Blockforce October Macro Cryptocurrency Commentary

16 min readNov 11, 2019

Key Highlights

Bitcoin returned 11.5% for October, compared to mid 2% returns for gold, the S&P500, and the MSCI All-World Index. The S&P hit new highs to close the month, returning 23% YTD — a favorable return for traditional assets, but one that is dwarfed by bitcoin’s 150% YTD return.
Macro events continue to be a factor for the asset, as the congressional Facebook hearing pushed bitcoin down 10%, only to see a 40% rally caused by China’s big push on blockchain technology.
Baidu trends saw a significant spike for the words blockchain and bitcoin, although searches for blockchain outweighed those for bitcoin by a 10:1 ratio
CME bitcoin futures volume was non-existent for the first three weeks of the month but increased during the last week of October given the dominant news cycle regarding Facebook and China. CME contract volume was under $200M for the month, the lowest since Jan 2018, but open interest remained relatively healthy.
Bakkt bitcoin futures got off to a slow start last month, but both volume and open interest continues to grow. Open interest closed the month on at a high of $900k on October 31.
Institutional beta products, like the Grayscale Trust product line, saw record inflows tripling QoQ.
Bitcoin led top 10 assets from April through August, but was the 3rd worst performer in September when altcoins saw a bit of revival. During October, alts led again, spearheaded by Tron (TRX, +36%) and Binance Coin (BNB, +25%), with bitcoin sitting in the middle of the top 10 price appreciation.
Bitcoin experienced a death cross late October, but it's important to note that the last two parabolic rallies in 2012–2013 and 2016–2017 were preceded by the same false breakout.
Bitcoin volatility closed the moth at a 2 ½ month high but is still 10% below its long term average of 82%.
Bitcoin’s monthly price range remains below 40% for the 3rd consecutive month. The dampened range over a span of multiple months is usually followed by a significant 80%+ move. Coinciding with the 4th quarter historically being the best in terms of performance for the asset, along with a volatility uptrend, it should be an interesting year-end for the flagship cryptocurrency.
Spot market volumes on ticked up slightly, with Binance’s bitcoin volume up 15% MoM. Coinbase bitcoin volume was 5% MoM, its 4th straight monthly decline
Total notational trading volume in top 5 assets is still a far cry away from Jan 2018’s $63B, peaking YTD at $54B in June. Outside of bitcoin, Ripple (XRP) was the only top 5 coin to see positive volume growth.
The lending market continues to grow, as Genesis loan origination grew 38% QoQ, with USD or cash equivalent lending representing 31% of total loans, up from 14% at the beginning of the year.
Bitcoin & Ethereum saw a bump in network transactions, ending their multi-month decline in October. Both sit comfortably below their respective all-time high, with bitcoin 14.4% below its May high, and Ethereum 37% below it’s January 2018 record.
Hash rates for both bitcoin and Ethereum continue their upswing, up 7.5% and 8.2% for the month respectively. MoM change in bitcoin hash rates is slowing after posting double-digit growth over the last six months.

Big thanks are owed to the crew at Digital Assets Data as their data aggregation and enterprise-level data feeds are paramount to sourcing, interpreting, and understanding the vast amounts of data available in cryptocurrency markets.

Market Overview

The month of October was a reversion to the norm for bitcoin, as volatility returned to the crypto markets while the S&P 500 hit all-time highs. Macro events are becoming more and more relevant for the nascent asset class, a narrative that has become more frequent in 2019 than in previous years. During the month, two global newsworthy events — the Facebook/Libra hearing from Congress and President Xi’s decisive statement on blockchain, caused bitcoin to fall 10% and rally 42%, respectively. Bitcoin closed the month up 11.5%, compared to the mid 2% return for gold, the S&P500, and the MSCI All-World Index. Global markets continue to extend their rally in the fourth quarter, with the S&P500 up 23% year-to-date through October, an excellent year for a traditional asset, but bitcoin’s 150% year-to-date return dwarfs this number.

China’s Bet on Blockchain

Baidu search trends for ‘blockchain’ outweighed the search trends for ‘bitcoin’ by a 10:1 ratio

After posting a 10% downturn on Facebook’s Congressional hearing regarding Libra, crypto-assets ripped about 40% in a short period when President Xi announced his support of blockchain technology. His initial message greatly enhanced the countries stance on blockchain, stating China should seize the opportunity to adopt the emerging technology. His comments were followed by a public message on China’s CCTV (broadcasting to 1B people) declaring that the country wants its Communist party members to pledge loyalty to the party via a blockchain, an unalterable indefinite record. The CCTV segment on blockchain lasted about 5 minutes, and the China state media urged investors to remain rational, affirming, “The rise of blockchain technology was accompanied by that of cryptocurrencies, but innovation in blockchain technology does not mean we should speculate in virtual currencies.”

