Summary:

• The SFOX Multi-Factor Market Index has moved from neutral to mildly bullish as of November 11th, 2019.
• New regulatory clarity in Hong Kong, IPOs in the U.S., and institutional investment products suggest that overall crypto development may be ramping up.
• Despite its dubious status as a cryptocurrency project, volatility surrounding Facebook’s Project Libra seems to correspond to broader crypto volatility.
• Recent news about China’s interest in blockchain technologies seem to be reenacting the early days of Project Libra: following a price spike on news of President Xi supporting blockchain, the market isn’t sure precisely whether or how this blockchain interest will pertain to crypto.
• Whale movements and increased futures trading have set the tone for the months that have historically had the most volatile crypto movements.

In the October 2019 edition of our monthly volatility report, the SFOX research team has collected price, volume, and volatility data from eight major exchanges and liquidity providers to analyze the global performance of 6 leading cryptoassets — BTC, ETH, BCH, LTC, BSV, and ETC — all of which are available for algorithmic trading on our trading platform.

The following is a report and analysis of their volatility, price correlations, and further development in the past six weeks. (For more information on data sources and methodology, please consult the appendix at the end of the report.)

Current Crypto Market Outlook: Mildly Bullish

Based on our calculations and analyses, the SFOX Multi-Factor Market Index, which was set at neutral a month ago, has been moved to mildly bullish as of November 11th.

What to watch next: further clarity on how China views the role of cryptocurrency in its focus on blockchain developments.

Similar to the early days of Libra before the project’s details were revealed, it may be the case that the market, after the initial fervor surrounding Xi’s comments, doesn’t know how to react because they aren’t sure precisely how China’s pro-blockchain stance will pertain to cryptocurrencies per se. Given the historic interest in and volume of Chinese cryptocurrency trading in the past, increased clarity about China’s stance on cryptocurrencies could potentially stoke increased market volatility and price action.

Political Instability and Bitcoin as a “Safe Haven”

The story so far: Political instability in Lebanon, Chile, and Hong Kong have some revisiting Bitcoin’s potential to function as a safe haven.

One of the first use-cases for which Bitcoin was extolled was the ability to provide people with financial freedom and security in countries with unstable political climates or inaccessible banking infrastructure. Analysts have been discussing BTC’s utility as a safe haven anew in the last month as Lebanon’s banks closed in the wake of civil unrest (October 25th), political protests in Chile turned violent (October 28th), and Hong Kong BTC trading spiked in a politically volatile atmosphere (October 2nd). In theory, BTC may be well-poised to help individuals in these climates of political uncertainty and upheaval: not only is it relatively inflation- and censorship-resistant, but it is also relatively uncorrelated to other asset classes, such as gold and the S&P 500, as the most recent SFOX correlation data reveal:

However, this increased trend of political upheaval doesn’t appear to have had a clear impact on the crypto market at large, which may reflect a limitation of the “Bitcoin as a safe haven” argument that Venezuelan reporter Diana Aguilar observed in a May 2019 op-ed: “The fallacy that bitcoin could “save” a country’s whole economy assumes the country meets all the requirements for mainstream adoption. Just to start, there would be needed widespread computer and financial literacy, reliable electricity infrastructure, stable internet service and an economy that not only allows the majority of citizens to count on a device to keep their digital wallets but also the safe migration from fiat money to digital money.”

What to watch next: political volatility in the U.S. and Hong Kong could hypothetically impact crypto volatility.

As public impeachment hearings begin in the U.S. and political upheaval persists in Hong Kong, there may be potential for renewed interest in BTC from two places that do have “widespread computer and financial literacy” and so on. Especially in concert with China’s renewed interest in blockchain technologies and the relationship we’ve seen between crypto markets and the U.S./China trade war, further political instability in these regions could hypothetically put Bitcoin on more people’s minds — especially as we enter the holiday season.

Bitcoin Mining IPOs

The story so far: China-based BTC mining companies Canaan and Bitmain filed for U.S. IPOs.

Canaan Creative reportedly filed for a U.S. IPO on October 28th, with a goal of raising $400 million in the offering; two days later, Bitmain Technologies reportedly resubmitted an application for a U.S. IPO, with a goal of raising somewhere between $300 million and $500 million in the offering. These applications come after both companies tried and failed to be listed on the Hong Kong Stock Exchange. If these IPOs end up happening, they would provide U.S. investors with a new vehicle for investing (albeit indirectly) in Bitcoin through traditional markets.

What to watch next: China’s stance towards crypto companies, along with other IPO applications.

As we noted above, China indicated in early November that it would no longer be cracking down on mining companies; further regulatory developments in China have the potential to significantly affect the BTC mining landscape and how the industry chooses to advance itself in both China and the U.S. Similarly, these IPOs, if successful, could hypothetically encourage other crypto-based companies to pursue similar filings, giving traders the ability to invest in more aspects of the crypto ecosystem through traditional markets.

New Regulatory Clarity Comes to Hong Kong

The story so far: Hong Kong has new regulatory clarity for cryptocurrency exchanges.

Hong Kong’s Securities and Futures Commission published new rules this month allowing cryptocurrency exchanges to apply for and receive an operating license (November 6th). Exchanges are reportedly eligible only if they “provide services to professional investors only, have an insurance policy to protect clients in case assets are lost or stolen, and use an external market surveillance mechanism.” This further regulatory clarity marks both the continued maturation of the crypto markets and a potentially positive signal in the development of Asian crypto markets.

