Financial Research

Crypto Benchmark Indices Performance and Review

Over the past 7 days, the FS CryptoFX Agg Index increased by 12.6%, compared to a 0.2% decrease for the S&P 500 (Slide 6). Bitcoin’s price surged above $9,000 last Wednesday and, at a point, reached nearly $9,500. This rally is likely to be a good sign as we are approaching the Bitcoin mining reward halvening event in less than one week. Another good sign was that Bitcoin broke through its 200DMA for the first time since the February crash. As one of our crypto investment rules, a break above its 200DMA generally signals a positive long-term trend and has been bullish for Bitcoin historically. Sector RotationBitcoin led all other segments of crypto markets this past week. And because of the strong performance of Bitcoin, FS CryptoFX Commodity index and FS CryptoFX Large cap 10 index were the best performing sector-based and size-based index, respectively. The strong momentum of FS CryptoFX Platform index persisted and had the best performance among all non-Bitcoin sectors. Zilliqa and Stellar led within the sector, up 20% and 17%, respectively. The largest member, Ethereum, also gained 7% over the past week. FS CryptoFX Privacy index was the only index that declined over the past week and was down 0.1%. Dash was the primary cause of the laggardship, as it was down 3% over the past week. Ripple further scales back XRP sales in Q1Ripple released its Q1 XRP markets report this week. The biggest takeaway? Ripple’s big pause of XRP sales continues. Recall that Ripple owns a large chunk of the XRP token supply; about 55% of total supply. In response to the investment community’s well-founded concerns over this concentration, Ripple created a series of Escrow contracts whereby XRP is temporarily locked. Each month one contract releases 1 billion of XRP (1% of the total supply) for sale or for broader ecosystem growth initiatives and the Company is free to do as it pleases with the XRP. While Ripple has historically returned about 80% of released coins into escrow, it has also sold a large portion of the permanently released coins onto the market. In 2019 these sales totaled $500 million in aggregate and sales in Q2 alone topped out at $250MM. While it is hard to say how large of an impact these 2019 sales had on token price, it suffices to say that these $500MM in sales did not help. XRP cratered 46% on in 2019 compared to massive 64% rally for Bitcoin. Possibly due to the Company’s increasing concern over the XRP token’s legal standing, Q1 ’20 sales were just $1.8MM and signal a sustained downtrend in Ripple’s XRP sales from $250 million in Q2 ’19 to $66MM in Q3 and just $13MM in Q4. All else equal, less tokens coming onto market is a net positive for anyone holding the XRP token in hopes of capital appreciation. However, the investment thesis of XRP over the long term is still questionable between the stability of the token price (as an intermediate currency in the Ripple network) and the upside potential. Interestingly, the report also cited strong growth from the Company’s On-Demand Liquidity (ODL) service which employs the XRP token in payments. According to the report, this service saw dollar value transacted increase 294% quarter over quarter. As with most stats though, the devil is in the details. Major Ripple partner, MoneyGram, reported in its Q1 filing that it received a total of $16MM of incentives from Ripple in Q1 ’20; up from a combined $11.3 million paid during Q3 and Q4 19. To date, Ripple has invested over $70MM in the Company. So, would this increased traction be considered organic network growth? Absolutely not – it came with a hefty price tag. Additionally, it is worth noting that daily transacted value on the XRP ledger, while it has seen some growth over the last year, remains in the $150MM range; well below bitcoin’s $2Bn+ in daily transacted value. Nevertheless, through its XRP sales and its successful fundraising efforts, Ripple has amassed a war chest of funds to deploy into the XRP ecosystem. Over the long-term, these strategic investments and the related on-chain data warrant close watching. Nevertheless, investors would be wise to analyze Ripple the firm’s performance and XRP token’s success separately.

Benchmark Crypto Indices Weekly Performance Review — May 5
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Benchmark Crypto Indices Weekly Performance Review — March 16

