Smaller cap assets are generally more volatile, but they also offer higher potential returns, at least according to the generally accepted principles that govern traditional financial markets. However, in crypto land, rules are there to be broken. The price action over the 3y horizon paints an interesting picture. If we take the MVIS Digital Assets 10 index and compare it to the Digital Assets 100 index, the former outperformed even during the glorious days of 2017 and even with the decline in valuations since the peak, the index is up nearly 2,500%. Over the same time frame, the MVIS Digital Assets 100 index is up “just” over 1,000%.
However, if we now take the MVIS 100 large-cap index and compare it to the MVIS 100 small cap index, the path to date is somewhat different. The small cap index outperformed into the final stages of the bull run. Going forward into the final quarter of 2018, the two indices tracked very similar performance and this trend remained intact well into spring 2019. Since then, the large-cap index has outperformed dramatically, but this trend may be running out of steam and over the last month as the two indices posted very similar performance.
Suppressed levels of Bitcoin volatility may be partly to blame for this as large range price action, followed by a brief, albeit sharp breakout, results in nothing but shaking out retail and over leveraged positions. The smaller cap assets have been largely ignored by the professional money managers entering the space, in part due to limited liquidity. But there are plenty of opportunities to gain alpha using event driven strategies, be that hard forks, airdrops or exchange listings.
Looking at the price action yesterday, smaller cap assets outperformed as low volatility levels encouraged flows into higher beta alternatives. Even the reports that the latest edition of China’s Industrial Structure Adjustment Guidance Catalog, which will take effect at the start of 2020, will not include cryptocurrency mining as a prohibited activity, failed to result in a meaningful rally by Bitcoin (note - the previous version of the document earlier this year included Bitcoin mining as one of the government’s targets).
Nevertheless, the Bitcoin futures curve remains in contango and the March’20 contract is trading at a $300 premium. Similarly, Ethereum contango delta is trading at a $5 premium, in part supported by the ongoing growth in the DeFi market. Elsewhere, Ethereum Classic’s outlook looks encouraging given the upcoming hard fork early next year which will lead to more interoperability with the much larger Ethereum network. At the same time, the hard fork presents yet another opportunity for relative value plays to capture spread tightening vs Ethereum and for contrarians to bet that some miners will switch away from Ethereum, given the planned transition from Proof of Work (PoW) to Proof of Stake (PoS).
In terms of news flow, just in time for their third annual Swell conference, Ripple announced that it has surpassed 300 customers. During Swell 2018, Ripple announced On-Demand Liquidity (ODL, formerly known as xRapid), leveraging XRP to eliminate pre-funding in cross-border payments. In less than a year, two dozen customers have signed up to use the product, with some of them already being live.
Elsewhere, Bitcoin mining giant Bitmain’s co-founder Micree Zhan, who was abruptly ousted from the company last week, said he’s going to take legal action to secure his return to the firm. In a letter posted on his WeChat feed Wednesday, Zhan publicly addressed what he described as a coup without consent for the first time. Last week, fellow co-founder Jihan Wu told all Bitmain staff in a surprising email that Zhan had been dismissed from all of his roles, and forbade employees from engaging with him.
Thank you for reading,
The BeQuant’s Analytics team