory, down 20% since June’s high but increased 20% for the year.

Market Overview

Bitcoin closed out the month of September on a negative note, falling 14.4% for the month, the third consecutive month of negative performance. After significantly outperforming every other major asset class in the second quarter, bitcoin was the largest detractor for the third quarter.

Global asset class performance was book-ended by bitcoin and gold, with gold being the best performing major asset for the third quarter, up 4.5%, while bitcoin was down 23.8%. Traditional assets saw their fair share of volatility during the quarter. The CBOE Volatility Index hit a high of 24.8, its highest recorded value since January 4, 2019. Elevated volatility and gold’s outperformance versus other major asset classes comes on the back of increased macroeconomic risks such as deflation, negative global rates, and the ongoing trade war with China.

There are many bitcoin supporters that point to it as a store of value and replacement for gold as reasons to add exposure, but we are very much under the impression that while that may be true for a decade-long view, the current use of cryptocurrency is as a highly speculative investment and most people treat it as such.

Bitcoin by Quarter

The fourth quarter has historically been the best three months for the asset, averaging a 112% return and exhibiting negative returns in only two of the last seven years

Historically, bitcoin struggles during the third quarter, and with a negative 24% return for 3Q19, it posted its fourth-worst quarterly performance since 2012. It’s a small sample size, but the fourth quarter has historically been the best three months for the asset, averaging a 112% return and exhibiting negative returns in only two of the last seven years (2014 & 2018). Seasonality is something that traditional asset followers are comfortable with, especially retail and other consumer-spending based industries, but it’s unclear what macroeconomic seasonality may influence the price of bitcoin. Given the small sample size, it’s hard to place credence in the findings, but this is crypto — it’s new, exciting, and ever-changing.

Institutionalization: Derivatives and Futures

The Bakkt futures launch on September 23rd was arguably the most hyped event in bitcoin’s recent history, as bitcoin proponents pointed to it as the opening of the institutional floodgates. Even with delays that lasted about a year, the launch was hailed as “the most bullish institutional event in bitcoin history” and “a historic moment” by crypto news outlets. Unfortunately, this appeared to be more of a buy the rumor, sell the news event. In total, there were 754 contracts traded (representing 754 bitcoins) in the last five business days of the month.

We are big proponents of Bakkt and applaud their efforts to help institutionalize the asset, especially with regards to the enterprise value and commercial applications. It is apparent that the floodgates opened but there hasn’t been a wave of interest behind them at this time. To our surprise, the Bakkt contracts are not tradeable or even listed on Bloomberg as of month-end. A second institutional product that launched in September saw similar results. The VanEck Solidx Bitcoin Trust launched on September 4th and was able to attract only $530k from Qualified Institutional Buyers (QIBs) by month-end. The lack of institutional participation may have to do with the recent pullback in bitcoin’s price or because global macro events have institutions in a risk-off mode. Whatever the case, we are going to be watching the adoption of both products closely.

The CME futures got off to a slow start following their record-setting June with over $7 billion in notional volume traded, but in September almost $4 billion changed hands — the second-highest month since inception and 33% above the third-best month (March 2018). Average daily open interest also came within 3% of June’s record, tallying approximately $110.3 million in September. As usual, futures interest picks up in the quarterly expiration, but we are still impressed with the amount of trading and open interest as it shows considerable growth from 2018.

Furthermore, the CME announced they will be listing options in the first quarter of 2020, which bodes well for the asset class. Interest in options trading has skyrocketed and as reported by Skew, over $3 billion traded on Deribit in the third quarter, boasting a 20% increase quarter-over-quarter. Overall, we view the 3rd quarter to be positive for derivatives as new highs in average quarterly daily open interest on the CME, Bakkt’s launch (finally!), record options volume on Deribit, and a pending CME options launch in Q1 2020 — all pointing toward a bright spot in the ongoing debate of the institutionalization of the asset class.

Volatility

As we reported to Forbes on September 22nd, the 30-day volatility of bitcoin fell to 36% during the month, the lowest since April 1st kicked off a parabolic rally in the asset. The next day, bitcoin fell 11%, and volatility has since ticked up — closing the month at 54%. Bitcoin’s shorter-term volatility declined rapidly into the latter half of the quarter, but it appears that we may be at an inflection point. The spread between the 30-day and 60-day volatility is the tightest it has been since late July, currently sitting at 7.5% after starting the month with a 33% deviation.

Bitcoin is usually the least volatile of the top 10 digital assets by market capitalization but spent the early part of the quarter with the highest volatility reading relative to its peers. As volatility faded for the quarter until the last few days of September, bitcoin receded to the lower part of the volatility band. Its peers preceded bitcoin’s uptick in volatility late September as altcoins experienced a sizeable increase in volatility starting a few weeks earlier. In fact, the volatility band range of the top 10 coins at the end of September was the widest for the third quarter, with bitcoin returning to normalcy at the lower end of the range. The average volatility of the top 10 coins closed the month at 92%, well above bitcoin’s close of 54%.

VIX and Bitcoin Correlation Receding

Last month we highlighted short-term correlation trends that were apparent in high-cadence data of bitcoin and the VIX Index. While inconclusive on a longer time horizon, we zeroed in on the elevated relationship when the VIX index was around $20. The Volatility Index fell from its lofty values near the end of August. It held slightly above its long-term average throughout September, and the correlation to bitcoin receded with it.