Over the past 7 days, the FS CryptoFX Agg Index decreased by 33.7%, compared with a 8.8% decrease for the S&P 500. The best performing size-based index was FS CryptoFX 250, which was down 32.8%. The worst performing size-based index was FS CryptoFX 40, which was down 35.0%. The best performing sector index was FS CryptoFX Stable Coin, which was down 0.6%. The worst performing sector index was FS CryptoFX Platform, which was down 36.3%. Crypto Market vs. Major Asset Classes Turmoil in ETH markets causes first MKR auction Ethereum had a tough week. The 2nd largest cryptocurrency plummeted about 39% over the past 7 days. In isolation this is bad: anyone holding ETH has felt the pain that almost all investors are feeling during this uncertain time. In the context of an emerging DeFi market structure, it is causing other challenges. As we’ve written in the past, decentralized finance or DeFi has been on one of the fastest growing segments of the digital asset industry. Lending has proven to be its first killer app and ETH is playing a crucial role as the de-facto asset being employed. ETH is commonly deposited into smart contracts to generate and collateralize debt positions which are typically denominated in a stablecoins. But what happens when the collateral (ETH) backing a stablecoin denominated loan declines by about 40% in the span of one week? In short, positions that were once fully collateralized are no longer covered. To make up for this shortfall, most DeFi smart contracts trigger a collateral liquidation process. Given the collateralization buffers built into the protocol, this process is usually sufficient to restore the protocol back into balance. However given increased gas prices on Ethereum caused by its persistent price decline, dysfunction in the market resulted in persistent under collateralization on MakerDAO’s platform this past week. To recapitalize the market, the final MKR auction backstop was enacted for the first time in the protocol’s history last week. By initiating the auction process, the protocol is seeking to mint new MKR tokens in order to close out the $4MM shortfall ultimately to the detriment of MKR holders whose holdings will be diluted by the new issuance. Overall, we see two main takeaways from the MKR auction announcement: Firstly, ETH volatility has had a significant negative impact on the functioning of DeFI markets. Secondly, blockchain governance continues to mature. With the implementation of the MKR auction (which is slated for March 19th) and proposed adjustments to various lending rates, the Maker Community is making efforts to stabilize the network.

Benchmark Crypto Indices Weekly Performance Review — April 28

Over the past 7 days, the FS CryptoFX Agg Index increased by 6.9%, compared with a 1.3% decrease for the S&P 500 (Slide 6). Although finishing the week 6.8% higher, Bitcoin trailed the Mid-caps and Small-caps by 3.2% and 0.1%, respectively. Sector Performances FS CryptoFX Platform index once again posted the best performance among all FS crypto indices. All constituents within the Platform index have been up over the past week – The biggest contributors were Cardano (+28%), Stellar (+27%), Tezos (+22%) and Ethereum (+9%). FS CryptoFX Exchange index and Privacy index lagged over the past week – although Kyber Network and 0x surged 43% and 15%, respectively, the biggest token within the sector, Binance Coin (+2%), pulled down the overall performance of the index. Within the Privacy sector, Horizen and Monero led, and were both up 7%. Zcash (-4%) has been the worst performing coin within the Top 50 cryptocurrencies. Primarily due to that, FS CryptoFX Privacy index trailed Bitcoin last week by 3.4%. China launches state blockchain infrastructureChina was not kidding when it said it wanted to become the world leader in blockchain technology. Last Monday, the People’s Bank of China (“PBoC”) confirmed that was piloting its Central Bank Digital Currency (“CBDC”). Last weekend, the Chinese government announced that it is launching its more all-encompassing Blockchain Services Network (“BSN”). Nicknamed ‘ChinaChain’, China’s BSN aims to provide a one-stop-shop blockchain environment where information can flow freely between different infrastructures. Think of it as a “plug and play” network whereby developers and their respective applications can tap into multiple different chains through the BSN network which adds value by providing cross-chain interconnectivity. At the moment, the BSN supports a number of permissioned blockchains including a modified version of the Hyperledger Fabric blockchain with “special encryption algorithms.” Most surprisingly, the network also claims to support permission-less networks, EOS and Ethereum, though what this will actually look like in practice is still highly uncertain. In other words, don’t expect to be able to use BSN to tap into a truly public blockchain. Like it or not, there is a new kid on the block. Sate spearheaded “blockchain” technologies such as CBDCs and China’s blockchain services network are coming to market. While these technologies promise similar cost efficiencies compared to public blockchains, they do not come with the benefits of censorship resistance, immutability, and increased levels privacy. In almost all instances, they will come with the promise of increased surveillance and could ultimately strengthen the case for public DLTs that prioritize privacy.

