The final two weeks of June continued the slide that began on June 10th. Global cryptocurrency market capitalization fell $21.6B from $277.7B on June 15th to $256.1B on June 30th, representing a 7.8% drop. As we’ve discussed before, we’ve estimated the floor for this number to be in the $250–280B range based on pre-December 2017 figures, and we’re now witnessing the 3rd re-test of this zone.
Given positive correlations with nearly every cryptocurrency, we turn our attention to Bitcoin as a proxy for broader market trends. BTC has returned -15.1% since June 1st, with 30-day trailing 24hr-volume down 31.9% from May 31st. The continued decline of price and on-exchange 24-hr volume could be attributed to any number of external factors, so let’s look at a few possibilities:
When looking at price action as it relates to volume trends, we find it helpful to look at on-balance-volume (“OBV”). OBV is a momentum indicator that displays a running total of buy and sell volume. OBV has been predominantly range-bound through June, topping out in early June and returning to its May lows for the last week of June. Given the significant downward movement in price, we’d expect a more pronounced drop in OBV from May lows.
YTD OBV Profile
In the context of the price and 24-hr volume trends, this would indicate a thin order book where light sell volume can significantly affect spot price. We also note that this type of divergence between price and OBV may signal a potential upcoming trend reversal.
Another phenomena we’ve recently discussed is the dynamic between price trend and CME’s 3-month and 6-month futures contracts.
The first CME 6-month futures contracts opened December 15th, a few days before BTC pushed to its ATH. The second 6-month futures contract began trading on April 3rd, near YTD lows at the time. We’d suspect a long-bias of these April contract holders, given the 65% drop from ATH as of first trade date for these contracts. The first 3-month contract opened near a cycle high on April 30th, while the second 3-month contract began trading on May 29th approximately 1.6% higher than the opening of the April 3rd 6-month contracts.
CME Futures Expiration Intervals
To play this perfectly, one would’ve had to take a short position on the Dec’17 6-month contracts, a long position on Apr’18 6mo, a short position on Apr’18 3mo, and long positions on both the May’18 3mo and Jul’18 6mo. In this scenario, price would need to remain suppressed until expiration of the Apr’18 3mo on July 27th, before reversing the trend prior to expiration of the May’18 3mo on August 31st. The reversal in trend after July would put the long May’18 3mo and Apr’18 6mo contract holders in a profitable position. Adding to the speculation, BTC jumped 10% in the hours immediately following expiration.
While this is certainly interesting to analyze overlaid on the BTC market cycles, we’re not quite ready to drink the kool-aid. Looking at open interest, Dec’17 6mo’s expired on June 29th with 306 open contracts. With 5BTC per contract and approximate market price of $5,900/BTC at expiration, this would represent ~$9M. Total open interest across all four tradable contracts is 2,703, representing $89.2M as of close on Jul 2nd. We do not believe the BTC/USD market, which averaged $4.3B 24hr volume in June, was directly affected by futures traders. As rumors and conspiracy theories percolated through the trading community, it’s more likely that this catalyst became a self-fulfilling prophecy. We do recognize the outsized effect of this type of catalyst in the Bitcoin market, and we are continuing to actively monitor the correlation between futures expirations and price as the sample size grows.
As we’ve discussed before, we continue to monitor Bitcoin velocity. Velocity continues to drop from May, though the slope of the downtrend is beginning to flatten. The drop in velocity signals the use of the underlying asset a storage of value, rather than a transactional asset.
Additionally, mining difficulty continues to rise month over month, and hashrate is just off of all-time highs in the ~45 ExaHash/second range (~45 quintillion hashes per second). Increasing hashrate indicates the addition of miners supporting the network. In the context of a falling BTC velocity, this may suggest that miners are opting to hold their mining rewards, rather than sell at current levels.
We’ve seen estimates that the breakpoint for BTC mining profitability is in the $6,000, $5,000, $4750, and $3,900. Given the asymmetry of electric costs across various geographies, we view the breakpoint as more of a range than a specific number. Wherever that breakpoint is, it’s more important to recognize that mining profitability is at all time lows.
BTC Mining Profitability
From a network perspective, things remain healthy. Transaction fees have declined significantly, as have unconfirmed transactions. In the last week of June, a $300M transaction was sent with a $0.04 transaction fee and cleared in minutes. This is monetary poetry, representing the purest application of blockchain technology.
As we introduced a few weeks ago, we continue to monitor NVT Ratio. NVT Ratio relates the market value of all coins in circulation to the value of transactions sent over the network. In the past 2 weeks, we’ve seen a continuation in the decline of NVT Ratio (see below, market value yellow, NVT ratio brown), with consecutive lower highs and lower lows in the trend. Inflections in the NVT ratio curve tend to correlate with trend reversals on asset price.
What We’re Reading
The prestigious venture capital firm has launched a $300 million crypto fund, named a16z crypto. The new fund is dedicated to investing in cryptocurrencies and blockchain-related projects. The launch of a16z crypto exemplifies the firm’s continued bullish stance on the crypto industry, as general partner Chris Dixon states that the fund will not be deterred by market conditions and that this is a long-term play.
The world’s largest brewer is using blockchain technology to track and record various advertising metrics and activities. This added efficiency in digital advertising will reduce the amount of time spent tracking advertising metrics and allow for more impactful ad campaigns.
Goldman Sachs is exploring cryptocurrency trading derivatives, according to Chief Operating Officer David Solomon. The move further strengthens the notion of Goldman Sachs’ softening attitude towards crypto, as they already participate in publicly-traded bitcoin futures.
The main financial agency of South Korea, the FSC, has revealed a new crypto regulatory framework and guidelines pertaining to anti-money laundering and Know Your Customer (KYC) requirements for crypto exchanges. The new policies have demonstrated the willingness of the government of South Korea to regulate the cryptocurrency market to protect investors and their assets.
The CEO and founder of Binance has stated that the company is about to launch a crypto-fiat exchange in Uganda, the first time Binance has touched fiat currency. The new platform will support the Ugandan Shilling along with other major cryptocurrencies. The company believes that opening more fiat channels will help promote user growth, especially when the total market cap of the industry inevitably increases. The decision to launch the exchange in Uganda demonstrates the use case of crypto in less developed countries.
Digital assets have been added to the Federal Reserve Economic Data (FRED) database, which is perhaps the most important source of data on the global economy. FRED recently announced the addition of daily data on the prices of Bitcoin, bcash, Ethereum, and Litecoin. The announcement may be taken as another sign of the legitimacy of cryptocurrency and of growing mainstream interest.
Intel is working with blockchain startup, Enigma, to help secure its privacy-enhancing smart contracts. Privacy is the biggest barrier to smart contract adoption, something that blockchains are inherently bad at achieving due to the data-heavy nature of privacy enhancing features. Enigma plans to work with intel to develop applications that support the protocol and Intel’s Software Guard Extensions.
U.K.-based crypto futures trading platform, Crypto Facilities, is launching a Litecoin derivative product. Timo Schlaefer, CEO of Crypto Facilities, believes that the Litecoin-dollar futures contracts will increase price transparency, liquidity, and efficiency in the cryptocurrency markets, as well as open up Litecoin trading to more institutional investors.