As we all well know, cryptocurrency doesn’t mean blockchain, and blockchain does not mean cryptocurrency. The message from China didn’t stop bitcoin and many other altcoins, especially projects in China, to soar. Most publicly traded equities in China that had cryptocurrency and/or blockchain exposure also saw a significant move upward, averaging around 10%. China’s endorsement of blockchain was not an endorsement for bitcoin, but rather its fondness for the underlying technology. This also paved the way for a few rule changes within the country, followed up by the countries own digital currency (DCEP), which is speculated to be rolled out sooner than estimated. Baidu Trends show a massive spike in search traction following the initial announcement, although search trends for ‘blockchain’ outweighed the search trends for ‘bitcoin’ by a 10:1 ratio. Interest waned in the days following the announcement but closed the month multiples above their recent and long-term average.

Institutionalization: Derivatives and Futures

The increased competition between traditional financial institutions, plus developments by counterparties like Binance and Deribit, will continue to accelerate the exponential growth of bitcoin institutionalization

The institutionalization of the asset class is heating up into year-end, and considerable strides have been accomplished over the past few months. A crypto ETF remains unlikely in the near future, but that has not stopped companies from offering institutionalized products to the masses. As discussed in last month’s commentary, the new Bakkt contracts only traded 754 contracts during the first five days of launch, underwhelming expectations. Fast forward a month, the contracts have continued to show substantial volume increases, partially fueled by the increased volatility as of late. In addition, the CME announced last month that they were going to issue options on their futures contracts in Q1 2020, but Bakkt announced they are going to beat them by launching options in December of this year. The increased competition between traditional financial institutions, plus developments by counterparties like Binance and Deribit, will continue to accelerate the exponential growth of bitcoin institutionalization.

CME

As per usual, the first of the three months in the near contract is met with paltry volume when compared to the last month of expiration, and October was no different. In October, the CME contracts traded a total of $179.7 million in notional volume — the lowest since January 2018. We’d typically view this as a deterioration of interest in the asset class given the substantial setback, but with Bakkt now claiming market share and open interest remaining relatively healthy for the first month of a new contract, it’s a bit early to worry. Bitcoin’s price was stagnant for much of the first half of October, which usually leads to lackluster volume. Volumes picked up substantially into month-end, and we will be looking for considerable growth in November. It will be interesting to watch two financial powerhouses compete for institutional volume. CME has the first-mover advantage, but Bakkt has physical delivery and appears intent on capturing market share as quickly as possible.

Bakkt

In September, only 754 contracts (representing 754 bitcoin) traded in Bakkt’s newly released exposure vehicles. Both open interest and volume continued their sporadic uptrend, accelerated by Facebook’s congressional hearing and, subsequently, the positive news out of China. Volumes hit an all-time high on October 25th, with $9.6M worth of contracts changing hands. Also, Bakkt’s contracts closed the month of October with their highest open interest to date, hitting $900,000 on October 31st. While the initial adoption has probably left most people underwhelmed at the general lack of volume and open interest versus the CME futures and spot currency trading, there continues to be growth in the ICE-backed contracts, and we imagine that the introduction of options in December will increase the volumes by a significant multiple.

Binance

Binance has aggressively pushed into the futures market over the last few months. During October, the exchange’s daily futures volume hit $1 for the first time, quickly followed by the eclipse of $2 billion at month-end. Also, in a move to take on established futures rival Bitmex, the exchange upped its leverage capability to 125x. While some “institutional” crypto counterparties may use the Binance futures contracts, the broad swath of traditional financial institutions are probably not going to bet on the relatively unknown counterparty in traditional circles. To us, this makes the volume metrics even more impressive. We couldn’t be more fascinated with Binance’s continued growth and execution, and their recent rollout of futures contracts is no different.

Trust Products

People trust the name and presence that comes with Grayscale and have obviously made the bet that 2% a year is worth the extra security that comes with the trust versus owning bitcoin or other assets outright

Grayscale has been a dominant force in with their “not an ETF” trust, and saw record quarterly inflows during the third quarter, according to a report released by the company. In all, they welcomed inflows of $255 million (tripling last quarter’s inflow), of which the majority ($171.7m) went into their flagship bitcoin trust. They cited 84% of the interest came from institutional investors (mostly hedge funds), and surprisingly 80% of Q3 inflows were in-kind — meaning they accepted cryptocurrency deposits into the trust instead of cash. It behooves me to say that I am unsure why sophisticated hedge funds would rather pay a 2% management fee to Grayscale to hold their crypto assets instead of utilizing custody or an established institutional exchange like Coinbase, for free. I imagine the reasoning behind this is two-fold — one, as shown with the adoption of other institutional products, investors pay for convenience, and the Grayscale Trust, whether the public or private version, is extremely familiar to institutional investors. Secondly, there is still a considerable arbitrage opportunity available between the public and private vehicles. As of this writing, the Grayscale Bitcoin Trust (GBTC) is trading at a 24% premium on the public market versus the private, while the Grayscale Ethereum Trust (ETHE) is at an astounding 89% premium on the open market. Grayscale has also emerged as a considerable player and one of the most well-known institutional counterparties in the cryptocurrency space, and people trust the name and presence that comes with Grayscale and have obviously made the bet that 2% a year is worth the extra security that comes with the trust versus owning bitcoin or other assets outright.