Benchmark Crypto Indices Weekly Performance Review — April 21

Over the past 7 days, the FS CryptoFX Agg Index increased by 4.0%, compared with a 3.0% increase for the S&P 500 (Slide 6). After a week of testing its 50-day moving average, Bitcoin finally climbed above it on Thursday morning and finished the week 3.1% higher. Sector RotationPrimarily because of Bitcoin’s “laggardship”, FS CryptoFX Commodity index trailed all other non-stablecoin sector-based indices last week. The leadership of FS CryptoFX Platform and Privacy indices persist, as these indices outperformed Bitcoin by 6.8% over the past week. Ethereum and Zcash were the biggest contributors of each index, up 10% and 24%, respectively, relative to Bitcoin. FS CryptoFX Exchange index reversed back and outperformed Bitcoin by 4.3% for the week. Due to the excellent performances of the mid-cap platform and privacy tokens, FS CryptoFX Mid-cap 40 was the best performing size-based index. FS CryptoFX Small-cap 250 was the worst-performing size-based index, trailing Bitcoin by 0.2% last week. PBoC Confirms trials of Central Bank Digital CurrencyChina’s Central Bank (“the PBoC”), confirmed last week that it is indeed piloting Central Bank Digital Currency (“CBDC”) technology. While this is not such a big surprise (the PBoC has been researching digital currency technology for over five years) it represents another step major step in the inevitable deployment of the technology. Dubbed the Digital Currency Electronic Payment (“DCEP”), China’s CBDC could bring major efficiencies to current monetary systems. In particular, the PBoC’s DCEP could help reduce monetary flows related to corruption, more easily facilitate P2P transfers, allow for 24/7 availability, and even facilitate transaction processing absent internet service. On the other hand, CBDCs, such as China’s DCEP will most certainly come with increased levels of surveillance. By essentially eliminating physical currency in favor of a CBDC, surveillance of individual behavior will rise and personal privacy will likely suffer. In the case of China, don’t expect the populous to be up in arms over this increased surveillance. Given the country’s already high usage of digital payment systems and its relative complacency with higher levels of government surveillance, we do not expect the roll out of the CBDC to be met with staunch opposition. Libra White Paper: Take Two Last week, The Libra Association published v2.0 of its whitepaper which detailed major changes to its framework. In summary, there were four major developments 1. Introduction of four, single-currency stablecoins in addition to the LBR libra reserve token. Support will initially be added for USD, EUR, GBP and SGD with plans to roll out to other currencies in the future. The paper also cited that the Libra association would look to discontinue said stablecoins in favor of CBDCS should their respective monetary authorities issue them.   2. Further clarity on permitted wallet operators: The Libra association will only support two types of wallet operators in its new roll-out: “Designated Dealers” who would be authorized to buy and sell LBR coins to exchanges and OTC dealers as well as “Regulated Virtual Asset Service Providers” or entities/exchanges that are registered or licensed in a regulated, Financial Action Task Force (“FATF”) jurisdiction. “Unhosted Wallets” which would drive the spread of the Libra network to financially underserved communities, will not be permitted for the time being. 3. Postponing the transition to a permissionless system: One of the major concerns raised by regulators was how the network would ensure compliance with KYC/AML regulations while maintaining a permissionless system. The short answer? The Libra Association agreed that this is, indeed, hard to accommodate and will be putting any plans to move to a fully permissionless system on hold. 4. Further details on what assets would be held in the reserve: Each single currency stablecoin will be backed by a reserve of cash or cash-equivalents and “very short-term government securities” denominated in their respective domestic currencies. Additionally, more clarity was provided on what assets would compose the reserve for LBR, dubbed the “multicurrency coin”. The LBR token will be backed by a basket of some of the single-currency denominated stablecoins and would represent a digital composite. Libra also conceded that it is open to and will likely delegate oversight and control over the basket weights to a group of regulators or central banks. In combination, the changes provide some more clarity on what the Libra Association could actually look like. If there was any question as to how the Libra Association would navigate the regulatory landscape, the v2.0 whitepaper confirms that regulatory concerns will be top of mind going forward. Decentralization will continue to occupy the back seat.

