A comprehensive look of the crypto space and what matters ahead
August Markets Overview
August has been a volatile month for major cryptocurrencies, the prices of bitcoin plunged 7.82% in the month, it was the second consecutive monthly drop after July. However, bitcoin’s market dominance has reached above 69% during the month, and it’s on track to test the key level of 70% in 4Q19. At the same time, the total market cap of altcoins has been shrinking and dropped below the $80 billion level.
Risk aversion was one of the key themes for the global markets in August, that came after the escalation of the US-China trade war, increased likelihood of a no-deal Brexit, and recession signals from the bond markets. As a result, the DXY has touched the 99 levels since May 2017, gold surged past the 1550 mark, and bitcoin retested the 12000 levels. Alongside the low inflations and the potential of additional interest rate cuts from the US Federal Reserve, we expect the macro environment could continue to create a positive bias for bitcoin for the rest of the year.
However, the picture seems less rosy in the altcoins space as the performance of major altcoins lagged against bitcoin and the dollar. For example, Litecoin has plummeted more than 30% against the greenback, while Ethereum gave up about 20% of value in August, and we saw similar patterns on XRP and EOS as well.
Figure 1: Major Cryptocurrency Performances in August
ETH, LTC Led Altcoins Bleed
Major altcoins were mostly on the back foot in August, and their performances were noticeably weaker than bitcoin. Ethereum and Litecoin led the losses with more than 22% and 35% monthly drop respectively.
However, there were a few exceptions. Ethereum Classic or ETC surged 4.5% ahead of the scheduled hard fork. The event is expected to happen in mid-September, and it is called “Atlantis”, and it will implement some of the recent innovations from its parent Ethereum chain.
Meanwhile, we saw IPC and PAX were among the August gainers, both surged 74% and 0.2% respectively.
Figure 2: Altcoins August Performances
Crypto News Highlight in August
- On August 2, the People’s Bank of China said it will step up its efforts in establishing its cryptocurrency, markets believed that is China’s answer to Facebook’s Libra project. Earlier reports have shown that the proposed plan will serve as a digital currency as well as an electronic payment system. Forbes reported that the plan will involve seven institutions in the coming months, including some of the biggest banks in China such as ICBC, BoC, and ABC. Tech giants Tencent and Alibaba were also reportedly on the list. The report cited sources saying the China crypto will be launch in November. However, the official media Global Times denied the reports, saying that the November timeline is “Inaccurate speculation.”
- Bakkt’s developments have kept the crypto community excited, as institutional interest is expected to back in focus. On August 16, the ICE-backed crypto venture was greenlighted by the US regulators, and it will start its physically-settled bitcoin futures products in September. The knee-jerk response of the announcement was a 3% price jumped of bitcoin. Markets were generally positive on the launch, however, sentiment-wise it remained wait-and-see.
- Facebook proposed Libra has remained under pressure as the social media giant’s dream of creating a global cryptocurrency has continued being challenged by regulators and lawmakers globally. Members of the US House of Representatives’ Financial Services Committee have traveled to Switzerland in mid-August to study about the privacy issues of Libra but didn’t ease the regulators’ concerns. On the other hand, some of the European officials were more open to the idea of creating a global virtual reserve currency. In the annual Jackson Hole Symposium, Bank of England Governor Mark Carney said a virtual reserve currency could ease the global economy’s reliance on the dollar alone and could help non-US policymakers when it comes to managing inflation and safeguarding financial stability.
- The Litecoin halving 2019 has concluded in early August, it was a scheduled event for every four years after 840,000 blocks are mined, reducing block rewards by 50%. At the time of halving, about 63 million coins had been issued, representing almost 75% of the total supply. This leaves about 21 million LTC that remain to be mined, with a current value of $2 billion. Litecoin creator Charlie Lee said, “So a lot of people are buying in because they expect the price to go up and that’s kind of a self-fulfilling prophecy. So, because they’re buying in, the price does go up.”
Bitcoin September Outlook: Cautiously Optimistic
After two consecutive monthly declines, data suggests that the outlook of the leading cryptocurrency could be cautiously optimistic. Figure 4 shows the BTC’s monthly performance since 2012, considering all the past September performances, bitcoin has never had a three consecutive September monthly decline in the history.
Moreover, the case of occurring a three consecutive monthly decline seems limited. We’ve only seen 3 monthly declines in a roll during 2H19, which is part of the so-called “crypto winter” period, and from February to April 2014.
Figure 3: Bitcoin Monthly Performances
Chart Shows Signs of Improvement
Chart-wise, although BTCUSDT has continued to trade within the descending triangle, however, both MACD and the DMI have shown positive developments after the price actions in early September. Yet, it’s too early to call the bearish sentiment has reversed, we will keep a close eye on the price action in the coming days. It’s worth noting that the volume (yellow circle) seems didn’t pick up much to justify the positive price movement, so this will be another front that we will be looking at.
