September Cyrptocurrency Macro Recap

The digital asset market had a full news cycle during the third quarter, including ongoing difficulties for Libra, negative news surrounding potential ETF launches, Bakkt’s rollout, Binance’s US exchange launch and subsequent blocking of United States IP addresses. During the second quarter, bitcoin rallied 163% while altcoin’s struggled relatively in both price appreciation and volume compared to the flagship cryptocurrency. Digital asset prices peaked on June 26th and fell for the last week of 2nd quarter, a trend that continued throughout most of the third quarter.

The following overview borrows heavily from the research notes published by David Martin, CIO of Blockforce Capital. I asked David if I could share some of his thoughts here for the Forbes community and he graciously agreed.

Overview

Bitcoin closed out the month of September on a negative note, falling 14.4% for the month, the third consecutive month of negative performance. Global asset class performance was book-ended by bitcoin and gold, with gold being the best performing major asset for the third quarter, up 4.5%, while bitcoin was down 23.8%.

Bitcoin experienced its third worst quarter since 2012, down 23.8%. Historically, the 4th quarter provides the most upside for cryptocurrency with an average 4th quarter performance of 112%, so there may be a rally into year-end.

Institutionalization

Much progress has been made in the institutionalization of the asset class. Futures volume was relatively healthy, interest in derivatives continue to grow at a healthy clip, and Bakkt’s long awaited launch came to fruition in late September. The CME also announced that it was rolling out options on their futures contracts, and recently Bakkt announced that it will attempt to beat the CME to their option roll-out.

Bakkt’s rollout was widely anticipated but had a slow start. During the five days it was live in September, only 754 contracts traded (representing 754 bitcoins), with most of the volume being in the October expiry.

CME contracts had a record setting June, with over $7 billion in notional volume trading hands during the month. September saw just under $4 billion in notional volume, but maintained an equal level of average open interest as was seen in June, a positive sign for the institutionalization of the asset class.

Volatility

In September, bitcoin volatility fell to its lowest point since April 1st, hitting 36% - the next day bitcoin dropped 11% and volatility starting picking back up toward month end. In total, most of the third quarter was spent below bitcoin’s long term volatility average of 79%.

Bitcoin is usually the least volatile of the top 10 digital assets by market capitalization but spent the early part of the quarter with the highest volatility reading relative to its peers. As volatility faded for the quarter until the last few days of September, bitcoin receded to the lower part of the volatility band.

Top 10 Price Weakness

September ended a challenging quarter for altcoins in particular, with top altcoins averaging a 44% loss since June 30th.

Ethereum led the pack for September, the only top 10 asset to post positive performance for the month. In total, seven of the top assets outperformed bitcoin in September marking the first month since May in which bitcoin was not the performance leader.

Bitcoin is still the second-best performing asset (+124%), trailing only Binance coin’s (BNB) 160% return for the year. However, BNB has not fared well as of late, down 51% in the quarter versus bitcoin’s 24% drawback, but it still leads due to its early-year performance.

Spot Market Volumes Continue to Decline

While bitcoin spot market volumes for the first three quarters of 2019 are 27% ahead of where they were in 2018, the monthly volume is down 58% on Coinbase and 48% on Binance from their peak year-to-date values.

Blockchain Network Health

Bitcoin’s hash rates, which measure the processing power of the network, continue to hit new highs and have climbed 55% since the beginning of the year. Ethereum had seven months of positive growth through August, but plateaued in September, dropping 2% month-over-month.

Bitcoin network transactions declined for the fourth straight month, down 15% from May’s high but are up 20% since the beginning of the year. Ethereum’s network transactions follow a similar trajectory, down 20% since June’s high but increased 20% for the year.

What we are looking for in October and November

Bitcoin broke through key support in September, posting its third straight month of negative return while volatility hit a four-month low during the month. The ongoing underperformance of altcoins and bitcoin’s dominance continue to be of focus for us, although there was a bit of a reversal as bitcoin, the top 10 performance leader for three straight months, closed the month with 7 of the 10 top assets

outperforming. Ethereum was the only top 10 asset to post a positive return in September, and we will be watching for this to continue. Spot volumes are down again this month but CME futures volume continues to grow. We will be interested to watch Bakkt’s adoption over the next few months and feel that this is a key barometer for institutional adoption.

Disclosure: Eric Ervin is CEO of Reality Shares, Inc., parent company of Reality Shares indexes and ETFs.