Benchmark Crypto Indices Weekly Performance Review — April 13

Over the past 7 days, the FS CryptoFX Agg Index increased by 4.5%, compared with a 12.1% increase for the S&P 500. Bitcoin started the week with a robust 10% rally that brought the price above $7,400 again for the first time since the March correction. However, Bitcoin sharply declined on Friday morning, and ultimately finished the week up 2.6% due to a rally on Sunday. Over the past two weeks, Bitcoin has tested its 50D moving average but was not able to break through this level of resistance. However, it is still too early to conclude that Bitcoin will not break through this key level of resistance and thus bears watching closely as key technical level in the coming week. Sector RotationThe sector leadership swung last week. FS CryptoFX Platform had the best performance, up 11.2% over the past week, primarily due to the strong performance of Tezos (+21%), Stellar (+14%) and Ethereum (+12%). Led by Zcash (13%) and Dash (+12%), the Privacy sector retained its momentum, and was up 6.7% on the week. Although it was up 2.3%, the Exchange sector trailed other “non-stablecoin” sectors last week. Chainlink’s price surged 52% over the past week primarily due to the announcement of its listing by New York-based Exchange, Gemini. As a result, the FS CryptoFX 40 Mid-cap index (+9.5%) has been the best performing size-based index over the past week, beating the small-caps (+4.9%) and the large-caps (+4.0%). Halving RehearsalOne of the essential factors why Bitcoin is perceived as digital gold is its finite supply.  Satoshi Nakamoto set a cap for the total supply of Bitcoin at 21 million when he created the Bitcoin protocol. These 21million coins are  diminishingly released through the rewards of confirming transactions/packaging blocks (aka mining). This reward halves for every 210,000 blocks, hence the term “halving”. So far, Bitcoin’s block reward has been reduced from the initial 50 BTC per block to 12.5 BTC per block. Furthermore, it is expected to be reduced to 6.25 BTC per block when the block height reaches 630,000 early next month. In terms of total supply, more than 87% of the supply of Bitcoin has already been released. Bitcoin block rewards are so important, not only because they are the only way for Bitcoin to be released into circulating supply, but also because they are the primary source of income for transaction confirmers (aka miners). As an integral part of the cryptocurrency ecosystem, the profitability of miners affects the security and functionality of PoW-type cryptocurrencies such as Bitcoin. Bitcoin Cash was hard forked from the Bitcoin blockchain in August 2017, and Bitcoin SV was hard forked from Bitcoin Cash in November 2018. As hard forks of the original Bitcoin blockchain, both Bitcoin Cash and Bitcoin SV have the properties of Bitcoin, which include mining reward halving. Last week, the mining rewards for Bitcoin Cash and Bitcoin SV were halved. This is the first halving for these two cryptocurrencies since their creation through hard forks. The halving process and results are not only a trial of these two cryptocurrency ecosystems but also a good preview of Bitcoin’s halving that will come next month. Bitcoin Cash first reached the block height of 630,000 at 8:19 am on Wednesday, and its mining reward was reduced from 12.5 to 6.25 per block. The halving of block rewards directly leads to a decrease in miners’ profitability. According to the data of Bitinfocharts, the hash rate of Bitcoin Cash dropped by 60%, from 3.6EH/s on April 8th to 1.4EH/s on April 10th. This implies that about two-thirds (by hash rate) of miners left Bitcoin Cash, either shutting down or switching to other SHA-256 cryptocurrencies. The same thing also happened to Bitcoin SV. One day later, on the evening of April 9th, Bitcoin SV also reached its height of block 630,000, and its hash rate also dropped significantly, from 3EH/s to below 1EH/s. In the meantime, according to Blockchain. info, Bitcoin’s hash rate rose from 105EH/s on April 8th to 110EH/s on April 10th, reaching the highest level since the Bitcoin price bottoming at the end of March. From the increase and decrease in the hash rate of each currency, we can see most of the increase in Bitcoin’s hash power is likely attributable to the miners who fled from Bitcoin SV and Bitcoin Cash in favor of mining Bitcoin. As of today, the relative strength of Bitcoin Cash vs. Bitcoin is still weakening and Bitcoin Cash has underperformed Bitcoin by more than 8% this past week. Bitcoin SV trailed Bitcoin more than 10% at one point last week, but it has gradually recovered, and underperformed Bitcoin by the same ~8%. Will there be any difference between Bitcoin’s and Bitcoin Cash’s/Bitcoin SV’s halving? First of all, similar to the other two cryptocurrencies, the income structure for Bitcoin miners is also highly dependent on block rewards (and  Bitcoin price). When the block reward is halved, mining profitability will be significantly decreased, and the price of Bitcoin required to maintain Break-even mining profitability will also be much higher. Depending on the price at the time, Bitcoin miners may migrate to Bitcoin Cash or Bitcoin SV in tiny proportions. However, a large-scale migration like what happened during the halvings of Bitcoin Cash and Bitcoin SV may not occur. The reason is that Bitcoin is a giant (based on both market capitalization and hash power) compared to the other two currencies. A small amount of migration would significantly affect the profitability of Bitcoin Cash and Bitcoin SV. Some miners using old mining rigs may be forced to shut down if the price does not increase enough. Lowering the hash rate will bring the entire ecosystem to a new equilibrium. However, for profitability, the real improvement may have to wait until new shipments of next generation of mining rigs in the second half of this year assuming price remains constant. In the short term, especially in the period before and after the halving, price volatility may increase. Since some miners may need to sell Bitcoin to finance their future operations, the selling pressure may increase. However, in the long run, we still believe that halving the reward is a positive catalyst – as miners are the only net sellers. With more development and broader adoption, the increase in demand and the decrease in supply will gradually push up the price of Bitcoin.

