2020 Q3 Review – Decentralized Finance explodes

The total market capitalization for cryptocurrencies increased by 40% in the first half of this year, after a 56% increase in 2019. Q1 2020 began with a 71% bullish rally followed by a sudden 56% drop, making the quarter essentially break even. Q2 2020 also saw a 40% increase, with a further 28% increase in Q3 2020.

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The 50-day and 200-day moving averages continue to hold a bullish cross after a short 53 day bear market through April. The two most recent bull markets, or periods with a bullish 50-day and 200-day moving average cross, lasted 165 days and 44 days, with the current bull market spanning 145 days. These key moving averages have crossed five times since April 2019, confirming a sustained period of macro trend indecision.

Bitcoin is the world’s largest cryptocurrency by market cap and commands a large portion of the trading volume in the cryptocurrency markets. The ratio of the Bitcoin’s market cap 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 in Q1, Bitcoin Dominance returned above the moving average at the end of the quarter, suggesting a flight out of highly speculative alt coins. Through Q2, Bitcoin Dominance ranged from 64%-70%, but closed the quarter at 66%. In Q3, Dominance dropped dramatically to as low as 57%, and closed the quarter at 59%.

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 24 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 +1969%, 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 only the fourth negative Q4 in Bitcoin’s history.

The average gain among all positive periods, excluding the extreme outlier in Q2 2011, is 118%, 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. Q3’s average change since 2011 has been +7% while Q4’s average change since 2010 has been +115%.

Source: BraveNewCoin BLX

The opening and expiration dates of the Chicago Mercantile Exchange (CME) cash-settled BTC futures contracts, launched in December 2017, have had a significant impact on price. The CME facilitates trades for the largest portion of derivatives contracts in the world. Historically, volatility has increased at each contract rollover period. On June 26th, 2019 CME BTC futures traded a record US$1.7 billion in value, surpassing the previous record by more than 30%. Record open interest of US$532 million in notional value occurred on May 19th, 2020, one week after the Bitcoin block reward halving. This quarter’s key expiry dates include October 30th, November 27th, and December 24th.

Ethereum has completed 20 trading quarters, far fewer than Bitcoin, but most of the Ethereum price changes within each quarter have been very similar. Negative quarters have historically held 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 +117%, and the average loss among all negative quarters is -39%. ETH has only outperformed BTC in nine quarters, three of which have occurred in 2020.

Source: BraveNewCoin ELX

Ripple has had 24 total trading quarters, with half yielding a negative return. Positive quarters have averaged 233%, while negative quarters have averaged -31%. Most positive quarters have closed +50% or less and most negative quarters have closed -50% or less. The asset has outperformed Bitcoin and Ethereum in a total of nine quarters. However, since Q1 2018, Ripple has only had six positive quarters. Q3 2019 through Q1 2020 has held the longest stretch of negative quarters, totalling -69%. Additionally, Ripple has never experienced four consecutive negative quarters.

Source: XRPLX

Since the beginning of the year, Bitcoin and Ethereum have experienced extreme volatility while remaining highly correlated to several indices and commodities. Both Bitcoin and Ethereum have also strongly outperformed these indices and commodities. Ethereum has the strongest gain at +171% while Oil has been the biggest loser of the group over the past year at -35%.

Since 2015, spikes above 40 in the Chicago Board Options Exchange’s CBOE Volatility Index (VIX) have represented local lows in Bitcoin and Ethereum price. In Q1 2020, 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 and ETH. Over the past week, both Bitcoin and Ethereum have had a shrinking 30-day rolling correlation with the SPX and Nasdaq. If the VIX falls throughout Q4, Bitcoin and Ethereum should benefit and see a bullish continuation of their current trends.

Stablecoins have continued to increase in popularity over the past two years. The total stablecoin circulating supply is now nearly US$20 billion. Tether ERC20 (USDT) dominates all other stablecoins in terms of circulating supply, daily active addresses, and daily transactions. ERC20 USDT transfers on the Ethereum chain currently represent 17.5% of all transfers on the chain. Binance USD currently has the highest average transaction values at US$237,000 and Tron USDT currently has the lowest average transaction values at US$4,200. Tether is also the dominant base trading pair of choice as evidenced by the nearly US$2.13 billion in volume over the past 24 hours.

