Weekly Market Report - 1st June 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 - 1st June 2019
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. 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: MXM, HC, ORBS, LA, R, NEX
Coins that dropped out of the top 100 coins compared with last week: NULS, CLAM, TFUEL, ELA, GBC, SAN
Rolling Returns of Top 100 Tokens by Sector
Returns of the top 100 Tokens by sector from April 30th, 2019, to May 31st, 2019
Returns vs Volatility
This is a look at the mean and total daily returns vs volatility for the 15 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 April 30th, 2019, to May 31st, 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 March 1st, 2019, to May 31st, 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 similar to what we have observed in the past week with the exception of the computing/mining pool sector. Its correlation with the crypto market has dropped from 0.69 to 0.17. This is mainly due to Maximine Coin returning to the top 100 tokens. The token saw a significant price surge over the past week and its market cap has now exceeded $88 million.
Focus Spotlight — Cryptoeconomic Indicators
The cryptocurrency market has remained volatile for the past few years. For investors, it is always important to evaluate the fundamentals of an asset before making any investment decisions. In the traditional world of finance, professional investors often utilize valuation models such as discounted cash flow analysis and ratio based valuations to estimate a stock’s value.
Given that most cryptocurrencies are not securities issued by an entity, it is rather difficult to determine the value of a token based on its future cash flow or dividend payments. Over the past two years, a new study of cryptoeconomic analysis techniques has emerged, in which crypto is evaluated based on market data as well as information derived from on-chain transactions. In the following, we will introduce two widely known metrics- NVT and MVRV.
One of the most popular metrics is the Network Value to Transactions (NVT) ratio, defined as the total market cap divided by the daily transaction volume on the blockchain. The ratio was introduced in 2017 to create an equivalent of the price-earnings ratio for Bitcoin. The total value of transactions flowing through the network is used as a proxy for the utility provided by the network, serving as a substitute for the earnings component.
The NVT ratio is primarily used to identify bubbles and to detect sharp increases in network value. However, a major drawback for NVT it that it only spikes after a bubble has peaked, which is when the market has already begun its correction phase. This is mainly due to the fact that in the short run, prices change the fundamentals. In other words, when there is a sharp increase in price, growth in trading activity on crypto exchanges (off-chain transactions) is often followed by a growth in on-chain transactions as investors quickly make deposits and withdrawals from the exchange wallets. As a result, the on-chain transaction volume, the indicator for the network’s utility, experiences a sudden surge, thus lowering the NVT ratio even though the market may be severely overbought.
In early 2018, the NVT Signal was introduced, in which the daily transaction volume is replaced by its 90-day moving average. This was viewed as an alternative with improved predictive power.
The chart above shows the price of Bitcoin and the NVT signal using a logarithmic scale. As displayed, the NVT signal spiked twice in 2013, which were followed by major price corrections. The same occurred during the crypto bull-run in late 2017, where the NVT signal jumped above 100 in December 2017, indicating that Bitcoin was significantly overvalued. Currently, the NVT ratio is around 100, which is relatively high compared to the last decade. However, the NVT has been on a steady climb over the past few months. Thus compared the sudden spikes in 2013 and 2017, it is less likely that the market will enter a major correction in the near future.
Market-Value-to-Realized Value (MVRV) is another ratio used to evaluate the fair value of a token. While market value is derived from the token’s market cap, assuming that every token holds the same value, realized value counts the value of each token separately. The price of each token is based on the market price at the time of its last on-chain transaction. This adjusts for the difference between the price discovery at exchanges and the value of lost or unmoved coins at a certain point of time.
Bitcoin’s MVRV is shown in the area graph above. Similar to what we have observed previously, the ratio peaked during late 2013 and 2017, signaling extreme overbought conditions, which were immediately followed by significant market drops. Conversely, the market saw strong reversals after the MVRV ratio plunged below 1.
Although many investors use the NVT Signal and MVRV ratio to identify market tops and bottoms, with less than a decade of Bitcoin’s price data, it is difficult to define the upper and lower bounds for the two metrics.
Given that the crypto market has defied forecasts based on past evidence multiple times already, decades more of data may need to be collected before these indicators have sufficient predictive power. Therefore, in addition to relying on price indicators, it is important that investors still conduct thorough research and fully understand the fundamentals of crypto assets before making any investments decisions.
Thank you for reading this week’s report! Please leave a comment below to share your thoughts and ideas on crypto trading!
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; CoinMetrics and Wooboo Charts for NVT and MVRV visualizations.
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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