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The Hard Fork – Weekly Market Commentary

This Week’s Topics:
1) Bitcoin, gold outperform traditional equity/bond portfolio
2) BCH hash rate crashes after ‘Halving’
3) Public crypto companies report losses

Indices Round-up
TradeBlock Index Asset1 Price ($) 7d∆2
XLMX Stellar Lumens 0.05 -0.76%
ETX Ethereum 151.49 -2.05%
ZCX Zcash 34.99 -3.49%
ECX Ethereum Classic 5.08 -3.67%
XRX XRP 0.18 -3.75%
EOSX EOS 2.38 -4.57%
LTX Litecoin 40.06 -5.56%
XBX Bitcoin 6,695.15 -6.01%
XMRX Monero 51.73 -8.93%
BCX Bitcoin Cash 219.71 -9.51%
1. Underlying asset sorted in descending order by 7 day price movers.
2. 7 day price movers monitored from 04/06/2020 06:00 ET thru 04/13/2020 06:00 ET.

7 day price movers

Digital currencies traded flat to lower on the week, as a recovery last week failed to continue. Among our indexed currencies, XLMX declined the least, shaving off 0.76%. Conversely, BCX traded down the most, dropping 9.51%. BCX price declines come as the network went through its ‘halving’ which resulted in a crash in hash rate, as miners saw reduced profitability. In traditional markets, US equities closed the week higher, with the S&P 500 reaching its highest level in more than a month.


Bitcoin, gold outperform traditional equity/bond portfolio

Risk assets across the globe retreated in Q1 2020 as lockdowns related to COVID-19 put pressure on the world economy. While both hard assets bitcoin and gold declined alongside US equities in early March as investors fled to cash, bitcoin and gold have recovered a majority of these losses. We analyzed various portfolios to determine the impact on a traditional portfolio of allocating even a modest percentage to hard money assets, such as gold and bitcoin.

We compared three different model portfolios: (1) Equity + bond 60:40, (2) Equity + bond + bitcoin 55:35:10, and (3) Equity + bond + gold 55:35:10. In the figure below we breakdown the performance of these three portfolios over the last year. As shown in the figure, a portfolio with equities and bonds and a modest allocation to bitcoin outperformed the equity and bond only portfolio as well as the one containing gold, by a modest margin. In either case, allocating a small percentage to either gold or bitcoin increased returns. In a similar analysis we conducted last year, we found that during that time frame bitcoin had also outperformed a traditional 60:40 equity + bond portfolio.

Figure 1: Model portfolio comparison

Data for chart sourced from TradeBlock and WSJ Markets


BCH hash rate crashes after ‘Halving’

Last week the Bitcoin Cash network underwent its scheduled block reward ‘Halving.’ The halving is a pre-set inflation adjustment that reduced the new supply of bitcoin cash tokens by 50%, similar to Bitcoin’s halving which will occur in May. Following its halving, the bitcoin cash network hash rate declined considerably as miners reduced resources dedicated to mining. Prior to the halving, the network hash rate hovered around 4,000 PH/s. Following the halving, the hash rate declined to around 800 PH/s before rising to around 1,900, PH/s.

In analyzing mining breakevens, we estimate that after mining rewards were cut by ~50% following the halving, miners would have been operating at significantly negative profit margins and thus reduced hash power dedicated, leading to a large network hash rate decline. In the figure below, we estimate gross bitcoin cash mining profitability over time.

Figure 2: Estimated bitcoin cash mining profitability over time

Data for chart sourced from TradeBlock

In addition to our analysis on bitcoin cash mining profitability, we published an in-depth report last month on bitcoin mining ahead of its halving in May 2020.


Public crypto companies report losses

This past week, both Galaxy Digital and Canaan reported fourth quarter 2019 and full year 2019 financial results. Galaxy Digital is a liquidity provider and asset manager headed by Michael Novogratz. Canaan is the first digital currency mining company to go public, IPO’ing in New York last year.

In 4Q 2019, Galaxy reported a net income loss of $32.9 million while Canaan reported a net income loss of $148.6 million for the same quarter ending 2019. While net income at Canaan declined, the mining firm saw a 66% revenue increase year-over-year. Canaan’s share price (CAN) is down 60% since its IPO, while Galaxy’s share price is down 67% since its IPO.

Galaxy reportedly experienced layoffs in February of 2020 as the firm grappled with weak financial results. On the earnings call, Galaxy CEO Michael Novogratz reassured investors that the recent bitcoin price crash has not invalidated its thesis as a safe haven asset. Additionally, he mentioned that he believes bitcoin and ether should end the year at higher prices following a rebound. He remains optimistic that privacy and other aspects closely related to digital currencies will continue to gain tailwinds over time.

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