Daily Market Update - September 9, 2020

Digital assets market:

On the digital asset side, market cap dropped $8B to $306B with a small dip during America’s evening session that saw $BTC and $ETH drop to lows of $9,820 and $324 respectively. $BTC has since then corrected back to $10,100 levels with trading volume at $28B. Month to date, $BTC has declined 1,800 USD from $12,000 highs.

$ETH has dropped ~30% month to date, down $139 USD from highs of $480 at the peak of the DeFi boom. Gas fees back to normal levels at 88 GWEI average.

When Bitcoin Correlations Break Down

It’s hard to remember that global markets performed quite well on the first day of September trading, with stocks continuing their ascent following a record August, and digital assets rallying 3-10% across the board. This of course did not last, culminating with four straight days of selling that continued into the long holiday weekend.

The week before, we discussed how the gold / Bitcoin correlation was approaching 1.0, trading in near lock-step before, during, and after Fed Chairman Powell’s speech. We also mentioned that Bitcoin correlations are spurious, and narratives can and do change quickly. Right on cue, the gold / Bitcoin trade fell apart last week, with Bitcoin falling 13% week-over-week while gold was essentially unchanged. Instead, Bitcoin began to move more closely with risk assets like technology stocks and oil.

The reality is, Bitcoin is neither correlated with gold nor equities nor oil. This is exactly what an uncorrelated asset does -- it confuses everyone. The entire digital assets market began its slide early Tuesday morning, and at the time, equity futures were still green. It was a full 3 hours later when the wheels came off the equity bus, and at that time Bitcoin and other digital assets had already fallen precipitously. However, the narrative du jour was that Bitcoin followed stocks lower, and as such, Bitcoin traders watched TSLA and other Nasdaq stocks for clues for the remainder of the week.

We’ll see which asset Bitcoin finds itself correlated to this week.

So What Was the Catalyst?

A 13% decline in Bitcoin and a 20%+ decline in Ethereum and other related assets (like DeFi tokens) over a condensed 48-72 hour period, with no real catalyst, usually means 1 of 2 things:

1) This is just a healthy reset after a fast and furious summer rally, and historically, market participants have been rewarded for buying digital assets on dips. We give you Exhibit A - June 2019: After Bitcoin rose 100% from April 1st to June 1st, Bitcoin fell 12% to start June before gaining almost 100% in just 14 days to end the month.

2) We are missing the catalyst

Bitcoin Rose over 100% from 4/1/2019 - 5/31/2019, then fell 12%, before rallying another 100% in late June 2019

To figure out if we’re missing the catalyst, let’s take a look at some of the signs of stress that we’d expect to see if this digital asset rally was truly over:

  • Real equity weakness -- too early to tell, especially with a round of fiscal stimulus likely heading our way now that the equity market is throwing a tantrum.

  • Lower exchange / DEX volumes -- Quite the opposite. Trading volumes across both centralized and decentralized digital asset exchanges continue to be strong, with last week’s volumes near YTD highs.

Bitcoin is now more closely tied to safe-haven gold than ever, possibly bringing the cryptocurrency greater resilience to risk aversion in the traditional markets.

  • The 60-day correlation between the two assets is hovering at record highs above 0.5, according to Coin Metrics data.

  • The positive correlation has strengthened sharply since the beginning of July, as the U.S. dollar started taking a beating against other major currencies.

  • The sell-off in the greenback, the global reserve currency, is seen as boding well for scarce assets like bitcoin and gold.

  • The strengthening of the positive correlation appears to validate the popular narrative that bitcoin is a store of value and a haven asset. Some investors believe it is sound money, like gold.

  • As such, the cryptocurrency’s sensitivity to movements in risk assets, mainly equities, could lessen.

  • Bitcoin defended the $10,000 support for the fifth straight day on Monday, despite losses on Wall Street. 

  • The repeated defense of the critical support, coupled with several bullish developments in on-chain metrics, suggests scope for a recovery rally.

  • Bitcoin’s hash rate or computing power has risen to fresh record highs near 150 exahashes per second, according to Glassnode.

  • That suggests miners remain unfazed by bitcoin’s recent decline from $12,400 to $10,000.

  • Further, the percentage of bitcoin unmoved in over three years has hit a two-year high of 30.91%, according to data source Glassnode.

  • “It suggests an increase in the holding mentality,” Simon Peters, a crypto-asset analyst at multi-asset investment platform eToro, said in an email.

  • “The recent drop represents overselling and buyers may soon step back in again,” Peters added.

  • The cryptocurrency is trading near $10,200 at time of writing, representing a 0.7% gain on the day.

Alts and DeFi watch:

  • All DeFi coins with the exception of $UMA were also in the red with drops ranging between 2% and 7% 

  • $LINK’s DeFi dominance at 34% while dropping 26% over the past seven days, broke past 12 support levels and currently trading at 11.80 range. Currently showing oversold levels and trading in the bottom Bollinger band range.

  • $YFI dropped to as low as 21,900 before settling into range-bound trading between 22,000 and 22,600. 

  • $UMA token trading at 15.6 levels as the second top market cap behind $LINK with 18% of $LINK’s market cap.

  • $LEND drops 5% overnight again after dropping 8% yesterday to 0.54 levels and down 27.7% over the past seven days as DeFi farmers transitions away from AAVE their preference dependent on the one that can provide the best yields

Decrease in DeFi activity -- Given the fast ramp-up in Decentralized Finance (DeFi) usage, you’d expect a big reversal in activity to accompany a 30-40% price correction. This most certainly was not the case. While Ethereum gas prices fell (indicating less congestion from transactions across the network), total value locked in DeFi protocols barely registered a blip.

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