Weekly Market Report - 23rd February 2019
This weekly report aims to provide an overview of the crypto markets focusing on secondary trading. Though nothing here is investment advice, we hope this provides some useful and targeted information.
Weekly Market Report - 23rd February 2019
As we approach Ethereum’s Constantinople hard fork, the market has become increasingly volatile. This week’s report looks into the price behavior of several coins around hard forks in the past, and identifies trading patterns in those times.
Market Overview
We are focusing our market overview on the top 100 tokens from CoinMarketCap for now and the sector classification is roughly in line with what MyToken uses with some minor modifications. To be sure, we will continuously be 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:
STORJ, TOMO
Coins that dropped out from the top 100 coins compared with last week:
KCS, DGD
Rolling Returns of the Top 100 Tokens by Sector
Returns of the top 100 Tokens by sector from January 22, 2019 to February 22, 2019
Returns vs Volatility
Mean Daily Return vs Volatility from January 22, 2019 to February 22, 2019
We abbreviated the name 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 November 22, 2018 to February 22, 2019. The 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 stable coins and education (since there is only 1 token here). Stablecoins having a 0.29 correlation with BTC and 0.27 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 — ETH Price and Block Reward Reduction
Starting from February 2019, the overall crypto market has seen strong gains with multiple tokens surging well above 10% over the past week. Among these top gainers was Ethereum, whose price has risen from $123 to $149 between Feb 17 and Feb 20.
For Ethereum, one of the main reasons for such price increase relates to its upcoming Constantinople hard fork. Different from recent hard forks such as the Bitcoin ABC and SV last November, this is a planned upgrade that has received support from the majority in the ecosystem. Apart from a number of improvements for the network, the upgrade will reduce future block rewards from 3 to 2 ETH. The so-called “Thirdening” will reduce the future supply growth of ETH and limit the impact of inflation. With a current average block time of 20 seconds and a circulation supply close to 105 million ETH, the market has an estimated annual inflation rate of 4.5% but will reduce to 3% once the upgrade is completed. In theory, given the same level of demand, reducing the inflation rate and expected total supply should push up prices for platform tokens such as ETH.
Originally the Constantinople was expected to occur at the end of October 2018. However, due to a “consensus issue” that was discovered during testing on Oct 13, 2018, it was decided that the upgrade would be delayed to January 2019. As shown below, Ethereum prices saw no signs of recovery in late October to November after the announcement of the delay.
In early December 2018, it was announced that the upgrade everyone had long waited for would finally go live on January 16. Starting from mid-December, the price of Ethereum surged nearly twofold. Unfortunately, the upgrade was once again postponed after a vulnerability discovered just one day prior to launch. The expected launch date was then rescheduled to Feb 27. As we move closer to the launch date, the Ethereum market seems to have started another rally.
To evaluate if the effect “Thirdening” would actually cause an impact on ETH prices, we decided to take a look at past cases. A similar block reward reduction had occurred before on the Ethereum blockchain in 2017 during the Byzantium hard fork, where block rewards were reduced from 5 to 3 ETH. Below is a look at the price performance of ETH two months before and after the Byzantium upgrade. On September 18, 2017, an announcement was made that testing had been completed and the hard fork was expected to occur on October 16th. Prices began to increase around time, leading up the actual event. However, if we look at the price relative to BTC, it seems that ETH did not outperform the market and that the upgrade did not contribute much to the price increase.
Similar to the Constantinople hard fork, the reduced block reward in the Byzantium hard fork was only one out of the many changes made in the upgrade. Below we look at a special case for HDAC where changing the block reward and limiting inflation served as the sole purpose of the upgrade.
HDAC is a blockchain-based IOT contract platform that has its own native coin HDAC. Originally the block reward was set at 5000 coins per block. In late 2018, the company decided to change its coin economy by reducing its block rewards and total supply. In October 2018, the company initiated a vote to reduce block rewards from 5000 to 2500 HDAC. The vote concluded on October 15 and went into effect three days later. After the updates were made on the source code, the price of HDAC doubled within the next three days. On December 20, 2018, the company proposed another plan to further cut block rewards down to 500 HDAC and lower the total supply of HDAC from 12 billion to 2.8 billion coins. On the day of the announcement, prices jumped by 40%.
Ethereum Classic’s new monetary policy is another example showing how changes in coin supply could affect market prices. Originally the block reward system for ETC was similar to that of ETH, where the number of new coins would increase at a constant rate. In late 2016, developers for ETC proposed the ECIP 1017, a proposal suggesting the network to adopt a similar approach to the Bitcoin network, where block rewards would reduce by a percentage after reaching certain block heights, eventually creating an upper bound for total supply. For ETC, the plan was to reduce rewards by 20% for every 5 million blocks and have a max supply of 230 million coins. ECIP 1017 was presented on December 16, 2016 during an ETC meetup in London, and made its first changes to the network on December 12, 2017, where block rewards dropped from 5 to 4 ETC. It seems that these two events had boosted ETC prices around those times.
Bitcoin, the world’s first cryptocurrency, also has a block reward reduction plan embedded in its original design, where block reward would decrease by half every 210,000 blocks. The most recent halving occurred on July 9, 2016, with rewards dropping from 25 to 12.5 BTC. From the price performance chart below we see that a bull run was formed around one month prior to the event.
If we further zoom out and look at prices for the entire year, prices seem to have formed an upward trend throughout the year and that the halving was the only event to have made significant changes to the price movement. Although a number of market analysts pointed out in early 2016 that prices should remain stable during the event, as the effects of halving should have been priced-in months before, we still observe sharp rises in price and high volatility around the actual event.
Having discussed the effects of block reward reductions on market prices for different events, we plot the price performance for each of these coins relative to the US dollar 30 days before and after their associated events. The red line represents ETH price performance, in which the Constantinople upgrade is expected to launch on Feb 27, 2019.
From an economic standpoint, the reduction in block rewards in the Constantinople hard fork will bring positive impact to the network. However, we need to keep in mind that the recent price surge may be partly due to speculation. Therefore, whether or not the price surge will continue will be dependent on many other factors as well.
Data Source
We included data from sources such as CoinMarketCap for analyzing historical price performances, volatility, mean daily return, correlations between each sector, and MyToken for sector breakdown.
Stay Tuned Here
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