Market Reboot

Issue #2 – May 2, 2022

Something appears to be afoot in traditional financial markets.

Elon is taking Twitter private, Amazon reported its worst EPS since 2000, and a contraction in U.S. GDP to -1.4% just as the Fed reverses its rate policy. No wonder interest rate and equity volatility rank in the 99th and 90th percentiles respectively since 2016.

See the full report below for details. 

 

Bitcoin Dominance, AKA market share, has ebbed and flowed over time, currently sitting at 42% and below its 59% average in February 2016, owes to an uptick in functionality of protocols that have been met with increasing adoption.

Source: 3iQ Research. Data sourced from Coin.Dance, Etherscan.io as at April 28, 2022.

 

Source: 3iQ Research. Data sourced from Coin.Dance, Etherscan.io as at April 28, 2022.

 

Source: 3iQ Research. Data sourced from Coin.Dance, Etherscan.io as at April 28, 2022.

Set against the near peak volatility noted below, is a more stable price action in digital assets, where Bitcoin and Ethereum post below average volatility.

Building on last week’s bulletin, today’s publication provides more detail on the volatility divide and growing utility of crypto.  The graph above supports this notion of expanding adoption of the Crypto universe, as investors potentially fold in the growing functionality of smart contract protocols such as Ethereum, Solana, Polkadot and Algorand.

As part of 3iQ’s commitment to client education, those interested in commentary or with questions beyond the scope of this report can reach out to our Research Team here.


 

Bitcoin and Convexity

A proxy for the convexity enjoyed by long duration fixed securities, Bitcoin has loosely followed the expected performance profile, by outperforming in down markets, underperforming in up crypto markets. Bitcoin’s integrity, performing over time regardless of circumstance, owes in part to its increasing adoption as the collateral layer for crypto. Not too similar to the role treasuries play in the global fiat funding markets.

However, Bitcoin’s growth profile could periodically disrupt the type of persistent convexity exhibited by the more mature US fixed income market. A price to pay for growth.

The divergent volatility relationship between the $38 trillion dollar S&P 500 and the $750 billion dollar Bitcoin is exhibited in the below chart, where it has only grown since first sharing in last week’s publication.

Source: 3iQ Research. Data sourced from Bloomberg as at April 28, 2022. You cannot invest directly into an index.

 

Extending the volatility discussion to interest rates and Bitcoin, we see that the current disruption in traditional assets may have been attended by a historic spike in interest rate volatility as measured by the MOVE index.

Today’s level measures in the 99th percentile as rate hikes and growth uncertainty could cause economists and investors to question the utility of existing models and strategies as such data suggests regime change.

The graph below demonstrates the relatively steady price performance of Bitcoin in the face of elevated rate volatility. Note that Bitcoin’s breakout from $5k to $60k USD occurred in the year following the outbreak of COVID-19. In the early innings of a growing interest rate disruption, we suggest investors could monitor some of the coin and market metrics provided below.

Source: 3iQ Research. Data sourced from Bloomberg as at April 28, 2022. MOVE index is a representation of implied volatilities of interest rate options across the US yield curve. You cannot invest directly into an index.

 

Despite a lower volatility profile, the correlation between Bitcoin and the S&P 500 is at the 94th percentile based on a 5-year lookback. The takeaway being that although crypto adoption may increase after turbulence in broader markets, the path to that outperformance could be choppy.

Source: 3iQ Research. Data sourced from Bloomberg as at April 28, 2022. You cannot invest directly into an index.

 

Source: 3iQ Research. Data sourced from Bloomberg as at April 28, 2022.

The elevated correlation of 52% (94th percentile, based on a 5y lookback) is exceeded only by notable periods of volatility such as:

– Q4 2018, when equity markets embarked on a 25% decline after Powell hinted at rates hikes

– April 2020 on the reality of COVID-19 setting in

– More recently how inflation & Fed policy reversal impacts growth and risk appetite

 


 

Taking a Closer Look at Alternatives

The decline in Bitcoin dominance is a feature, not a bug in crypto ecosystem code. With Bitcoin as a store of value against the inflationary impact of expanding global fiat systems, it has moved to be the collateral layer for a growing number of protocols and coins.

The below table is a sampling of coins and metrics from dozens that are recognized across the industry to shift the focus from recognized problems in fiat to the actionable opportunities in digital assets.

Source: 3iQ Research. Data sourced from Messari as of April 28, 2022. Figures expressed in USD unless otherwise stated. Past performance is not indicative of future results. 

 

Source: 3iQ Research. Data sourced from Messari as of April 28, 2022. Figures expressed in USD unless otherwise stated. Past performance is not indicative of future results. 

 

The below table denominates Bitcoin in terms of currencies, assets (Gold, Oil) and the smart contract protocol, Ethereum:

Source: 3iQ Research. Data sourced from Bloomberg as of April 28, 2022. Past performance is not indicative of future results. 

 

Research Team

Mark Connors

Mark Connors

Head of Research

Herbert Zhang, CFA

Herbert Zhang, CFA

Director and Portfolio Manager

Connor Loewen

Connor Loewen

Cryptocurrency Analyst

Contact us: research@3iq.ca

 
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About 3iQ Corp.

Founded in 2012, 3iQ is Canada’s largest digital asset investment fund manager with more than C$2.5 billion in assets under management. 3iQ offers investors convenient and familiar investment products to gain exposure to digital assets. For more information about 3iQ and its digital asset investment funds, visit www.3iQ.ca or follow us on Twitter @3iQ_corp.

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Fred Pye

Frederick T. Pye

CHAIRMAN, CHIEF EXECUTIVE OFFICER & DIRECTOR

Frederick T. Pye is the Chairman, Chief Executive Officer and Director of 3iQ Corp. He is also the Chairman and Director of 3iQ Digital Holdings Inc. Mr. Pye is recognized for creating and promoting creative and unique investment products for the investment industry.

Mr. Pye has managed private client portfolios with Landry Investment Management and various other investment dealers. Prior to this Mr. Pye was Founder, President & Chief Executive Officer of Argentum Management and Research Corporation, a company dedicated to managing and distributing quantitative investment portfolios including the first long-short mutual fund in Canada.

He was also Senior Vice-President and National Sales Manager of Fidelity Investments Canada and an integral part of the team that saw assets rise from $80 million to over $7.5 billion in assets under management during his tenure. He also held various positions with Guardian Trust Company, which listed the first Gold, Silver and Platinum Certificates on the Montreal Exchange.

Mr. Pye obtained a Masters in Business Administration from Concordia University.