Benchmark Crypto Indices Weekly Performance Review — April 6

Over the past 7 days, the FS CryptoFX Agg Index increased by 14.0%, compared with a 2.1% decrease for the S&P 500. Bitcoin had four consecutive sessions of closing in the green to start last week. At one point on Thursday, Bitcoin even broke above the key trading resistance near $7,000. Overall, Bitcoin prices went up by 15%. More importantly, the sentiment of Bitcoin (and broader crypto market) seems to have recovered from the previous selloff. And as noted by our Chief Technician Robert Sluymer, the short term trend of Bitcoin turned positive last week. Sector RotationSize-based indices: The “larger caps” led last week as the FS CryptoFX Large-cap 10 (+14%) outperformed the FS CryptoFX Mid-cap 40 (+12%) while the FS CryptoFX Mid-cap 40 (+12%) outperformed the FS CryptoFX Small-cap 250 (+11%). The big two, Bitcoin (+15%) and Etheruem (+14%), are the biggest contributors to the leadership of the large-cap index. Following being the laggard to other sector-based indices last week, FS CryptoFX Exchange index (+16.2%) was the best performing sector this week. The tokens of the three “China-originated” exchanges, Huobi Token, Binance Coin, and OKB, were the biggest drivers of the Exchange sector’s outperformance – all up about 20% over the past week. The strong momentum of the Privacy sector (+15.4%) continued and was the second-best performing sector over the past week.  Index Quarterly RebalanceFundstrat CryptoFX Indices have undergone a quarterly rebalance as of 3/31/2020. There has been no change in the constituents of the FS CryptoFX 10 Large-cap Index. FTX Token, Hedera Hashgraph, ICON, Algorand, Kyber Network, MonaCoin, QCash, and Status have been added into the FS CryptoFX 40 Mid-cap Index. At the same time, Maker, Insight Chain, Holo, Seele, Molecular Future, Bytom, Enjin Coin, and IOST dropped. The Aggregate index now has 720 currencies vs. 723 as of the 12/31/2019 rebalance. For the sector-based indices, OKB and UNUS SED LEO have been added into the FS CryptoFX Exchange index. Hedera Hashgraph and Horizen have been added to the FS CryptoFX Platform Index and FS CryptoFX Privacy Index, respectively. Likewise, the FS CryptoFX Stablecoins index now includes the multi-collateral Dai. Bitcoin halving creeping up amid Covid-19 crisisWhile just about everything has been postponed in the face of the COVID-19 crisis, Bitcoin’s halving will not be. Expected to occur the week of May 18th, the much-anticipated event that investors have been vigorously debating for months is right around the corner. We continue to view the halving as a long-term bullish event. All else equal, the halving of mining block rewards will result in less BTC supply coming onto the market. This should result in favorable net demand-supply dynamics over the long-term. So, why does there continue to be so much debate in the community over the ultimate outcome?    While reduced supply is a positive for investors who hold bitcoin as a store of value asset, it has negative implications for certain miners, especially those with the least efficient mining hardware and the highest electricity costs. With block rewards composing about 95% of a miner’s total revenue, all else equal, halving block rewards is expected to reduce mining revenue by about 50%. Similar to how many businesses would have trouble covering their costs in the face of a 50% decline in revenue, higher cost miners can also be expected to come under serious pressure.   In the face of revenue declines and a largely unchanged cost structure, the concern is that these miners will be forced to liquidate large amounts of BTC held on their balance sheets to keep their lights on. In other words, even though there is less BTC being mined and available to be sold on the market, we could see an unusually high level of selling pressure while mining margins get squeezed. In a scenario where BTC price, in USD terms, remains stable throughout the period, expect one of the most underappreciated features of the BTC protocol to come into play: the difficulty adjustment. Should BTC price remain stable in USD terms, the least profitable miners can be expected to eventually close up shop, at least the time being. With mining rigs coming off the network, overall hash power will decline and, absent a difficulty adjustment, block times will creep past their usual 10-minute interval. To return the network to equilibrium, a downward difficulty adjustment will reduce the necessary hash power needed to successfully mine a block. Therefore, miners who were still profitable post-halving will be more profitable as they now expend less electricity to earn block rewards. With greater profitability across the network, the scramble to cover costs by selling BTC will be abated. Expect this to neutralize what could be some adverse short-term structural impacts. So, yes, there are solid arguments to be had on both sides of the halving debate. We remain in the camp that this is a long-term bullish event. Long-term supply/demand dynamics will win out over shorter-term, self-correcting, market structure changes.