Source : CoinMetrics

The large selloff on March 12th prompted a move to stablecoins for many traders as the USDT/USD price on Kraken spiked (red line, chart below). This premium continued through the first half of Q2 along with a bullish rally for Bitcoin. Throughout 2019, the opposite correlation was true. As bullish price action cooled off in Q2, USDT/USD slipped below US$1 (yellow) and was mostly below US$1 for the remainder of the quarter. In Q3, when bullish momentum returned, the USDT premium held above US$1. A USDT premium will likely be present for any sustained bullish momentum throughout Q4.

Metrics tracking on-chain activity for the top coins and assets showed strong activity throughout the quarter. Both transactions per day (line, charts below) and weekly active addresses (fill, charts below) saw sustained increases for BTC, ETH, LTC, ADA, BNB, LINK, XTZ while XRP and BCH saw modest rises or declines in on-chain activity. On September 17th, ETH broke the single-day on-chain transactions record with 1.4 million transactions, a level not seen since January 2018, thanks to the Uniswap governance token (UNI) airdrop.

Bitcoin (BTC) transactions per day & weekly active addresses. Source: CoinMetrics

Ethereum (ETH) transactions per day & weekly active addresses. Source: CoinMetrics

Ripple (XRP) transactions per day & weekly active addresses. Source: CoinMetrics

Bitcoin Cash (BCH) transactions per day & weekly active addresses. Source: CoinMetrics

Litecoin (LTC) transactions per day & weekly active addresses. Source: CoinMetrics

Cardano (ADA) transactions per day & weekly active addresses. Source: CoinMetrics

Binance Coin (BNB) transactions per day & weekly active addresses. Source: CoinMetrics

ChainLink (LINK) transactions per day & weekly active addresses. Source: CoinMetrics

Tezos (XTZ) transactions per day & weekly active addresses. Source: CoinMetrics

In the mining realm, Hash Rates and Difficulty for many coins using Proof of Work hit new all-time highs, including BTC, DASH, and ZEC. On May 11th, Bitcoin’s third block reward halving occurred, dropping annual inflation from 3.6% to 1.8%. Bitcoin’s hash rate and difficulty have been extremely volatile since March this year, as older inefficient ASIC miners no longer become profitable and new more efficient ASIC miners are released. ETH’s hash rate and difficulty have continued a slow rise since January, as spot prices and fees have increased mining profitability. With the eventual transition to ETH 2.0, PoW will be phased out completely in favor of PoS.

Bitcoin (BTC) hash rate & difficulty. Source: BitInfoCharts

Ethereum (ETH) hash rate & difficulty. Source: BitInfoCharts

Bitcoin Cash (BCH) hash rate & difficulty. Source: BitInfoCharts

Litecoin (LTC) hash rate & difficulty. Source: BitInfoCharts

Dash (DASH) hash rate & difficulty. Source: BitInfoCharts

Zcash (ZEC) hash rate & difficulty. Source: BitInfoCharts

Monero (XMR) hash rate & difficulty. Source: BitInfoCharts

DogeCoin (DOGE) hash rate & difficulty. Source: BitInfoCharts

The Decentralized Finance (DeFi) bonanza exploded this quarter with a boom in creation, trading, and yield-farming. June and July saw the birth of Compound protocol (COMP) and yEarn Finance (YFI) which were early players in liquidity mining and yield-farming.

Several new Decentralized Exchanges (DEXs) emerged from obscurity or were created, including; Uniswap, Mooniswap, Matcha, 1inch, Balancer, Curve, Swerve, and SushiSwap. Several so-called Food Tokens exploded in popularity with the promise of high and unsustainable yields only to quickly implode, referred to as a “rug pull”, and disappear. Other new DeFi coins also brought forth unaudited spaghetti code which was quickly exploited by hackers.

The on-chain effects for the boon in DeFi-related activities have been enormous, with a nearly 3x increase in ETH supply sent to DeFi contracts and ETH transaction fees reaching stratospheric heights. For several days this quarter, total transaction fees in USD surpassed $5 million with average fees per transaction reaching as high as US$17.07. BTC as well has seen an over 6x increase in supply locked in DeFi, mostly in the form of wBTC, a tokenized version of BTC used to interact with smart contracts on the ETH chain. The total value locked into the DeFi ecosystem now stands at nearly US$11 billion.