What to watch next: Exchange reactions and further regulatory action.

Regulatory clarity is only half the story: the question now is whether exchanges operating in Hong Kong will submit to regulation or attempt to continue skirting it (e.g., by moving elsewhere). Ultimately, increased regulation is a positive sign for the growth and maturation of the sector, but exchange responses will provide an indicator as to whether those exchanges are ready for that level of maturation.

New Institution-Friendly Crypto Offerings Coming Soon

The story so far: Major crypto trading venues have announced BTC options coming in the next few months.

The CME, Bitfinex, and Bakkt all announced that they would start offering BTC options in the next few months, with Bakkt starting on December 9th, the CME started on January 13th, and Bitfinex starting some time in Q1 2020. The offerings add to the roster of crypto investment vehicles particularly geared towards institutional investors and professional traders.

What to watch next: Options performance upon launch.

We saw with the underwhelming launch of Bakkt that the market may potentially be watching the performance of sophisticated investing products at launch as indicators of broader institutional interest in crypto, and thus those launches may hypothetically affect the overall market. As such, one may want to keep an eye on these platforms as the launch times of their new products near.

Crypto Whales Making Splashes

The story so far: Whale movements continue to correlate with broader crypto market movements.

As SFOX detailed in its recent report featuring Whale Alert, October saw significant movements from whale-sized transactions that corresponded with broader market movements. For instance, “from October 21st to October 22nd, the price of BTC dropped almost 20% from a high of $8325 to a low of $6737.30; in the following three days, the price climbed almost 60%, from that low of $6737.30 to a high of $10610.00. All the while, Whale Alert logged a significant number of high-value transactions,” up to and including 10,000-BTC transactions. It’s not clear exactly who these whales were, but their movements could have theoretically been either a cause of or reaction to broader market movements. Similarly, on October 18th, Korean authorities broke up a darknet child pornography ring and auctioned 10,000 seized BTC on Binance, which correlated with a ~2% drop in BTC’s price — from $8062.56 to $7915.01 — in just 30 minutes.

For greater graphical clarity, see this additional chart tracking only the month-over-month changes in the prices of BTC, ETH, gold, and the S&P 500:

By looking at the 30-day historical volatilities of ETH, BCH, LTC, BSV, and ETC as a percentage of BTC’s 30-day historical volatility, we can see more clearly that most altcoin volatility was following BTC’s volatility, with altcoins becoming relatively less volatile than BTC following the large market movement from October 23rd through October 27th.

As discussed above, the near-zero correlations that cryptoassets maintain with gold and the S&P 500 lead some to view cryptoassets as appealing hedges or safe havens in times of political and macroeconomic uncertainty. It’s also worth noting that ETH has been exhibiting a high (i.e. close to 1) correlation with LTC for several months now, though the reasons for this correlation are unclear.

For a more complete look at BTC’s correlations with other assets throughout the past five weeks, see the following graph:

Appendix: Data Sources, Definitions, and Methodology

All cryptocurrency prices are denominated in USD unless otherwise noted.

We use two different in-house volatility indices in creating these reports:

1. 30-day historical volatility (HV) indices are calculated from daily snapshots over the relevant 30-day period using the formula:

30-Day HV Index = σ(Ln(P1/P0), Ln(P2/P1), …, Ln(P30/P29)) * √(365)

2. Daily historical volatility (HV) indices are calculated from 1440 snapshots over the relevant 24-hour period using the formula:

Daily HV Index = σ(Ln(P1/P0), Ln(P2/P1), …, Ln(P1440/P1439))* √(1440)

S&P 500 performance data are collected from Yahoo! Finance using GSPC (S&P 500 Index) data. Gold performance data are collected from Yahoo! Finance using XAU (Philadelphia Gold and Silver Index) data.

30-day asset correlations are calculated using the Pearson method, in accordance with the following formula:

In our calculations, x = 30-day returns for BTC/USD, y = 30-day returns for the other asset in consideration, and r = the correlation coefficient between BTC and the other asset in consideration.

The cryptoasset data sources aggregated for crypto prices, correlations, and volatility indices presented and analyzed in this report are the following eight exchanges, the order-book data of which we collect and store in real time:

• bitFlyer
• Binance
• Bitstamp
• Bittrex
• Coinbase
• Gemini
• itBit
• Kraken

Our indices’ integration of data from multiple top liquidity providers offers a more holistic view of the crypto market’s minute-to-minute movement. There are two problems with looking to any single liquidity provider for marketwide data:

1. Different liquidity providers experience widely varying trade volumes. For example: according to CoinMarketCap, Binance saw over $20 billion USD in trading volume in November 2018, whereas Bitstamp saw $2 billion USD in trading volume in that same time — an order-of-magnitude difference. Therefore, treating any single liquidity provider’s data as representative of the overall market is myopic.
2. Liquidity providers routinely experience interruptions in data collection. For instance, virtually every exchange undergoes regularly scheduled maintenance at one point or another, at which point their order books are unavailable and they therefore have no market data to collect or report. At best, this can prevent analysts from getting a full picture of market performance; at worst, it can make it virtually impossible to build metrics such as historical volatility indices.

Building volatility indices that collect real-time data from many distinct liquidity providers mitigates both of these problems: collecting and averaging data from different sources prevents any single source from having an outsized impact on our view of the market, and it also allows us to still have data for analysis even if one or two of those sources experience interruptions. We use five redundant data collection mechanisms for each exchange in order to ensure that our data collection will remain uninterrupted even in the event of multiple failures.

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