Figure 4: BTCUSDT Daily Chart
OKEx’s Long/Short Ratio at Low level
After a volatile month, the OKEx’s BTC Long/Short Ratio started at a low level of 1.03 in September. The ratio is proven to be an effective leading indicator to predict price actions. The higher the ratio, the higher the potential profits for traders with short positions, and BTC prices tended to go lower. Conversely, the lower the ratio, the higher the potential profits for traders with long positions, with that, BTC prices tended to go higher.
On August 14th the Ratio reached 1.57, the price of BTCUSDT dropped from near 11,000 to almost 9500 in two days. A similar pattern repeated on August 28th when the ratio was at 1.51.
Figure 5: OKEx’s BTC Long/Short Ratio
Bitcoin Volatility Lowered
According to the data from Woobull, bitcoin’s volatility has lowered in August and the trend is likely to continue in September. Bitcoin’s 60-day volatility started at 14.9% and dropped to 8.3% by the end of the month, while the 14-day volatility tended to be more fluctuated. Generally, lower volatility could increase investor’s exposure to bitcoin.
Figure 6: Bitcoin 60-Day (Red) and 14-Day(Pink) Volatility
Increasing Correlation with VIX; Less with Gold
In our previous publication “VIX is Bitcoin’s New Friend”, we have reviewed the increasing correlations between the prices of bitcoin and the VIX Index. The August data has proved our findings of the VIX (purple line) has been getting closer with bitcoin, particularly in the 180-day rolling correlations chart shown in figure 8. Although the VIX seems to become a new reference for bitcoin, gold remained an important indication for bitcoin’s price movements.
Figure 7: BTC’s 90-Day Correlations with DXY (Blue), VIX (Purple), Gold (Teal)
Figure 8: BTC’s 180-Day Correlations with DXY (Blue), VIX (Purple), Gold (Teal)
Minor Changes in BTC-Altcoins Correlations
We’ve noticed the correlations between bitcoin and the majority of the large-cap/mid-cap altcoins have slightly dipped in August, but it was not at a concerning level. ETH remained one of the highest correlated altcoins with BTC, its correlation coefficient jumped from 0.77281 to 0.82587. Meanwhile, the BTC-BCH correlation coefficient slipped to near 0.75 level from 0.8. It’s worth noting that BSV and TRX have got closer ties with bitcoin, this is especially noticeable in the BSV case.
Figure 9: Bitcoin’s Correlations with Major Altcoins
Altcoins Strategy: ETCUSDT
- The pair has performed relatively well compared to other major altcoins as it seems finished the previous head and should pattern and forming a new trend.
- Despite the recent positive price movements, the lack of volume could be a hurdle of the rally.
- The pair is likely to try to reclaim the resistance level of 7, which is the high of late August. Initial support would be the 50-day SMA, which is around 6.58.
- If the pair is able to stay above 7, it will likely be new support, and the next reference level would be the mid/upper 7 handles.
Figure 10: ETCUSDT Daily Chart
Future Macro Event Risks
- European Central Bank is scheduled to have its policy meeting on September 12. Markets are expected the ECB will follow its US counterpart to cut its deposit rate by 20 to 25 basis points and will announce a package of stimulus measures, including a €50 billion a month of fresh bond purchases under its quantitative easing program, which had previously been phased out at the end of last year.
- The easing narrative will likely carry on by the US Federal Reserve Open Market Committee’s September policy meeting on 17 and 18. CME’s FedWatch Tool indicates that there will be over 90% of the chance that the FOMC will cut the benchmark rate by 25 basis points. After the last FOMC meeting, the prices of bitcoin enjoyed a 7-day gaining streak. The September meeting is particularly important because the Fed will give a summary of economic projections.
- The highly-anticipated Bakkt physically delivered daily and monthly bitcoin futures contracts will officially launch on September 23. The Intercontinental Exchange backed crypto venture is expected to drive additional institutional interest into the crypto space. Analysts have generally welcomed the entrance of Bakkt, as its future products are settled in bitcoin not dollar, meaning that clients who trade that product will receive actual bitcoin in their accounts upon settlement.
- The US Congress and Senate will return from August recess on the second week of September, US-China trade dispute and the unrest in Hong Kong are expected to be among the hottest debated topics in both chambers. On the trade war front, although the two countries agreed to have a face-to-face trade talk in Washington in early October, yet, we haven’t seen a clear meeting agenda, and the markets appear reluctant to put high expectations for any possible talks in the future. On the Hong Kong front, the Speaker of the House Nancy Pelosi has vowed to speed up the legislative process of the bipartisan Hong Kong Human Rights and Democracy Act as soon as Congress resumes.
- A possible RRR cut could be coming soon from China. After a meeting chaired by Premier Li Keqiang, the State Council called for the “timely” use of tools including broad and targeted reserve-ratio cuts to support the economy. The People’s Bank of China last made a broad RRR cut in January, after a similar announcement by the State Council meeting in December.
- The situation of Brexit remains liquid, as the UK Prime Minister Boris Johnson stepped up his efforts in exiting the European Union by October 31, with or without a deal. Meanwhile, opposition MPs and Tory rebels have passed a bill that forces PM Johnson to ask for an extension beyond the Brexit deadline if a deal has not been agreed with the EU. However, the suspension of the parliament, which pushed by Johnson, could begin as soon as September 9.
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
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