The Hard Fork – Weekly Market Commentary

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This Week’s Topics:
1) Ethereum fork scheduled for this week
2) Bitcoin futures trading volume set record in 2019
3) Chinese regulators issue new warnings on crypto

 

Indices Round-up
TradeBlock Index Asset1 Price ($) 7d∆2
ECX Ethereum Classic 4.66 10.91%
BCX Bitcoin Cash 210.47 7.53%
EOSX EOS 2.66 5.01%
LTX Litecoin 42.75 1.74%
ETX Ethereum 132.68 -0.06%
XLMX Stellar Lumens 0.05 -0.52%
XRX XRP 0.19 -1.05%
ZCX Zcash 28.47 -2.49%
XBX Bitcoin 7,290.82 -3.11%
XMRX Monero 46.05 -4.10%
1. Underlying asset sorted in descending order by 7 day price movers.
2. 7 day price movers monitored from 12/23/2019 06:00 ET thru 12/30/2019 06:00 ET.

7 day price movers

Digital currencies broadly traded higher on the week. Among our indexed currencies, ECX rose the most, gaining 10.91%, while XMRX declined the most, losing 4.10%. The price rise in ether classic (ETC) is likely attributed to a recent announcement around a hard fork which would see the network become more compatible with Ethereum. Ether (ETH) traded modestly higher ahead of its own scheduled fork which is set to take place later this week as developers continue to adjust towards the transition from proof-of-work to proof-of-stake. In traditional markets, US equities traded higher with the nasdaq reaching a new all time high. Both the nasdaq 100 and S&P 500 posted one of their strongest years since 1997.

 

Ethereum hard fork scheduled for this week

Ethereum is scheduled to undergo a hard fork, Muir Glacier, to be activated this week at block height 9,200,000. The decision to initiate a fork was decided recently at the 77th Ethereum Core Devs meeting in order to delay the difficulty adjustment by 4,000,0000 blocks or approximately 611 days.

The difficulty adjustment is designed to dis-incentivize miners in order to ensure the Ethereum network transitions from proof-of-work (PoW) to proof-of-stake (PoS). However, the difficulty adjustment can result in inefficiencies in the network, slowing confirmation transaction times and thus usability of the network. As such, it is necessary for the Ethereum network to appropriately be positioned for a transition to PoS before the adjustment begins.

Following the Istanbul upgrade to the network earlier this month, it was uncovered that the difficulty adjustment would become noticeable sooner than initially expected and it was decided that a new upgrade, Muir Glacier, should be initiated at the beginning of the year in order to delay the difficulty adjustment until a later time.

 

Bitcoin futures trading volume set record in 2019

US regulated bitcoin futures platforms saw an increase in trading activity in 2019 vs 2018. Both the CME and CBOE launched competing bitcoin futures products in December 2017. While trading activity in both products increased in the first few months of 2018, demand began to decline as 2018 saw consistently falling bitcoin prices.

Throughout the second half of 2018 and the first half of 2019, bitcoin futures trading activity slowly migrated to the CME with the CBOE announcing they would discontinue bitcoin futures products in the Spring of 2019 as demand declined. In April a sharp increase in the price of bitcoin spurred a considerable rise in trading activity, with the CME seeing its highest volume month ever over the summer. In the fall, Bakkt launched its much anticipated bitcoin futures product which has seen month over month growth since inception–yet still trails the CME.

Despite new futures platform launches, aggregate bitcoin futures trading activity declined in the second half of 2019. Nonetheless, bitcoin futures trading volumes for 2019 were significantly higher than those in 2018. In the figure below we diagram notional bitcoin futures trading volume over time across the following US regulated platforms: CME, CBOE, and Bakkt.

Figure 1: Notional bitcoin futures trading volume over time

Data for chart sourced from CME, CBOE, and Bakkt volume bot

 

Chinese regulators issue new warnings on crypto

On December 27th, Chinese regulators posted an announcement identifying the risks of a resurgence in digital currencies, and urged local authorities to prevent businesses from engaging in various activities, including facilitating the sale of digital currencies. Additionally, Chinese regulators warned against the rise in zero interest digital currency loans, digital currency wealth management, and mortgages associated with digital assets.

In October, Chinese President Xi Jinping had praised blockchain technology, which likely caused a price rise in digital currencies that week. However, in our weekly report at that time, we cautioned that Chinese lawmakers were likely not embracing decentralized public digital currencies, such as bitcoin, but instead private blockchains.

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