Weekly Market Report - 27th April 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 - 27th April 2019
For most investors, the main concern of trading cryptocurrency is its extreme volatility. Luckily, crypto derivatives are here to offer hedging solutions. At the same time, some products also allow traders to take leverage and enjoy greater flexibility in speculation. To understand which products are most suitable for you, check out this week’s report!
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:
DGD, ETN, ORBS, MONA, RDD
Coins that dropped out of the top 100 coins compared with last week:
LOOM, WICC, TRUE, BIX, PIVX
Rolling Returns of Top 100 Tokens by Sector
Returns of the top 100 Tokens by sector from March 27th, 2019, to April 27th, 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 March 27th, 2019, to April 27th, 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 January 27th, 2019, to April 27th, 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. The correlation is similar to what we have observed in the past week. Within the cryptocurrency market, excluding stablecoins, the computer power/mining pool sector shows the least correlation with the remaining sectors due to the price performance of Maximine Coin. For those interested, we have covered analysis on the project behind this token in last week’s report.
Focus Spotlight — Intro to Crypto Derivatives
For most investors, the main concern of trading crypto is its extreme volatility. Unlike the traditional market, the crypto market is largely unregulated and speculation is the main driver for such volatility. Investors that pour their wealth into small-cap tokens could lose an important proportion of their assets within minutes.
As crypto trading becomes increasingly popular, derivative products have been introduced to the market to offer hedging solutions. At the same time, some products have also been introduced allowing investors to leverage their position for greater flexibility in speculation. For those unfamiliar, a derivative is a contract between two parties in which its value is derived from the price of underlying assets. There are many types of derivatives, with the most popular one being futures contracts. A future contract is an agreement in which an asset is bought at a predetermined price but delivered at a specified time in the future.
Crypto futures were first introduced in late 2017 by Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE). Both exchanges offer cash-settled contracts, meaning that cash payment is made during settlement instead of actual Bitcoin transfers. There are a number of differences between the two in terms of contract size, ticks, trading time and margin rates. We select the two contracts that have the closest expiration dates and summarize their differences in the chart below.
The first two Bitcoin futures contracts were approved and launched towards the end of the crypto boom in December 2017. While both started with roughly the same notional trading volume, the volume on CBOE began to fall short compared to that of CME over the course of 2018. In March 2019, CBOE announced that Bitcoin futures will no longer be traded on their platform after the last contract expires in June. One possible explanation for such poor performance may be that in terms of the contracts’ price discovery method, CBOE relies on the auction on Gemini exchange, whereas CME uses an aggregate price of multiple spot markets, making the product appear to be more reliable for investors.
For derivative contracts offered by crypto exchanges, the two largest players in the market are currently BitMEX and OKEX. In addition to futures contracts, the two exchanges also offer perpetual contracts, which is similar to a future contract that has no expiry or settlement. While the value of the perpetual contract is derived from spot markets, they are more flexible as traders can go both long or short and leverage their positions for a greater potential return. When traders take leverage, they are essentially borrowing funds from a lender thus are charged interest. Perpetual contracts charge a funding fee which is based on the funding rate. The calculation for this rate varies across different exchanges. However, the rate is mainly the percentage difference between the price of the perpetual contract and the spot index. When the market is bullish and prices in the perpetual market are rising more rapidly than the spot market, the funding rate will be positive. At the end of the funding period, those with a leveraged long position will pay the those with shorts and vice versa.
When trading these contracts, important things to consider include market liquidity, leverage ratio, trading fees, and etc. We summarize the main differences between the perpetual contracts offered by BitMEX and OKEX in the following chart.
In terms of Bitcoin perpetual contracts, the two share similarities in their fee structure, leverage ratio and required margins. One main difference, however, is their loss mechanisms, which is how exchanges handle losses when an account goes into force liquidation but the mark price reaches the bankruptcy price. While both exchanges have set up insurance funds to mitigate these losses, BitMEX adopts the system where the positions of opposing traders are deleveraged automatically when the bankruptcy price is hit. In contrast, Okex adopts the clawback mechanism in which additional losses are allocated to users that have a net profit for the day.
Currently, the trading volume for perpetual contracts is significantly higher on BitMEX, as OKEX has been more focused on developing their futures markets and that their perpetual contracts were launched more recently in late 2018. However, OKEX has quickly caught up with BitMEX in terms of its high leverage ratio and is now offering many more trading pairs on their platform. In addition, OKEX may be more appealing to institutional clients as accounts with higher tiers enjoy overall lower trading fees.
For crypto investors, perpetual contracts offer a great way to profit in this volatile market as it allows high leverage and requires little margin. By the same token, investors could lose their funds more quickly when the market drops. We hope that after reading this article, readers can have a better understanding of the differences between futures and perpetual contracts as well as the risks associated with these products.
Thank you for reading this week’s report! Please leave a comment below to share your 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; CME and CBOE for Bitcoin futures contract information; and BitMEX and OKEX for perpetual contracts 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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