Weekly Market Report-Aug 17th, 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.

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:
ODE, CCCX, ELA, ALGO, ECOREAL

Coins that dropped out of the top 100 coins compared with last week:
UUU, FST, SOLVE, NEXO, EKT

Rolling Returns of Top 100 Tokens by Sector

Futures vs Spot Premium

Here we are using BTC/USD futures contracts from OKEx and Bitmex. Futures premium is the price difference between spot and futures, normalized by the spot price.

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 –

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 by Sector

Correlation between daily returns of each sector for the past 90 days. 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.

Rolling Correlation With BTC

90-day rolling correlation between Bitcoin and the top 10 altcoins for the past 24 months

Fear and Greed Index

The fear and greed index is derived from two sources of data — 1. market data, which includes price volatility, momentum, volume, Bitcoin dominance, and 2. investors’ sentiment data, which includes Google search trends, social media (twitter sentiment analysis), and surveys conducted by strawpoll.com.

A value of 0 means “Extreme Fear” while a value of 100 represents “Extreme Greed”. In the event of “Extreme Fear,” investors may be overreacting and the market may be oversold, which presents a buying opportunity and vice versa.

Focus Spotlight — Crypto Dark Pools

Since the start of H2 2019, Bitcoin has been hovering around the $10,000 level with no signs of breakouts. The market cap is currently above $280 billion, twice as much as the beginning of the year, yet it is 60% below its all-time high in late 2017.

Though most crypto traders are holding a bullish outlook, one bad day, or a massive sell-off, could send Bitcoin prices spiraling, wreaking havoc across the entire crypto market.

To prevent wild market fluctuations, many crypto whales and institutional investors have moved to OTC markets and crypto dark pools. Despite that dark pools seems to be a relatively new concept in the world of crypto, they have been around in the traditional financial market for decades and have helped facilitate trades with massive blocks of shares.

What are Dark Pools?

In short, dark pools are private trading venues where buyers and sellers execute large trades out of sight of other traders. Since trades are off from a public order book, they are less likely to impact market sentiment and cause sudden price movements. This is crucial for traders that wish to place large orders without causing slippage. Furthermore, trading fees tend to be much lower compared to that of an ordinary exchange.

Currently, there are a limited number of dark pools in the crypto industry. Two crypto exchanges that operate their own dark pools are Kraken and Bitfinex. Kraken offers BTC and ETH crypto-to-fiat trading pairs and is available to all investors. However, they charge a minimum trading fee of 0.2%, which is not that different from a regular exchange. As for Bitfinex, information regarding their dark pool is only available to verified institutional clients.

The chart above lists some of the existing dark pools in the crypto market. Each has its unique fee structure and set of requirements. In terms of available markets, Republic Protocol (REN) is the only one to offer trading pairs other than BTC and ETH.

Ren is a protocol which allows private transfer of crypto between blockchains. The project is branded as the world’s first decentralized dark pool. It has recently gained widespread attention due to the price surge in late July. The project, currently in its testing phase, will likely face difficulties generating liquidity moving forward given their decentralized approach and limited partnerships with exchanges and trading platforms.

In the past few years, other trading platforms including TradeHill, LakeBTC, TradeZero have also launched their own crypto pools. However, these platforms struggled to gain substantial attention due to a lack of liquidity.

With institutional investors entering the crypto market this year, there is an increasing demand for liquidity and privacy. Nevertheless, building a successful dark pool in the crypto market may be far more complex than one might imagine.

Building the ideal crypto dark pool

In the traditional stock market, the U.S., for example, has over 50 dark pools, which in total represents 40% of the off-exchange volume as of 2018. Though dark pools are not available to the public, retail investors can still access indirectly via brokers. Traders are generally able to fill large orders with the best current bid and offer price, as set forth by the National Best Bid and Offer (NBBO) regulation.

The crypto market, on the other hand, does not have such an established infrastructure. Market fragmentation, in which trading is distributed across many different platforms, allows each to optimize accordingly to fit the needs of their users, yet causes serious drawbacks. According to CoinMarketCap, the crypto market, with $70 billion daily trading volume, has a total of over 200 “active” crypto exchanges. The stock market, in contrast, has around $70 trillion daily volume but only 60 major stock exchanges.

Though such diversity in the crypto market appears to be in line with blockchain’s core concept of decentralization, this leads to increased difficulty in aggregating trades from multiple platforms. As a result, dark pools struggle to generate sufficient volume to provide a competitive fee schedule and more importantly offer a suitable price discovery method.

Over the past year, we have seen a large number of hedge funds, market makers, exchanges, OTC and other trading platforms joining the crypto space. If one is able to connect these liquidity providers via a single dark pool, this could resolve the issue with market fragmentation while providing the needed liquidity to all market participants, ensuring greater efficiency across the entire ecosystem. Hopefully, we will see such a platform emerge in the crypto space sometime soon.

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 tokens and sectors; MyToken for sector breakdown; Kronos Research for OKEx and BitMEX futures premium; Alternative.me for fear and greed index.

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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