Benchmark Crypto Indices Weekly Performance Review — March 31

Over the past seven days, the FS CryptoFX Agg Index increased by 1.9%, compared with a 10.3% increase for the S&P 500. In line with the rally seen across other asset classes, crypto markets were up broadly last week. Bitcoin’s price surged and reached nearly $7,000 on Wednesday morning before giving back most of its gains throughout the weekend and finishing up just 1.6% last week. Alts rally and Privacy sector continues its leadershipThe crypto market is in a typical “rebound” mode – smaller cap alts outperformed the mid-cap tokens, while the mid-cap tokens outperformed the large caps. The best performing size-based index was FS CryptoFX 250, which was up 3.2%, while the worst size-based index was FS CryptoFX Eq Wt, which was up 1.3%.  The Privacy sector’s leadership persists – FS CryptoFX Prvaicy index (+3.4%) once again outperformed all other FS CryptoFX indices in the past week. After being the laggard for four weeks, the Platforms (+1.7%) improved and were the second-best performing sector-based index. Primarily due to the poor performance of Huobi Token (-2%), the FS CryptoFX Exchange index was only up 1.2% last week, lagging other sector-based indices. Stablecoin Market Cap surpasses $7.5bn Chalk up another milestone for stablecoins. The total market cap of this segment surpassed $7.5bn this week and as of yesterday, accounted for about 4% of the total crypto asset market cap. Most notably, stablecoin market cap is up $1.9 billion since the start of the month. To give some context, it took over 3 years for stablecoins to reach $1.9bn in market cap (which they did in January 2018). While Tether (USDT) continues to reign supreme with a dominant 85% share of the stablecoin market,  new alternatives, despite limited listing compared to USDT,  are gaining traction. Launched in October 2018, Circle’s USDC stablecoin has grown from $200mm in market cap at the start of 2019, to about $700MM and now accounts for about 9% of total stablecoins in circulation. One driver of the recent increase in stablecoin market cap has undoubtedly been the widespread turmoil in financial markets. In the face of large swings in crypto asset prices, investors have elected to park some “money on the sidelines” in the form of stablecoins to weather out this storm. Nevertheless, this increase is another data point in the continued rise of stablecoin market cap against a broader crypto market which continues to vacillate within prior ranges. 

Benchmark Crypto Indices Weekly Performance Review — March 24

Over the past seven days, the FS CryptoFX Agg Index increased by 6.3%, compared with a 15.0% correction for the S&P 500. Bitcoin started the week with another massive loss of 16% and fell below $4,500 key level during Monday’s (3/16/20) session. However, since then, Bitcoin price sharply rebounded and climbed up to nearly $7,000 Friday morning and finished the week at $5,800. Sector RotationBitcoin has been the leader since the crypto market selloff. Because of that, both FS CryptoFX Commodity index and FS CryptoFX Large-cap 10 index have been the best performing indices within both sector-based indices and size-based indices in the past four weeks. The Privacy sector had been trailing other sectors since Feb 9th.   However, during the past week, the Privacy sector was the best performing group within the crypto space – FS CryptoFX Privacy index was up 15%. Dash (+34%) and Zcash (+15%) were the biggest contributors to this outperformance. The laggardship of the FS CryptoFX Platform Index persists. Amid the broad recovery in the crypto market, the FS CryptoFX Platform index fell 1.1%. The big players within the sector, Ethereum, Stellar, and Tezos, were down in the past week. FS CryptoFX Platform index has been underperforming since the start of March. The hard fork is alive and wellA hard fork of the Steem blockchain, the Hive blockchain officially launched on Friday 3/20. The move comes in response to Tron founder, Justin Sun’s takeover of the Steem network, a cryptocurrency based social media blogging site, which left many Steem community members less than satisfied to say the least. Abstracting from controversy surrounding Sun’s move and allegations that various exchanges aided in the takeover, the launch of the Hive network is significant. Hearkening back to the rich history of blockchain forks, of which the Bitcoin/BCash/BSV and ETH/ETC forks are top of mind, the launch of the Hive network is a reminder that hard forks are an inherent feature of public blockchains. Think about it like a revolution where people declare independence, set up a new country, elect new leaders, many citizens move there, and they issue a new currency that most citizens now only recognize as valid, leaving the old one worthless. That’s the analogy for what is being attempted here. Will it work? We will have to wait to see how it plays out.

