One of the most appealing aspects of cryptocurrency assets is their uncorrelated and asymmetric performances, which, when utilised in portfolio construction, theoretically should lead to a much more diversified portfolio. However, at the same time Bitcoin maximalists preach that Bitcoin is also a hedge against monetary policies running wild and therefore should benefit from geopolitical and macroeconomic risks. All the same, the riots in Hong Kong, which the police have warned has pushed the country’s rule of law to the "brink of total collapse" after more than five months of protests, are yet to manifest in a market evident trend concerning crypto assets. Other market narratives include the hype surrounding the block reward halving and the impact it will have on the price. However, research from the likes of Strix Leviathan indicates that there is no evidence that cryptocurrency assets experiencing a halving event outperform the broader market in the months leading up to and following a reduction in miner rewards. An asset’s return distribution prior to and following a halving is statistically equivalent to the rest of its return distribution with a high degree of confidence, suggesting that there is no evidence of abnormal pricing action from a shift in supply and demand dynamics. But even so, markets and in particular, highly speculative markets such as digital assets, are very rarely driven by underlying fundamentals. Even though Bitcoin may have a market cap of over $150B, it can still trade like a pink-sheet stock.
Even the widely followed Consensus Invest event in NYC, together with Blockshow in Singapore, has failed to spur on interest in digital assets. Interestingly, it was reported that Bitfinex is planning to launch options and a gold-backed stablecoin, among a host of new products. Reading between the lines suggests that Bitfinex and Tether, both at the epicentre of the ongoing NYAG case do not expect it to lead to anything that would materially impact its business model. If so, could this lead to another round of new money finally entering the market?
Something that may have been overlooked by the market are comments from the head of the U.S. Commodity Futures Trading Commission (CFTC) Heath Tarbert, who at a recent conference expressed the opinion that the upcoming update for the Ethereum network may lead up to the classification of ether as a security. Tarbert claims the agency is carefully considering ETH’s potential shift to the Proof of Stake (PoS) consensus mechanism.
Elsewhere, the Ethereum blockchain may get clogged up yet again, as Ethereum based trading card game Gods Unchained has outstripped CryptoKitties by volume after a censorship scandal involving game-developer Blizzard. In terms of daily transfers of its non-fungible tokens (NFTs), Gods Unchained was recording almost 500,000 such transfers per day at the end of last week. Keep an eye on gas fees and network utilisation levels to gauge how the blockchain is coping with the recent appetite for non-fungible tokens (NFTs).
Interestingly, yesterday, the Ethereum network issued the least amount of ETH it has in its history. As a guide, Ethereum’s next system-wide upgrade, Istanbul, is scheduled to arrive on mainnet the week of Dec. 4. The upgrade is expected to introduce six backwards-incompatible code changes to the world’s second-largest blockchain network. The most controversial among them, known as Ethereum Improvement Proposal (EIP) 1884, will increase the computational costs of recalling data about the ethereum blockchain for application developers. At the same time, the increased fees will better safeguard the $18 billion platform from potential denial-of-service, or spam, attacks.
Thank you for reading,
The BeQuant’s Analytics team