2020 Q1 Review – Global Market Turmoil

As COVID-19 quickly became a global pandemic, commerce and entertainment around the world came to a halt. Additionally, Russia and Saudi Arabia failed to agree on oil production cuts, fueling a price collapse.

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March 12th saw a sharp decline across all cryptocurrencies and exchanges within the same time period. For most coins, this drawdown was one of, if not the, largest single drop since trading began. Most crypto exchanges saw all-time highs in volume during this period, while derivatives exchanges Deribit and BitMEX briefly halted trading as liquidity vaporized.

BitMEX has formally attributed the downtime to “an aggressive DDoS attack” with the exchange resuming full service after 25 minutes. Deribit had two periods of unexpected maintenance due to system architecture, as well as triggering an internal circuit breaker several times.

The total market capitalization for all cryptocurrencies increased 44% in 2019, after increasing 138% in the first half of the year and decreasing 38% in the second half. Q1 2020 began with a 71% bullish rally followed by a sudden 56% bearish drop, closing the quarter at -25%. The 50-day and 200-day moving average crossed bearish after only 45 days. The two most recent bear markets, or periods with a bearish 50-day and 200-day moving average cross, lasted 325 days and 100 days.

Over the past year, Bitcoin has experienced extreme volatility while maintaining the strongest performance when compared to Gold, Oil, and several world indices. Among the group, only Bitcoin and Gold have remained positive over the past year. Bitcoin continues to hold a +37% gain over the past year, while Oil holds a -54% loss over the same time period.

Despite strong gains against legacy markets, BTC continues to experience periods of strong positive correlation with these markets. Since 2015, spikes in the Chicago Board Options Exchange’s CBOE Volatility Index (VIX) above 40 have represented local lows in BTC price. VIX, or the ‘fear index’, hit the highest level since the 2008 financial crisis, when the metric peaked at 90. Throughout most of Q1, the S&P 500 Index had a near 100% 30-day rolling correlation with BTC. If the VIX falls throughout Q2, BTC should benefit in the form of bullish consolidation or a slow but steady bullish reversal.

Historically, relative changes in Bitcoin markets have been closely related to three-month cycles. These quarterly cycles often see a dramatic expansion or contraction in price, with very few quarters ending with less than a 10% price change. Q2 and Q4 of any given year have historically been the most positive periods, while Q1 and Q3 have been the most negative periods. Q2 is typically the best performing quarter for all cryptocurrencies.

In total, there have been 21 positive quarters and 16 negative quarters. Bitcoin’s massive Q2 2019, at +160%, was the seventh-best quarterly gain. The highest positive period was Q2 2011 at +1941%, and the highest negative period was Q3 of the same year at -68%. Q1 2020 marked the fifth negative Q1, which holds the most negative periods of any other quarter, tied with Q3. Q4 2019 closed at -14%, which was the fourth negative Q4 in Bitcoin’s history.

The average gain among all positive periods, excluding the extreme outlier in Q2 2011, is 126%, while the average loss among all negative periods is -23%. The longest period of consecutive gains occurred between Q4 2016 and Q1 2018, totaling 484%. The longest period of consecutive losses occurred between Q3 2014 and Q2 2015, totaling 80%. Bitcoin has never had four consecutive negative quarters, again suggesting a positive close for Q2

Source: BLX

Ethereum (ETH) has completed 18 trading quarters, far fewer than Bitcoin, but most of ETH’s price changes within each quarter have been very similar. Negative quarters have historically had a tight range of -30% to -48% whereas positive quarters fit into three ranges: <+15%, around +100%, or >+500%. The average gain among all positive quarters, excluding the extreme outlier in Q1 2016, is +141%, and the average loss among all negative quarters is -39%. ETH has only outperformed BTC in seven quarters.

Source: ELX

Ripple (XRP) has had 22 total trading quarters, with just over half yielding a negative return. Positive quarters have averaged 276%, while negative quarters have averaged -31%. Most positive have closed +50% or less while most negative quarters have closed -50% or less. The asset has outperformed BTC in eight total quarters and outperformed ETH a total of nine quarters. However, since Q1 2018, XRP has only had two positive quarters. Q3 2019 through Q1 2020 has been XRP’s longest stretch of negative quarters, totalling -69%. Additionally, XRP has never experienced four consecutive negative quarters.

Source: XRPLX

Bitcoin is the world’s largest cryptocurrency by market cap and commands a large portion of the trading volume in the cryptocurrency markets. Among high market cap assets, ChainLink (LINK), Tezos (XTZ), and Binance Coin (BNB) were the best performers when compared to BTC throughout 2019.

The ratio of the market cap of Bitcoin and the rest of the cryptocurrency markets is simply referred to as Bitcoin dominance. The daily chart tracking Bitcoin Dominance has largely remained above the 200-day moving average since July 2018. The wider market is unlikely to broadly outperform BTC until the asset drops and remains below this key moving average. Despite dropping below the 200-day moving average throughout Q1, Bitcoin Dominance returned above the moving average at the end of the quarter, suggesting a flight out of highly speculative alt coins.

Stablecoins have continued to increase in popularity over the past year. The total stablecoin circulating supply is now over US$8 billion, with ERC20 USDT issuing US$3.94 billion over the past year. Omni USDT has lost nearly US$1 billion in circulating supply over the same time period. With a circulating supply of nearly US$704 million, USD-Coin (USDC) is currently the largest non-USDT stablecoin by market cap.

When comparing on-chain metrics against all stablecoins, USDT dominates nearly all categories. Huobi USD (HUSD) and Binance USD (BUSD) have higher average transaction values because they have fewer on-chain transactions with a much higher value. USDT related gas costs currently account for around 35% of all gas costs on ETH.

The large selloff on March 12th prompted a move to stablecoins for many traders as the USDT/USD price on Kraken spiked to a large premium (red line, chart below). This premium has continued since the initial event, to a smaller degree, suggesting USDT demand remains high. In Q1, periods of USDT/USD below US$1.00 (yellow) have correlated with bullish price action. Throughout 2019, the opposite was true. Any further bullish momentum for BTC in Q2 will likely correlate in a flight out of USDT, and a drop in the USDT price, slightly below US$1.00.

Bitcoin will undergo the third block reward halving this quarter, dropping annual inflation to 1.80%. Halvings, which occur roughly every four years, direct influence mining profitability. Post-halving, mining hobbyists may quickly lose profitability to larger scale mining facilities, and turn off their rigs, which increase centralization of the network. Other network factors that influence mining profitability include; ASIC efficiency, price, block times, difficulty, and transaction fees. The Bitcoin Cash (BCH) and Bitcoin Satoshi’s Vision (BSV) forks will also each undergo a block reward halving this quarter, likely within the next two weeks.