Benchmark Crypto Indices Weekly Performance Review — March 9

Over the past 7 days, the FS CryptoFX Agg Index decreased by 6.5%, compared with a 0.6% increase for the S&P 500 (Slide 6). Amid rising coronavirus fears and the oil price war between OPEC and Russia, Bitcoin’s price tanked 5.3% over the past week. Primarily due to the global asset class sell-off, the correlations between Bitcoin and other asset classes have increased. Despite the price decline, Bitcoin showed resilience and outperformed all other sectors (Slide 12). The laggardship of FS CryptoFX Platform and Privacy indices persisted as both indices declined 8.7% and 12.7%, respectively. South Korea taking steps to improve regulatory clarity Last Wednesday, South Korea introduced new legislation to improve KYC and AML monitoring for cryptocurrency transactions. The laws would require exchanges, wallet providers and custodians to partner with approved banks to verify customer information and ultimately link virtual wallets to traditional bank accounts. If instituted, these regulations would officially bring cryptocurrency operators under traditional laws and eliminate a number of the regulatory grey areas; an overall positive for long term adoption.      While this legislation could provide clarity for players within South Korea, it could also serve as a good model for other governments that have yet to implement formal regulations. The proposed changes are based on guidance from the Financial Action Task Force (an intergovernmental organization focused on combating money laundering) which was finalized in June of 2019. Given South Korea’s status as one of the leading crypto trading venues in the world, the adoption of this guidance could be a “call to action” for other countries who have yet to issue formal legislation.  The drafting of these regulations in and of itself represents a major milestone as just over two years ago South Korea was considering an outright ban of all cryptocurrency trading. The legislation is awaiting approval from the country’s president and most provisions are expected to take effect 6-12 months after it’s signed. Bitcoin amid COVID-19 PandemicWith COVID-19 creating havoc in fixed income and equity markets, the “crypto as a macro hedge” thesis is being put to the test. Overall, the thesis is playing out well for Bitcoin. Despite a 5.3% decline this week, Bitcoin is up 12.7% YTD compared to a 14.9% YTD decline for the S&P 500. This puts BTC within the camp of other risk-off assets which is being led by 20+ year treasuries which are up 29% YTD and gold which is up 10%. Additionally, our valuation models indicate that Bitcoin has further upside throughout the remainder of the year. Based on our regression model, which takes into account active addresses and volume per account, BTC’s fair value is ~$15K. Historically, this model has done a good job of explaining Bitcoin’s fair value and signaled that BTC was overvalued in July 2019 and undervalued in October 2019.  Likewise, based on a 1.7x price to mining break-even ratio (P/BE), our P/BE model suggests that BTC’s fair value is ~$13K .

Benchmark Crypto Indices Weekly Performance Review — March 2

Over the past 7 days, the FS CryptoFX Agg Index decreased by 15.9%, compared with an 11.5% decrease for the S&P 500. Major Asset Classes Performance Amid the rising fear of the spread of coronavirus globally, Bitcoin’s price fell seven days in a row and declined 13.7% in the past week. BTC fell below its 200DMA last Wednesday but recovered above it over the weekend. Bitcoin is still one of the best performing asset classes with a YTD return of 19%, while S&P 500’s YTD gains were eliminated during the correction last week. Bitcoin Price History YTD Sector RotationExcept for the stable coins, all crypto market indices were down last week. FS CryptoFX Exchanges index is the only sector that beat the Bitcoin last week (+0.7%). Beneficiaries of the relative resilience of Bitcoin compared to other cryptocurrencies, FS CryptoFX Commodities index, and FS CryptoFX 10 Large-cap index were also the leaders in the past week. The worst performing sector-based indices were FS CryptoFX Platform index and FS CryptoFX Privacy index. FS Platform index had been the leader in the prior six weeks. However, this leadership reversed as the prices of the most significant contributors, Tezos and Ethereum, declined 25% and 20% in the past week. The laggardship of the FS Privacy index persists. Since US Treasury Secretary Mnuchin said during a congressional hearing three weeks ago that “FinCEN is about to roll out some significant new requirements,” FS CryptoFX Privacy index has fallen over 30%. The big 3, Monero, Zcash and Dash fell 24%, 22%, 21%, respectively in the past week. However, FS CryptoFX Privacy sector is still the best performing sector YTD, up 71%. Crypto Sector Leaderships Ripple Controversy ContinuesRipple has been fighting an ongoing legal battle as to whether its XRP token is an unregistered security. Recent court filings indicate that the class action lawsuit can proceed. This is not the ideal outcome for Ripple the company and if a final ruling goes against them, there could be negative implications for crypto markets as well (Why Ripple’s XRP lawsuit could wreak havoc on the market). Taken in conjunction with the SEC’s proceedings against Kik Messenger and Telegram, a definitive ruling could set a legal precedent encouraging disgruntled token holders to take legal action against other cryptocurrency issuers.  The controversy surrounding the XRP token was stoked earlier this year by the Company’s ongoing sales of the meaningful percentage of XRP token that it owns. While Ripple has created escrow contracts that “lock up” the majority of the XRP supply that it owns, it has sold large amounts of said supply once they’ve been released for escrow. Looking at the Company’s XRP markets reports, Ripple sold $169MM and $251MM worth of XRP tokens in Q1 and Q2 2019 before scaling back sales to $66MM in Q3 and just $13MM in Q4.   What should investors and XRP token holders expect going forward? Until the court gives a clear ruling on the status of XRP token, we expect Ripple to proceed with caution when making XRP sales in the future, but the sales of XRP tokens are likely to continue. Ripple has substantial financial resources to fight this class action lawsuit and has built a business that, like it or not, is facilitating billions of dollars of transactions and could have some serious runway.