Source: Grayscale 3Q Report, sourced October 31, 2019

The second big-name trust, offered by a partnership between VanEck and SolidX (XBTCZ), has finally gotten a bit of traction, although it’s dwarfed by Grayscales dominance. After hanging out around $40,000 in assets, it’s now up to almost $600,000 — positive momentum, but hardly anything to notice thus far.

Top 10 Price Movements

In terms of price appreciation, bitcoin led the top 10 assets each month from April through August but was the third-worst performer in September when altcoins saw a bit of revival. During October, alts led again, spearheaded by Tron (TRX, +36%) and Binance Coin (BNB, +25%), with bitcoin sitting in the middle of the top 10 price performance. Tron, along with other major altcoins associated with China, experienced considerable rallies spurred by the Chinese governments’ endorsement of blockchain technology. The quick rally from Tron pushed it into positive territory for the year, up 6% through October. Binance Coin (BNB) continues to be the performance leader year-to-date (+225%), attributable to its rally during the early months of 2019 and furthered by its 25% performance in October. Ethereum, the sole top 10 asset to post a positive gain last month, was the worst performer of the top cryptocurrencies, up 1% for October. Furthermore, there are now only two (Ripple and Stellar) top ten assets to post a negative return for the year, as Cardano (ADA) and Tron (TRX) moved into positive territory during the month.

Death Cross in Bitcoin

Despite the massive upward move late October, the infamous “death cross”, when the 50-day moving average crosses below the 200-day moving average, emerged during October and is overwhelmingly viewed as a negative sign for long-term price trends. The short-term moving average had spent approximately six months above the longer-term average. While generally pessimistic, it’s important to note that the fakeout also took place in both 2011 and 2015 before their respective parabolic bull runs, as highlighted in red on the chart below.

Volatility

Bitcoin experienced two multiple standard deviation price moves during late October, closing down 7% on October 23rd due to the Facebook hearing, and rallying 16% on October 25th on blockchain adoption headlines out of China. The 16% daily move was bitcoin’s 12th largest daily move (in either direction) since 2015, and was the second-largest move year-to-date. As we mentioned in Forbes, these significant daily moves popped bitcoin’s 30-day volatility to close the month at 73%, a two and a half month high. Bitcoin’s volatility now sits about 10% below its long-term average of 82%. After spending multiple months in a declining volatility cycle, it appears that bitcoin’s volatility will be in an uptrend cycle as we close out 2019.

The recent spike in volatility was the result of two sharp moves in bitcoin’s price. Outside of those events, bitcoin’s recent trading action has been relatively modest and rangebound. This is apparent when looking at the monthly range of bitcoin, which was about 35% for October, as shown below. The 35% monthly range ranks in the bottom third since 2017, but usually, with a few consecutive months of sub 40% moves, a significant monthly move soon follows. This happened after six consecutive decreasing monthly ranges from May — October 2018, as well as the four months (Dec 2018 — April 2019) of sub 40% monthly range that preceded the rally in May and June. In both 2017 and 2018, the most substantial monthly moves took place in the fourth quarter, and given the recent price action, we’d expect for an interesting close of the year.

Spot Market Volumes

Ripple (XRP) was the only top 5 coin outside of bitcoin to see positive volume growth, increasing 27% month-over-month

After three consecutive months of declining bitcoin volume on both Coinbase and Binance, there was finally an uptick in October, although the first three weeks of the month experienced trivial volume and were on track to show a monthly volume decline of about 20% on both exchanges. Surprisingly, Binance had an uptick in their volume statistics, increasing 15% month-over-month, while Coinbase volume declined for the fourth straight month, down 5% month-over-month. Both exchanges are well below peak set mid-summer, as Coinbase is 60% below its year-to-date peak, and Binance fared a bit better, down 45% from its record $9 billion set in July.

While Binance’s bitcoin volume in July eclipsed its record set in January 2018 as the market was coming down from its all-time high, top 5 volume on both exchanges failed to eclipse the $63 billion that changed hands in January of 2018, with its year-to-date peak set at $53.9 billion in June, 14% below its high-water mark. Ripple (XRP) was the only top 5 coin outside of bitcoin to see positive volume growth, increasing 27% month-over-month.

