As coronavirus cases began to spike back in China and certain states in the United States, markets have had a correction across the board despite rebounding in the last few days. Crypto markets have not been an exception to this, with Bitcoin’s prices following suit. In this edition of This Week in Crypto: A Data Perspective, we’ll dive into some of the reasons for the correlation between traditional markets and crypto markets, as well as within other tokens and Bitcoin.
As well, we’ll analyze the DeFi rally — the outperformance of decentralized finance (DeFi) protocols’ token prices since the March bottom — and its implications in key on-chain metrics provided by IntoTheBlock. Finally, we review support and resistance levels demonstrated by blockchain positions that can provide valuable hints of where Bitcoin may be heading next.
Correlations Are Back as Bitcoin’s Safe Haven Potential Is Scrutinized
The debate of Bitcoin being a safe haven asset has been a hot topic for several years and been put to the test throughout 2020. One of the defining traits of a safe haven asset is that it is expected to retain or increase in value during market downturns. In order to achieve this feat, a safe haven asset would have to be uncorrelated or negatively correlated with broader markets. So how has Bitcoin performed during turbulent times this year?
During the stock market sell-off in February and March, Bitcoin — and the majority of cryptocurrencies — crashed even further. Specifically, on March 12, when the S&P 500 dropped nearly 10%, Bitcoin dropped the third-highest amount within a 24-hour period, over 35%, in what is now dubbed Black Thursday in the crypto space. As a result of this drop, Bitcoin exhibited a strong positive correlation with major stock indices and its potential as a safe haven asset came under scrutiny.
While this correlation decreased in the following months, it has been on an uptrend since late May. In part, fears of a second wave of coronavirus infections halting the reopening of the economy has appeared to have an effect in Bitcoin’s and stock indices’ prices. The increased correlation between crypto prices and major stock indices is displayed in the chart below:
The chart above calculates the 30-day correlation between the prices of Bitcoin and Ethereum with the prices of global stock indices and gold. Recall that a correlation coefficient (R) between 1 and 0.5 indicates a strong statistical relationship between two variables, meaning that they tend to move in tandem. A correlation coefficient below 0.5 points to a moderate to low correlation, while negative correlations illustrate negative relationships between the two variables.
As evidenced by the chart above, both Bitcoin and Ethereum have strong positive correlations with global markets, but not gold, pointing to the likelihood of their prices dropping in the event of another sell-off. Keep in mind, however, that correlation does not imply causation, and that despite the fact that this happened in March, there is no guarantee that history will repeat itself.
Another interesting pattern emerging is that the correlation between Bitcoin and Ethereum has been increasing since late May as shown in the graph below:
Currently at a 0.77 correlation coefficient, there is evidence of a strong statistical relationship between the prices of Bitcoin and Ethereum. This has also been the case with most tokens’ prices and Bitcoin’s. While this may generate doubts to the argument of Bitcoin as a safe haven, it also raises the question if not that — then what could it be?
IntoTheBlock CEO Jesus Rodriguez has a great piece exploring this question where he evaluates Bitcoin as a high sentiment beta, a younger, more volatile asset likely to be disproportionately sensitive to broad waves of investor sentiment. Finally, just because Bitcoin is not currently exhibiting properties of a safe haven asset, it does not mean that it won’t do so in the future as it matures. At IntoTheBlock, we will certainly keep an eye on these trends and make sure to update you through our platform.
The DeFi Rally
While markets have remained volatile throughout 2020, certain sectors have seen an increase in risk-appetite: in crypto’s case, it has been DeFi. As reported by Decrypt, Compound protocol’s newly-released token soared over 60% on its first day to become the highest valued decentralized finance (DeFi) token. This is the latest sign of a frenzy in DeFi tokens, which have severely outpaced the broader crypto markets, especially since the March 13 bottom. This trend becomes apparent when comparing the returns of the DeFi tokens in the CoinMarketCap top 100 versus the return of the total market cap as shown below:
While the price of Bitcoin, Ether and other large caps have remained sideways or moved slightly lower throughout June, DeFi tokens have appreciated an average of 31% month-to-date. These numbers may remind you of the 2017 ICO craze, but a key difference is that DeFi tokens have actually shipped a product and since they are permissionless protocols (mostly) on the Ethereum blockchain, we can identify fundamental metrics regarding their growth and adoption.
Leveraging IntoTheBlock’s on-chain indicators, we can observe an increase in the number of addresses — a proxy to the number of users — in DeFi tokens. Out of the list of DeFi tokens in the CMC top 100, all but Augur’s REP have reached multi-year highs in daily active addresses following Black Thursday. The graph below shows this trend for the Kyber Network Crystal (KNC):
Tokens such as KNC, LEND, OMG, LRC and NMR reached numbers of daily active addresses not seen since 2018. MakerDAO’s MKR token also recently hit an all-time high for this metric following the Coinbase listing. While daily active addresses show a strong correlation with price as shown in the graph above, this growth is seen as positive development in the ecosystem of these tokens as they draw in an increasing amount of interest that leads to a next wave of innovation as highlighted in a16z’s price-innovation cycle.
With optimism towards protocol upgrades, such as Compound’s token release, and an increasing risk-appetite, DeFi protocols’ tokens have outperformed the market since the March bottom. Analyzing IntoTheBlock’s on-chain indicators, we can see overall growth in adoption and usage of tokens in the decentralized finance space. While it is uncertain how long the DeFi rally will last, the wave of enthusiasm and development in the industry is likely to persist.
Next On-Chain Support & Resistance for Bitcoin
Technical analysis (TA) is a well-known tool for traders to assess price trends in hopes of finding good entry and exit points for their trades. While TA can be applied to almost anything traded from crypto to corn futures, blockchain’s digital and transparent nature provides us with indicators unique to cryptoassets. Before diving into some of these on-chain metrics, though, let’s first see what the technicals are pointing to based on a piece from Cointelegraph.
As mentioned in the article and seen in the graph below, a critical support level can be expected between $9,000 and $9,200, as well as resistance near the $9,800 mark.
Using machine learning to identify the most relevant clusters of addresses’ positions, IntoTheBlock is able to determine the number of addresses and volume of tokens profiting (in the money) or losing money (out of the money) at a given price. Based on the aggregate of these positions, we can then validate support and resistance levels and determine the strength of these using on-chain data.
As can be seen in the graph below, the In/Out of the Money Around Price (IOMAP) indicator detects that over 1.4 million addresses had previously purchased 1.1 million BTC at the range between $9,549 and $9,800, a critical resistance level, as several of these addresses will attempt to break-even on their positions. Furthermore, nearly 1.3 million addresses had previously purchased a total of 854k BTC between $8,960 and $9,249. This is expected to act as a strong support as holders in this range will attempt to remain profitable on their positions and push prices above this level.
By comparing these levels to those provided by technical analysis, we can verify buyers are expected to create support near the $9,000 range, while sellers will provide resistance around $9,800. The strength of these price ranges, as demonstrated by the magnitude in volume of these clusters, point to the possibility of Bitcoin trading range-bound and potentially moving strongly in either direction if prices breakout.
This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice.
The views and opinions expressed in this article are the author’s own and do not necessarily reflect those of CoinMarketCap.