Word on the Street: Crypto markets resilient during stock market rout

Q3 earnings season is under way and there’s been some jitters around company results not living up to their all-time high expectations, compounding the sell-off. The semiconducter industry, which includes the giant of cryptocurrency mining GPU chips Nvidia, were one of the worst hit sectors of the market sell-off this week. The sector fell ~7% compared to a broad market sell-off of ~3%.

Nvidia has been the top performer of the S&P for the past three years with returns over 1000%, the epitome of momentum stocks embodied by the FAANGs, but there are signs that it has finally topped and broken down with a valuation that was overstretched 15x its sales. There has been some speculation linking its breakdown to the ‘bitcoin bubble burst’ but in reality Nvidia flagged a slowdown in mining chips months ago as GPUs were phased out for ASIC chips.

The performance of stock market darling Nvidia was bolstered by the explosion in cryptocurrency mining over the past two years – returns on the S&P (red line) pale in comparison. It is now well and truly below its 200 moving average (blue line).

Although there is no evidence of causation or correlation between Nvidia and bitcoin prices, the collapse of the latter looks ominous for momentum stocks and the wider market in general.

The analog of the current S&P bull market with the two-year bull run during the Dotcom boom from 1998-2001 continues to show an ultra strong 95% correlation (when forwarded for three months).

Tether BTC premium continues (mid impact)

The Tether scare of last week hasn’t faded from people’s minds and the global spot price of bitcoin in USDT is still trading at a ~$100 premium to its fiat counterpart over the past 7 days.

*BTC/USDT still accounts for over 50% of global trading and has been trading at a ~$100 premium to USD over the past 7 days (orange line is the indexed spot price).
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Of the top four global exchanges trading BTC/USD, Bitfinex dominates volume and is trading at a $100 premium (similar to USDT prices) over its peers.

Bitfinex BTC/USD is still trading at a premium to other fiat-crypto exchanges

Bitcoin continues to show negative correlation with Chinese stock market (low impact)

As we pointed out last week, the rout in the Chinese stock market (Shanghai Index) at the start of the week coincided with the surge in BTC/USDT prices in a similar way sell-offs in US stocks traditionally lifts the price of gold in a flight to safety. This week the markets have moved in opposite directions: the stock market rebound crossing above the price of bitcoin.

*BTCUSDT (orange line) and BTC/USD (red) went in opposite directions to the Shanghai Composite Index this week after it rebounded from a sell-off last week in a similar inverse price action to gold.
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What is most interesting about the this negative correlation is the testing of ‘bitcoin as a store of value’ thesis which is traditionally gold’s role. So far, bitcoin and gold (in US terms at least) have shared little to no correlation so watching for a gold ‘flippening’ in a market would be a valuable indicator that bitcoin is fulfilling one of its core value propositions.

*BTC and gold (GLD) have showed little to know correlation over a year timeframe, and shows a more positive correlation with stocks. *

China is a huge potential market for cryptocurrencies (by far the biggest before being outlawed) and also a big buyer of gold, which trades at a premium in Chinese yuan over the US dollar.

Chinese court determines bitcoin ownnership legal (low impact)

On Thursday the Shenzhen International Court of Arbitration explained why owners of bitcoin, bitcoin cash and bitcoin diamond should be legally protected under China’s property and contract law.

The decision was made in an arbitration dispute between three parties over the share transfer of three cryptocurrencies bitcoin, bitcoin cash and bitcoin diamond. The arbitrator in the private dispute concluded that even though bitcoin is not legal tender it is still private property.

"The Party contends that Bitcoin has characteristics of a property (SOV), can be controlled by the owner, and has economic value to the owner. It does not break any laws. This arbitrator agrees."

As Katherine Wu of Messari notes, this is just an arbitration resolution and not an official judge ruling so not indicative of an official change of tack but it does leave more leeway for official trading to resume in the country.

Ripple publishes Q3 report (low impact)

Ripple published its own Q3 results on Thursday in which it reported sales of XRP of $163 million, a doubling from the previous quarter. Three billion XRP were released out of escrow and 2.6b returned to escrow.

Apparently, XRP II, a Ripple subsidiary registered as a licensed money service business, sold $98m worth of XRP in institutional sales. In Q4 2017, Ripple locked up 55b XRP in escrow and due to that lock up has access to just 13% of XRP in circulation. Of the 3 billion XRP released from escrow in Q3 2018, 2.6b was put into a new escrow contract and the remaining 400m is "being used in a variety of ways to help support the XRP ecosystem."

Most interestingly in the report is the geographic trends of crypto exchanges. For more than two-thirds of Q3, Malta-based exchanges were the leading exchanges by dominance of global trading volume, with South Korea taking over in the last couple of weeks. The tiny Mediterranean island is home to Binance and OKEX Technology.

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