Benchmark Crypto Indices Weekly Performance Review — February 24

Over the past 7 days, the FS CryptoFX Agg Index increased by 0.1%, compared with a 1.3% decrease for the S&P 500. (Slide 6). The best performing size-based index was FS CryptoFX 10, which was up 0.3%. The worst performing size-based index was FS CryptoFX Eq Wt, which was down 1.3%. The best performing sector index was FS CryptoFX Platform, which was up 3.5%. The worst performing sector index was FS CryptoFX Exchange, which was down 2.9%. Bitcoin is down 4.8% for the past 7 days. Cardano Upgrades Staking Cardano (ADA) has completed a hardfork upgrade that transitions the network to its new proof of stake (PoS) consensus protocol. Cryptocurrency staking is all the rage these days as some assets with these features have seen significant price outperformance this year. Investors have flocked to networks like Tezos which is up 127% YTD compared to Bitcoin only up 34%. Meanwhile, top exchanges like Coinbase, Binance and Kraken have added “staking as a service” offerings. These services have made it easier for non-technical crypto users to collect staking returns by participating in network consensus – which likely contributed to coin demand. In the simplest terms, the economics of the staking process consist of holding a certain amount of coins and receiving more over time. For this reason, many have classified staking returns as “yields” drawing similarities to owning a bond. But the risks are much different. Owning a bond does not come with the same principal price risk (assuming no default and you’re repaid at par). With staking coins, if the underlying asset goes the other way investors may be left holding the bag – even if they’ve collected a nice ‘yield’ along the way. But the market has been on investors’ side thus far this year largely offering staking returns and price appreciation. This is likely fresh in the minds of investors who are looking for a repeat of Tezos’s success. According to the staking return calculator on Cardano’s website, users may expect to earn approximately a 10% nominal return annually in ADA by staking their tokens. We think it’s important to not underestimate the power of flows over fundamentals at this stage in the crypto markets development – and believe some retail investors who find staking returns enticing may jump on the Cardano bandwagon simply for that reason – but we also remind them to make sure they understand the fundamentals and associated risks. Upcoming IRS Meeting Could be a Step Towards Regulatory Clarity On the regulatory front, the IRS has called for a meeting with cryptocurrency companies and their proponents, set to take place on March 3rd in Washington DC. According to Bloomberg Tax, the meeting will feature panels on technology updates, issues for cryptocurrency exchanges, tax return preparation, and regulatory guidance and compliance. Overall, we view this meeting as another positive step towards greater regulatory clarity and with it, a better environment for making longer term investment decisions. Taken in conjunction with the agency’s addition of its “did you receive, sell, send, exchange or otherwise acquire” crypto question to its form 1040 in 2019, we see two main takeaways. First, the IRS is serious about reducing crypto related tax evasion. Second, the current tax regime is not set in stone. We see a possibility that the IRS could reconsider its current approach, whereby all transactions are treated as taxable events, and allow for a de minimis exemption for low value cryptocurrency transactions in day-to-day use; a positive for increased adoption.

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