Lending

Throughout the course of 2019, the crypto lending markets have seen considerable growth. While many of the companies in the lending space have appropriate risk controls in place, each one needs to be considered carefully due to the custodial nature of these counterparties. In order to participate in the lending environment, a person needs to deposit collateral into an appropriate wallet/bank to receive services. Given the nascent nature of the asset class and ever-changing environment, the location of “deposit,” whether it be a decentralized platform or an institutional counterparty, should be considered carefully. It is our view that there are counterparties in the space that enact in this lending market well, but there are many that do not have the appropriate balance sheet assets, nor the appropriate risk controls, or they have policies like socialized losses, that add substantial hidden risk for the 3–10% yield offered. Coming from someone who spent their first few years in institutional portfolio management during the financial crisis and who watched Lehman Brothers fail, I worry this massive growth in lending markets is substantially contributing to a potential black swan event. At the end of the day, banks are too big to fail, but crypto counterparties are not.

Genesis recently released its Q3 report on loan originations, and the results are staggering. Loan originations grew 38% during the third quarter, and are up approximately 165% since the beginning of the year. Total originations stand at $3.1 billion as of September 30th. The most striking statistic coming out of this report is the shift in loan issuances from denomination in BTC to USD or equivalent. As 2018 ended, bitcoin lending represented 63% of the loans issued by Genesis. As of September 30th, that number fell to 50%, primarily due to the increase in USD or equivalent lending representing 31% of their activity, up from only 14% at last year’s end. We believe this is due to both the material growth in lending activity across the board, and because bitcoin’s price has rallied 200–300% since the December bottom.

Source: Genesis Q3 loan origination report

Celsius has seen similar growth throughout the year, as their cumulative loan originations stand at $2.1 Billion, and they currently have about $380 million in assets on their platform. BlockFi, another popular lending platform, has not released recent numbers but recently launched an enterprise platform geared toward institutional investors. Lastly, the decentralized finance market (DeFi) also saw considerable growth in the third quarter, pulling in over $525 million, according to dapp.com’s market report.

We are big fans of the crypto lending world, but it is essential to conduct thorough due diligence on each counterparty that one deposits assets with, as they are not subject to the same risk controls as traditional lenders.

Blockchain Network Health

Network transactions continue to be a healthy barometer of interest in cryptocurrency, and both bitcoin and ethereum saw an uptick in October, increasing 1.3% and 2.5%, respectively. Bitcoin set a new network transaction record in May with 11.5 million, but currently sits 14.4% below the recent high. Ethereum hit a yearly high around the same period, hitting 25.7 million transactions in June, but through October is 17% below its year-to-date high, and 37% below the all-time high set in January 2018.

Hash rates for both bitcoin and Ethereum grew in October, increasing 7.5% and 8.2%, respectively. October marks the sixth consecutive month in a row for bitcoin’s hash rate, although the month-over-month change is slowing down after posting double-digit growth over the six months. Ethereum’s month-over-month increase is it's most significant all year and is the largest monthly change in 12 months.

Looking forward to next month

Bitcoin experienced the infamous death cross in October when its 50-day moving average crossed below the 200-day moving average. Usually a negative signal, bitcoin had a false breakout preceding the last two prominent rallies, and this will be something to watch as we close out the year. The fourth quarter has historically been the best for the asset in terms of price appreciation, and with volatility ticking up and positive news of blockchain adoption coming out of China, it’s not hard to fathom that the asset will experience a volatile and (hopefully) upward trajectory into year-end. After months of bitcoin outperforming other top crypto assets, various altcoins have experienced a resurgence, although most significantly trail bitcoin’s year-to-date performance. We will be watching bitcoin’s network transactions, as they finally bucked their downtrend during October. Institutionalization continues to be a key factor to watch, and we are hopeful that November will bring more information regarding Bakkt’s option rollout.

Tracking all the developments and market moves in October only leave us more excited to see how October and the rest of 2019 will play out. If you would like to receive our monthly market commentary again next month, please sign up here.

The opinions and data presented herein are not investment advice and are for informational purposes only and should not serve as the basis of any investment decision. Information is given in a summary form and does not purport to be complete. Information and data have been obtained or derived from sources believed by Blockforce Capital to be reliable, however, Blockforce Capital does not make any representation or warranty as to its accuracy or completeness. The sole purpose of this material is to inform, and in no way is intended to be an offer or solicitation to purchase or sell any security, other investment or services, or to attract any funds or deposits. Past performance does not guarantee future results.

DISCLOSURE: Blockforce Capital manages investment vehicles that invest in and hold digital assets, including the digital assets discussed in this article.