Top 10 Price Weakness

September capped off a challenging quarter for altcoins in particular, with top altcoins down more than bitcoin for the quarter, averaging a 44% loss since June 30th. Ethereum fared well during the latter half of September and was the only asset in the top 10 to have a positive return for the month. In total, seven of the top assets outperformed bitcoin in September marking the first month since May in which bitcoin was not the performance leader.

Bitcoin is still the second-best performing asset (+124%), trailing only Binance coin’s (BNB) 160% return for the year. However, BNB has not fared well as of late, down 51% in the quarter versus bitcoin’s 24% drawback, but it still leads due to its early-year performance. Binance turned off access to United States IP addresses on its leading exchange in September. We believe this has a lot to do with the weakness in BNB, utilized by many as a base pair for altcoins, as well as a utility to receive a discount on trading fees. Binance launched its US exchange in mid-September; and while BNB is listed on the US exchange, there was much speculation pre-launch as to whether or not the BNB would be available to US traders.

As of quarter-end, four of the top 10 assets are now negative for the year, with Stellar’s (XLM) price almost cut in half since the year started. We have often discussed how we believe entrants to the market, especially on the institutional level, are only interested in gaining beta exposure to the crypto asset class through bitcoin given its resiliency relative to other top digital assets. Bitcoin leads the pack in terms of performance since April when the rally started and has been more resilient in the drawdown. Altcoins had an early 2019 spurt of performance but failed to keep pace during the second quarter, and in the third quarter got hit substantially harder.

Ethereum Revival?

Ethereum has shown signs of life throughout the year, but the last few months have been extremely challenging. Last month, we highlighted the massive performance gap as bitcoin returned 160% through August, while Ethereum was up only 31% for the year. Now at the end of September, bitcoin has returned 124% versus Ethereum’s 36% — still significant, but the performance gap is closing with Ethereum being the only top 10 digital asset to post a positive month.

Ethereum’s price action in September relative to bitcoin was a significant mean reversion event. From the end of June to August, rolling standard deviations of the average residual spread continued to widen to levels not seen since 2015. They started to revert at the beginning of September and Ethereum finished the month with an 18% outperformance versus bitcoin.

Spot Market Volumes Continue to Decline

General market interest has been declining as shown in the significant decline in spot market volumes throughout the third quarter. While bitcoin volumes for the first three quarters of 2019 are 27% ahead of where they were in 2018, the monthly volume is down 58% on Coinbase and 48% on Binance from their peak year-to-date values. The three sequential months of lackluster volumes are the longest stretch since the first half of 2018 in which all six months had declining month-over-month volume. Coinbase’s bitcoin volume is now 80% off of its all-time high in December 2017, while Binance fell below its February 2018 volume metrics by 1% and is down 50% since its June 2019 record high of $24 billion.

Binance’s US exchange launch saw similar results as Bakkt’s institutional rollout. In the first seven days post-launch, 610 bitcoins were traded, approximately $4.5 million, versus Bakkt trading 754 bitcoin. Both are off to a slow start, but we view the fact that Binance went to this considerable effort to appease US regulators as a positive sign and expect liquidity to grow over time.

Blockchain Network Health

A 40% drop in bitcoin’s hash rate was widely reported as the reason for the 11% decline in bitcoin’s price on September 24th but has since been debunked as a data error. According to data collected by Digital Assets Data, bitcoin’s hash rates, which measure the processing power of the network, continue to hit new highs and have climbed 55% since the beginning of the year. Ethereum had seven months of positive growth through August, but plateaued in September, dropping 2% month-over-month.

Bitcoin network transactions declined for the fourth straight month, down 15% from May’s high but are up 20% since the beginning of the year. Ethereum’s network transactions follow a similar trajectory, down 20% since June’s high but increased 20% for the year. The multi-month decrease during the third quarter is not a bullish sign, but we see these metrics following price trends and the general uptrend since mid-2018 being positive for adoption and social interest.

Looking forward to next month

Bitcoin broke through key support in September, posting its third straight month of negative return while volatility hit a four-month low during the month. The ongoing underperformance of altcoins and bitcoin’s dominance continue to be of focus for us, although there was a bit of a reversal as bitcoin, the top 10 performance leader for three straight months, closed the month with 7 of the 10 top assets outperforming. Ethereum was the only top 10 asset to post a positive return in September, and we will be watching for this to continue. Spot volumes are down again this month but CME futures volume continues to grow. We will be interested to watch Bakkt’s adoption this month and feel that this is a key barometer for institutional adoption.

Tracking all the developments and market moves in September only leave us more excited to see how October and the rest of 2019 will play out. If you would like to receive our monthly market commentary again next month, please sign up here or check out our website at www.blockforcecapital.com

The opinions and data presented herein are not investment advice and are for informational purposes only and should not serve as the basis of any investment decision. Information is given in a summary form and does not purport to be complete. Information and data have been obtained or derived from sources believed by Blockforce Capital to be reliable, however, Blockforce Capital does not make any representation or warranty as to its accuracy or completeness. The sole purpose of this material is to inform, and in no way is intended to be an offer or solicitation to purchase or sell any security, other investment or services, or to attract any funds or deposits. Past performance does not guarantee future results.

DISCLOSURE: Blockforce Capital manages investment vehicles that invest in and hold digital assets, including the digital assets discussed in this article.