Weekly Market Report - 16th March 2019
This weekly report aims to provide an overview of the crypto markets focusing on secondary market trading. Though nothing here is investment advice, we hope this provides some useful and targeted information.
Weekly Market Report - 16th March 2019
This week’s report looks into the stablecoins market and introduces some of the new projects that have gained popularity recently.
Market Overview
We are focusing our market overview on the top 100 tokens from CoinMarketCap and the sector classification is roughly in line with what MyToken uses with some minor modifications. To be sure, we will be continuously updating the sectors and their constituents as we develop a deeper understanding of the crypto ecosystem.
This week’s new participants in the top 100 coins:
WAN, BTT, THR, MXM
Coins that dropped out of the top 100 coins compared with last week:
QNT, ODE, LKY, AION
Since ODE was the only coin in the education sector, this sector is removed in this week’s market overview.
Rolling Returns of Top 100 Tokens by Sector
Returns of the top 100 Tokens by sector from February 13, 2019, to March 15, 2019
Returns vs Volatility
This is a look at mean and total daily returns vs volatility for the 16 sectors as well as the overall crypto and equity market. Some sectors only contain one or two coins/tokens while others have more than a dozen.
Mean Daily Return vs Volatility from February 13, 2019, to March 15, 2019
We abbreviated the names of several sectors to make it easier to view:
M = Market
DC = Digital Cash
CP/MP = Computing Power/Mining Pool
A/M = Advertising/Media
G/E = Gaming/Entertainment
C = Classics
D/GT = Dividend/Governance Token
E/T = Exchange Token
OC/I = Off Chain/Interoperability
Correlation Between Daily Returns of Each Sector
Correlation between daily returns of each sector from December 14, 2018, to March 15, 2019. Correlation ranges between -1 and 1. A correlation close to 1 or -1 means a very positive or negative relationship between the two subjects, respectively. A correlation close to 0 means no linear relationship between the two subjects.
The above figure shows the correlation between the daily returns of each sector. Correlations are very high between all sectors in crypto with the exception of stablecoins. Stablecoins having a 0.12 correlation with BTC and 0.14 with the crypto market is interesting to note since they are not supposed to move at all and should have near zero volatility.
Focus Spotlight — Stablecoins Market
Since the first edition of our research report, Kronos Research Team has been collecting market data and presenting an overview of the crypto market performance based on sectors. From the correlation matrix, we notice that over the past few months, stablecoins have had a correlation over 0 with the overall market, even though they were designed to be pegged to fiat currency and should have no relationship with other crypto assets.
If we look at USDT, the largest stablecoin by market cap, prices have fluctuated between $0.92 and $1.03 in the past 6 months, while forming an upward trend between October 2018 and January 2019.
To understand what influences the prices of stablecoins have, let’s first take a look at what they are. A stablecoin is a type of cryptocurrency that is pegged to another asset, usually US dollars. Stablecoins were introduced to offer traders a safe haven amid volatile markets, as converting between crypto and fiat is often costly and time-consuming. With stablecoins, traders can enjoy improved stability and easy liquidation during market drops.
To obtain these coins, traders first deposit their fiat to a reserved account held by a centralized entity like Tether, and receive the associated amount in stablecoins issued by the company on the blockchain.
While many criticize the legitimacy and security issues associated with these centralized platforms, traders are presented with an alternative option to obtain these coins directly on the blockchain. MakerDao is a decentralized organization that issues its own stablecoin DAI, where users deposit ETH as collateral to the smart contract and receive a percentage of the deposit in DAI. The process is similar to a fully automated crypto lending platform. Compared to Tether, this offers better transparency and security.
Although most stablecoins are 100% backed by fiat or crypto, they are often traded at a discount or premium. In late 2018, crypto traders began to question whether Tether had sufficient reserves to maintain its 1:1 ratio with the US dollar. The issue became increasingly controversial in the crypto space and on October 15th, 2018, USDT lost its peg and plummeted to a low of $0.92. With investors losing confidence in USDT, this presented an opportunity for new stablcoins to gain wide adoption, as Tether previously dominated nearly 99% of the market. As shown in the graph below, the total trading volume of stablecoins excluding Tether began to climb after mid-October.
Among those stablecoins that gained popularity during this time were TrueUSD, Gemini Dollar, USD Coin, and Paxos. Although these new projects adopt a centralized governance system and follow a similar business model to that of Tether, they place much greater emphasis on transparency and legality, promising independent account verifications and entrusting their funds to third-party custodians. Several even hired well-known accounting firms to complete audits to provide further assurance.
Now back to USDT, after the price drop in October, while many predicted an end for Tether, interesting enough, the price of USDT began to recover soon afterwards and even reached a high of $1.03 in January 2019.
If we look at the USDT market, the majority of its volume was traded against Bitcoin. While the overall crypto market saw another dip in mid-November, investors began switching their focus away from market valued coins such as BTC to those that provided price stability. Although stablcoins are backed by its pegged assets, their prices are still largely dependent on short term market demand. Therefore, the sudden drop in BTC prices may have boosted the stablecoins market between mid-November to late December, pushing USDT above its $1 pegged value.
While USDT is traded at a premium, the price of Bitcoin denominated in USDT is less expensive than that of USD. Therefore, a trader could arbitrage by first converting USD to USDT, purchase Bitcoin at a relatively lower price, transfer BTC to another exchange that offers BTC/USD trading pair, and finally selling Bitcoin at a higher price.
However, to complete the series of trades, a trader must bear transaction costs and be exposed to market risk. Suppose the price of Bitcoin plummets while the coins are being transferred to the second exchange, the trader will then face huge losses for holding the coins. Therefore, since the market sentiment remained bearish until the end of 2018, making such trades would be an extremely risky investment. This may be the reason why USDT was allowed to be traded at a 2% premium towards the end of December even though BTC prices recovered slightly.
With new stablecoins entering the market, the market is competing for better efficiency as well as improved security. Now that exchanges are starting to offer trading pairs between different stablecoins, traders can arbitrage such price differences without facing too much market risk. This will eventually allow stablecoin prices to become more steady relative to their underlying assets. As the crypto market expands, stablecoins will continue playing its role in facilitating market trades and provide greater convenience to the crypto space.
Data Source
We included data from sources such as CoinMarketCap for analyzing price movements, volatility, mean daily return, and correlations between each sector; MyToken for sector breakdown; and Tether, TrueUSD, USD Coin, Gemini Dollar, Paxos, and MakerDao websites for collecting stablecoins’ information.
Stay Tuned Here
KRONOS is a leading quantitative research firm based in Taipei, Shanghai and Beijing. We’re bringing new asset management strategies to the crypto world by leveraging our combined decades of experience trading in global traditional markets.
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