The Hard Fork – Weekly Market Commentary

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This Week’s Topics:

1) Rising interest rates could benefit Circle’s stable coin consortium members
2) XBT trading volume dominance falls as ETH, XRP gain share
3) University endowments jump into digital currencies

Indices Round-up

TradeBlock Index Asset1 Price ($) 7d∆2
XBX Bitcoin 6,241.20 -4.53%
LTX Litecoin 52.95 -7.80%
ETX Ethereum 197.81 -10.84%
ZCX Zcash 108.89 -11.61%
ECX Ethereum Classic 9.47 -12.01%
XRX Ripple 0.41 -12.10%
BCX Bitcoin Cash 441.11 -13.85%
1. Underlying Asset sorted in descending order by 7-Day Price Change.
2. 7-Day Price Change monitored from 10/07/2018 16:00 UTC thru 10/14/2018 16:00 UTC.

 

7 day price movers
Digital currencies rallied this morning after broadly trading down this past week. After several days of speculation around Tether’s true USD backing, it appears that traders could be losing confidence in the stable coin and moving into alternative digital currencies. Tether fell to an 18 month low this morning, while other digital currencies saw gains. The rally is in sharp contrast to last week when a series of negative news reports were released and global markets positioned for a risk-off environment. The largest leg down for digital currencies came on October 10, 2018, which coincided with a global equity market sell-off. Our ETX index, shown below, highlights the nearly 11% downward price move in ether that began around 9pm ET on October 10th.

Figure 1: ETX Index Price Crash

Data for chart sourced from the TradeBlock platform

Earlier that same day, US equities posted their third largest price fall of the year, with a daily decline of 3.29%. Global equities traded similarly, as the MSCI All World Country Index (ACWI) fell 1.82% on the day. Digital currencies, however, remain only modestly correlated with equities. Over the past 90 days, the correlation coefficient between XBT prices and the S&P 500 index (SPX) stands at 0.20. The 90 day correlation coefficient between ETH prices and SPX stands similarly at 0.19. 

One day prior on October 9, 2018, Juniper Research put out a report that concluded the digital currency market was facing an implosion. Juniper highlighted falling bitcoin transaction volumes, a failure of bitcoin to act as a safe haven during recent trade wars, and inherent valuation flaws as concerns. Additionally, global economist and noted digital currency critic, Nouriel Roubini, received widespread media coverage leading up to his Congressional testimony on Thursday October 11th in which he criticized digital currencies as a scam and in a price bubble. 

Rising interest rates could benefit Circle’s stable coin consortium members 
Circle recently launched its stable coin, USDC, which is backed by USD reserves. Circle has built out a separate entity, CENTRE, that will act as a consortium of member institutions with the goal of increasing decentralization of stable coin offerings. According to the white paper, CENTRE will act as a governance structure and networking entity that financial institutions opt into in order to mint new stable coins. Each member in CENTRE must go through a rigorous regulatory and compliance process that includes a test of their capital reserves and liquidity– common tests for US banking institutions. 

The CENTRE white paper states that these institutions are then responsible for issuing new coins into this network, such as USDC. This process works by which a customer, individual or institution, sends a cash deposit to a member of CENTRE, such as bank, that then mints the same USDC equivalent and sends the amount to the customer. The bank now has fresh cash deposits and the customer has newly minted stable coin. Unlike a typical customer deposit, the bank is not paying interest to the depositor on this reserve. When the customer (or counterparty to the original customer), comes back to this banking entity, they can exchange USDC for the same USD equivalent. During this time, however, it is reasonable to assume that these banking institutions would hold the cash deposit with the Federal Reserve Bank. As the FED raises interest rates, with one more rate hike expected this year and three rate hikes expected for 2019, these banks could stand to benefit as greater interest is paid on these cash holdings. 

XBT trading volume dominance falls as XRP, ETH gain share 
To construct a clearer picture of how trading volumes have changed across the space, we analyzed USD pair trading volumes* for the top three largest assets by market cap, XBT, ETH, and XRP. Year-to-date, trading volumes across all three assets measured in USD have fallen precipitously from a peak of nearly $80 billion in January (figure 2). 

 

Figure 2: Trading Volumes Measured in USD Value

Data for chart sourced from the TradeBlock platform
(*Exchanges: Coinbase Pro, Bitfinex, Bitstamp, Bittrex, Gemini, Kraken, itBit)

Further, while bitcoin trading volume dominance had risen since January, it has recently fallen to a year-to-date low as ripple and ether grabbed a larger percentage of trading volume (see figure 3). Ripple’s share among the top three assets increased from a YTD low in July at 3% to 14% of trading volume this past month.

 

Figure 3: Trading Volume Share by Digital Asset

Data for chart sourced from the TradeBlock platform
(*Exchanges: Coinbase Pro, Bitfinex, Bitstamp, Bittrex, Gemini, Kraken, itBit)

University endowments reportedly jump into digital currencies
First reported by The Information, an unnamed source has claimed that the endowments of Harvard University, Stanford University, Dartmouth College, Massachusetts Institute of Technology (MIT), and the University of North Carolina have all made investments into digital currency funds.

This comes on the heels of reports last week that Yale University’s endowment has invested with Paradigm, the digital currency fund which was started by Coinbase co-founder Fred Ehrsam. Harvard, Yale, and Stanford endowments are the three largest endowments respectively in the US, representing in aggregate more than $80 billion. This comes at a time of increased institutional interest in digital currencies, as nearly 20% of new investment funds in 2018 were found to be digital currency funds.

 

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