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The Hard Fork – Weekly Market Commentary

This Week’s Topics:
1) Bitcoin sees second largest mining difficulty drop in history
2) Negative yields put pressure on stablecoin issuers
3) Spot trading outpaces regulated futures activity

Indices Round-up
TradeBlock Index Asset1 Price ($) 7d∆2
XMRX Monero 47.01 19.75%
XRX XRP 0.17 15.67%
XLMX Stellar Lumens 0.04 9.53%
XBX Bitcoin 6,262.49 7.77%
ETX Ethereum 130.64 6.83%
LTX Litecoin 38.49 6.81%
BCX Bitcoin Cash 214.81 5.97%
ECX Ethereum Classic 4.92 4.68%
EOSX EOS 2.29 2.07%
ZCX Zcash 29.88 0.72%
1. Underlying asset sorted in descending order by 7 day price movers.
2. 7 day price movers monitored from 03/23/2020 06:00 ET thru 03/30/2020 06:00 ET.

7 day price movers

Digital currencies posted a broad rally on the week. Among our indexed currencies, XMRX rose the most gaining 19.75%. Meanwhile, ZCX traded up the least, adding 0.72% on the week. While volatility had roared back in digital currency markets over the last few weeks, the past several days have been range bound with traders and investors waiting to gauge the extent of COVID-19 impacts. In traditional markets, US large cap equities posted gains on the week in a sharp bounce from earlier sell-offs.

 

Bitcoin sees second largest mining difficulty drop in history

This past week, the bitcoin network experienced its second largest mining difficulty drop in history. As designed, the bitcoin network difficulty adjusts every 2016 blocks or approximately every two weeks. The adjustment is based on the network hash rate and is designed to ensure that miners continue to find new blocks at a rate of one per 10 minutes. With the recent and sudden bitcoin price crash, miners were operating at a loss as the market price of bitcoin declined to levels below mining breakevens. In our report last week we diagramed mining profitability over time and estimated this recent price crash was the first time in 2020 mining operators saw negative margins.

In the figure below we diagram bitcoin difficulty over time alongside TradeBlock’s XBX Bitcoin Index. The considerable decline in mining difficulty indicates that miners have removed resources, in aggregate, committed to mining bitcoin. While this occurs somewhat infrequently, with the last sustained decline coming in 2018, miners can face difficulty maintaining profitability when a prolonged price crash occurs. Just this past week mining operator, Digital Farms, suspended operations indefinitely due to low bitcoin prices.

Figure 1: Bitcoin mining difficulty over time

Data for chart sourced from TradeBlock’s tool page

 

Negative interest rates put pressure on stablecoin issuers

Global risk markets have retreated over the past month as economic fallout related to COVID-19 spread. Virus related concerns have pushed yields on US government debt into negative territory, as investors have flocked to safety. On Wednesday yields on both 1-month and 3-month Treasury bills fell below zero, just a week and half after the Fed cut its key benchmark interest rate to near zero.

While stablecoin issuers have seen an increase in demand for their assets amidst heightened volatility in other digital currencies, such as bitcoin and ether, negative yields can put pressure on their business. As we demonstrated in a previous report in 2018, Stablecoin issuers back each of their USD stablecoins with US dollars in short term interest bearing accounts. Upon redemption of the stablecoin, customers receive one US dollar back. During the interim period, stablecoin issuers hold the US dollars backing these stablecoins in low risk money market accounts clipping the yield. As rates have plunged to near or even below zero, stablecoin issuers could see pressure on their businesses and may be pushed to hold riskier or longer dated assets which offer higher yields.

 

Spot trading outpaces regulated futures activity

Bitcoin price volatility rose over March as COVID-19 roiled nearly every asset class. Amidst the market turmoil, spot trading volumes rose to near term highs on the heightened activity. While spot volumes rose, interestingly, regulated futures activity at the CME saw a considerable decline in bitcoin trading volumes. While the bifurcation is not readily clear, it could indicate that more institutional type firms, which trade at the CME, reduced volumes during the turmoil while more retail types increased trading activity during the period.

In the figure below we diagram spot trading volume and futures trading volume on a monthly basis alongside TradeBlock’s XBX Bitcoin Index. Spot trading volumes are sourced from the following exchanges: Coinbase, itBit, Bitstamp, Kraken, Bittrex, LMAX Digital, and Gemini.

Figure 2: Bitcoin spot and futures trading volumes over time

Data for chart sourced from TradeBlock and the CME

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