Weekly Market Report-Sep 14th, 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:
RDD, OCEAN, WIN, XMX

Coins that dropped out of the top 100 coins compared with last week:
EGT, FTM, PAI, ZEN

Rolling Returns of Top 100 Tokens by Sector

Futures vs Spot Premium

Here we are using the daily closing prices of BTC/USD futures contracts from OKEx and Bitmex. Futures premium is the price difference between futures and spot, 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

The chart above shows the 10-year US treasury (inverted) and the price movement of gold and Bitcoin. The rise of pessimism towards the global economy and loss of trust in traditional markets have pushed yields on U.S. Treasuries to a yearly low. As a result, the opportunity cost of holding non-income hedge assets such as gold and Bitcoin has dropped throughout the year.

BTC vs Gold vs U.S. Treasury Yield

Bitcoin price versus gold and 10-year US treasury yield for the past year

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 — Ethereum Istanbul Hard Fork

The Ethereum network has undergone a total of 7 hard forks since its launch in 2015. Following the latest Constantinople upgrade earlier this year, Ethereum developers have gathered to plan the next hard fork- Istanbul.

The hard fork is supposedly the last in a series of updates for the Ethereum network. Though not part of the original roadmap, it is nonetheless one of the most important upgrades that will change the future of Ethereum. Once completed, the current network will be ready for the Ethereum 2.0 Serenity, which will open access to the new PoS blockchain.

Istanbul consists of two stages which are scheduled to launch separately in October 2019 and Q1 2020. The first phase includes 6 new modifications with the goal of increasing the network’s scalability, security and interoperability. The second phase focuses on the implementation of the Progressive Proof-of-Work (ProgPoW) protocol. In the following, we will explain each in detail.

Stage One

On September 7th, 2019, Hudson Jameson, community manager of Ethereum Foundation announced plans to activate Ethereum’s Istanbul upgrade on the Testnet in October this year. The update is composed of 6 Ethereum Improvement Proposals (EIPs):

EIP-152 Blake2b F compression function precompile: As explained by the developers of Zcash, the EIP would allow “BTC Relay-style interoperation between the Zcash and Ethereum blockchains.” BTC Relay is an open-source Ethereum contract that stores Bitcoin block heads and enables users to pay with Bitcoin access Ethereum DAPPs. The improvement, which will take the form of a precompile would also lower the amount of gas fee required for this operation by a considerable amount. As the need for cross-chain interoperability becomes increasingly apparent, Ethereum can utilize its smart contracts to their advantage to build a coordinating point between multiple blockchains.

EIP 1108 Reduce alt_bn128 precompile gas costs: The upgrade aims at repricing the cost of “ecadd, ecmul, and pairing check” precompiles. In short, this will make it easier to deploy new scaling and privacy solutions to the Ethereum blockchain in the future, as it was previously too expensive to fit these features into a single block.

EIP 1344 ChainID opcode: The EIP is designed specifically to prevent replay attacks between different chains. A replay attack is when a user sends a transaction on one blockchain but the transaction is repeated on another blockchain. This usually occurs right after a hard fork, where the address and private key are the same for the two chains. By adding a chainID to each signature, the contract and transaction cannot be executed on another blockchain, which eliminates the risk for a replay attack.

EIP 1884 Repricing for trie-size-dependent opcodes: The EIP aims to rebalance gas expenditure and resource consumption. With the current imbalance, attackers could fill blocks with underpriced operations that require excessive CPU time and memory. The improvement not only prevents spamming attacks but also allows users to maximize the block gas limit while having a more stable processing time.

EIP 2028 Calldata gas cost reduction: This proposal calls to reduce gas cost from its current value from 68 gas per byte to 16 gas per byte. This would increase the bandwidth and improve scalability as more data can fit into a single block. The drawback, however, is that larger blocks may lead to increased network delay. Additional network tests on the mainnet are needed in the future to determine the optimal gas cost for the network.

EIP 2200 Rebalance net gas metering for SSTORE operations: The improvement proposes to modify the amount of gas charged for EVM SSTORE operations. EVM, or Ethereum Virtual Machine, is the sandbox responsible for the storage and execution of smart contracts. The current calculation method for storage cost, though initially designed to fairly reflect the cost of resources consumed by an operation, leads to unnecessary costs for a sequence of operations that require multiple updates. With this update, smart contracts would see a decrease in gas consumption which would ultimately benefit the entire network especially Dapps that are heavily reliant on smart contracts.

Stage Two

Istanbul 2.0 is scheduled much later than the first stage due to the fact that changes in the second stage require more time for testing. There is a total of 8 EIPs, with the spotlight being EIP 1057 ProgPoW.

ProgPoW has been a hot topic in the Ethereum community for years. Ethereum was created to become a decentralized global network supported by thousands of nodes. However, similar to Bitcoin, its proof-of-work model is heavily energy-inefficient. With its current state, mining giants have substantial control over the network. The PoS consensus, which Ethereum 2.0 plans to adopt, is believed to be more environmentally sustainable and fairer given that it weighs much less on computing power.

The problem, however, is that migration takes time. With the existing PoW protocol, ASIC miners enjoy the efficiency advantage over GPU miners. The ProgPoW services as a transitional measure to “close the efficiency gap available to specialized ASICs.” Once the upgrade is completed, ASIC miners would have significantly less control over the network, which allows the network to become more decentralized.

By the end of the Istanbul upgrade, the Ethereum network will have become a scalable blockchain with an increased level of efficiency, security, stability along with reduced fees, all without sacrificing decentralization and flexibility. Meanwhile, changes in its consensus algorithm will pave way for the upcoming Ethereum 2.0 upgrade.

The hard fork is expected to finish by the end of Q1, though previous hard forks suggest that there is a high chance of delay.

Constantinople

As mentioned previously, the Ethereum network has completed a number of hard forks over the past few years with the most recent one being Constantinople. Constantinople was unique given its so-called “thirdening” effect in which block rewards were reduced from 3 to 2 ETH per block.

The upgrade was originally planned for October 2018. However, due to issues discovered during its testing phase, it was postponed to 2019. Following the announcement, the price of Ethereum began to fall. In mid-December, ETH started another wave of rally, as the upgrade was expected to go live in mid-January. Once again, a new vulnerability was discovered during testing and the upgrade was pushed back to late February. As one may expect, ETH prices took a nosedive immediately after.

In the following, we plot the price performance of ETH around the three recent ETH upgrades. Here we are only showing planned hard forks that were included in Ethereum’s original roadmap.

As displayed above, prices tend to rally prior scheduled upgrades, as these changes are designed to increase the value of the network as well as its native token. Meanwhile, prices are most likely to fall following announcements of delay and the completion of upgrades, which suggests that part of the price rally is attributed to speculation.

Istanbul is scheduled to launch on Ethereum’s three Testnets starting October 2019 and complete its first stage of upgrade on its Mainnet by the end of the year. As we can see from Constantinople, vulnerabilities are likely to be discovered during testing which often leads to delays for Mainnet launch. Regardless, these changes will likely provide upside potential to ETH and certain project tokens in the upcoming months.

Thank you for reading this week’s report! We will be temporarily pausing our biweekly research updates for the upcoming weeks. For more updates please follow us on Twitter, Facebook and Instagram!

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 price data; Alternative.me for fear and greed index; TradingView for US treasury yield and price of gold; and Github for EIP 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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