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The Hard Fork – Weekly Market Commentary

This Week’s Topics:

1) Bitcoin hits new all-time high; volatility bounces back
2) YearnFinance ‘acquires’ 3 networks
3) Compound sees $85m in DAI liquidated

 

Indices Round-up

 

TradeBlock Index Asset1 Price ($) 7d∆2
XLMX Stellar Lumens 0.20 76.19%
XRX XRP 0.62 27.98%
ZCX Zcash 76.63 5.82%
ECX Ethereum Classic 6.53 1.89%
XBX Bitcoin 18,622.76 0.16%
ETX Ethereum 589.04 -0.44%
XMRX Monero 123.82 -2.68%
BCX Bitcoin Cash 289.04 -2.75%
EOSX EOS 3.07 -4.05%
LTX Litecoin 79.08 -9.38%
1. Underlying asset sorted in descending order by 7 day price movers.
2. 7 day price movers monitored from 11/23/2020 06:00 ET thru 11/30/2020 06:00 ET.

 

7 day price movers
Digital currencies posted mixed results on the week. Midway through the week, on thin trading sessions with the US thanksgiving holiday, large cap digital currencies broadly corrected. Into the weekend, most digital currencies were bid, paring a majority of the losses incurred just days prior (see Bitcoin price chart below). In early morning trading today, bitcoin rallied to surpass prior all-time highs, hitting over $19,800.
 

Figure 1: Bitcoin hits new all-time high


 

In traditional markets, US equities ended the shortened week higher with the S&P 500 rising over 1.5%. The industrials heavy Dow Jones index crossed 30,000 this past week for the first time ever. Despite the continued grind higher in equities, bond yields remain depressed with the yield on the 10-year remaining below 1%.
 

1) Bitcoin hits new all-time high; volatility bounces back
At approximately 10 AM ET Monday morning, bitcoin surpassed prior all-time highs. Bitstamp saw the lowest all-time high of US accessible exchanges back in 2017–reaching $19,660. Bitcoin rose past these levels to hit $19,873–which was the all-time across Bitstamp, Kraken, and TradeBlock’s XBX Index–which includes several exchanges.

Volatility saw a modest bounce back on the week after price fluctuations occurred during the thinly traded Thanksgiving week. The initial price decline can be, at least partially, explained by news that potential US regulations could hit the space soon. Coinbase CEO, Brian Armstrong, outlined in a series of tweets that the US Treasury was looking to impose regulations on business and personal digital currency wallets.

The regulations, if enacted, would impose strict KYC laws on private wallet addresses–a compliance requirement that if imposed would be difficult for individuals and businesses to comply with given the decentralized nature of the space. For instance, individuals depositing assets onto ‘DeFi’ applications or decentralized exchanges do not necessarily have information of the counterparties on the platform for KYC obligations. Additionally, assets are often moved from private address to private address for non-financial purposes, such as charity contributions, payments for goods or services, ‘tips’ for social media posts, and other activities.

Given the relatively negative impact the regulation is expected to have, bitcoin saw a steep decline. On Wednesday, bitcoin was trading at $19,200. On Thursday, bitcoin had declined nearly 15% to briefly trade around $16,200. Into the weekend, bitcoin broadly recovered the losses incurred to trade over $18,000 before then reaching a new all-time high of over $19,800 Monday morning (TradeBlock’s price indexes can be viewed here). The gyrations over the week pushed volatility up from near record lows. In the figure below we diagram, bitcoin price volatility year-to-date.
 

Figure 2: Bitcoin price volatility over six months


 

Despite the recent slight uptick in volatility, it remains well below historical levels. In the figure below we diagram bitcoin price volatility over the past two years. In recent months bitcoin volatility has declined to levels even below that of the S&P 500.
 

Figure 3: Bitcoin price volatility over two years


 

YearnFinance ‘acquires’ 3 networks
YearnFinance went on an acquisition spree this past week. YearnFinance will merge with Cover, Pickle Finance, and Cream lending which would make the DeFi platform a one-stop shop for a variety of financial activities.

Pickle offers aggregate yield farming opportunities, Cream offers a lending platform, and Cover offers market coverage services which can be used as a backstop for a number of DeFi applications. Additionally, the mergers will combine vaults–which currently have a substantial amount of collateral deposits–making the new yearnfinance a DeFi behemoth.

The ‘acquisitions’ do not resemble traditional acquisitions in the financial markets as decentralized entities do not have a traditional business structure and legal entities for such purposes. The acquisitions can be more viewed as a developer collaboration as the teams behind each platform will now be working together, and also a merging of collateral deposited across its contracts as the vaults will now be shared. Despite the terminology used to describe the acquisitions, the move will position yearnfinance as a one-stop platform for a number of DeFi activities from yield aggregation, to lending, to insurance.
 

Compound sees $85m in DAI liquidated
This past week on November 26th, beginning around 3:00 AM ET and ending around 4:00 AM ET, the stablecoin DAI began trading at increasing prices and volumes across the DAI/USDC, DAI/USD, and ETH/DAI pairs at Coinbase. The stablecoin, which is typically pegged to the US dollar at a 1:1 ratio by market forces, traded as high as $1.30. The DAI price spike coincided with a decline in ETH prices across exchanges during this period.
 

Figure 4: DAI price spike on Coinbase


 

Compound Finance, which maintains the largest DAI borrowing and lending market with more than $1.6 billion in supply and $1.3 billion in demand, uses the Coinbase price oracle, known on Compound as a price ‘reporter’, for its feed. Because of the DAI price spike, DAI collateral events were triggered resulting in more than 85 million being liquidated.

Incidents like this, and others in the past, continue to highlight the importance of institutional grade price indexes for digital currencies. TradeBlock’s digital currency indexes are designed to maintain reliable reference rates during anomalous market events, and incorporate sophisticated algorithms to prevent isolated exchange incidents from adversely impacting index rates.
 

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