The Longview — Considerations for the bulls and the bears

Every week the Mosaic research team will delve into important topics within the cryptoasset space.

Introduction

The global cryptoasset market has been nothing short of eventful in the past week. What was looking like an all-out Armageddon in the collapse Ethereum seems to have at least stabilized in the near term. ETH sharply rebounded off of the years lows of $167 to $226 in a matter of a few days and is currently trading range bound in the low 200’s. Although it is anyone’s guess what the future price of ETH will be, several factors point towards a potential base developing — pending Bitcoin maintains the current price level. While there are many reasons to be bearish on Ethereum, Bitcoin, and cryptoassets as a whole right now, it is important to objectively assess the negative factors at play today.

This article is divided into three main sections which constitute the key components that have impacted the recent fluctuations in ETH. The first part delves into general market sentiment fueled by social networks. The second key component emphasises the current positioning and correlations between ETH and BTC at current. Finally, the last part provides a general overview on the dynamics of major token sale projects.

Sentiment

It is no secret that Ethereum is greatly questioned at the moment. Go on to crypto twitter and one will quickly discover the dominance of negative sentiment towards Ethereum. On July 16th, a major market participant, Tetras Capital, released a short sell research report on ETH titled “Ether (ETH) Bearish Thesis: “The Flippining of Market Irrationality”

Investors often cite the wisdom of the crowds, the collective opinion of a group of individuals rather than that of a single expert; however, investors and traders in crypto markets also participate in herd like behaviour similar to all other markets. When sentiment shifts to extremes on either pessimism or euphoria it is important to consistently seek out new information. Given how bearish the attitude is towards Ethereum on Twitter amongst market participants, coupled with the dominance of negative press alongside websites like Dapp Capitulation, we have likely hit a potential peak in market-driven negative sentiment towards Ethereum during the current cycle. A quick glance at the price of Ethereum relative to its Active Addresses shows that Metcalfe’s Law is currently in effect, despite the extremely pessimistic chatter in the air as the Network Value of Ethereum relative to Active Addresses has greatly diverged signifying that user activity is high on the network while the price of the network continues to tumble.

In the event several project tokens do fall to 0 USD per token, it is clear that many projects across the Ethereum universe have ample runways to continue working on their projects regardless of market conditions; however, when taking a look at the activity actually transpiring in the treasuries of projects at the moment, an interesting picture is painted. It is likely that the majority of treasury selling of token projects has already taken place during the periods of April to August of this year as the cumulative treasury holdings in ETH during April was 4,463,226 ETH and dropped down by approximately 24% to 3,741,879 ETH in August. Although the month of September is not over yet, as of September 18th, the sale of ETH from these treasuries is marginal at 4% (3,577,119 ETH). Additionally, some projects with large warchests of capital like ICON are displaying signs of positive corporate governance by purchasing back tokens — on August 28th, ICON announced that they will buy back $5 million worth of ICX tokens.

Alongside the big picture view of the entire treasury holdings in the Ethereum Ecosystem, it is important to glean into the profiles and price action of the largest ERC20 constituents. As of today, the market capitalization of Ethereum is 22.6 billion USD — roughly 11% of the entire market capitalization of all cryptoassets. Of the entire Ethereum universe, the top 10 tokens represent 23% of Ethereum’s market capitalization so 2.25% on average of the overall crypto market. Some of the names included in the top 10 include, Binance Coin, OmiseGo, Maker, and 0x. Depending on what your definition of quality is may differ; however, each of these ERC20 tokens represent arguably some of the highest quality projects in the space, clearing Ethereum of a proverbially “run on the protocol” as neither of these projects are in dire need of selling large portions of their treasury holdings anytime soon.

During the bear market thus far, on average these 10 projects have experienced a pullback of approximately -85% from their all time high (ATH) falling in sync with ETH. However, it is interesting to note that Binance Coin and Maker have both experienced the smallest drawdowns, respectively -76.6% for Binance Coin and -79.5% for Maker. Binance Coin has also experienced the largest gain since the all time low in ETH on September 12th, gaining 65.9% as of September 18th marking a potential harbinger of safety and potential market strength in the broader ETH universe.

Over the past 30 days, 3 of the 10 ERC20 tokens experienced drawdowns greater than 10%(Tron, OmiseGo, and 0x), 5 recorded negative returns of less than 10%, while the remaining tokens — Maker and Bytom — posted positive returns of 3.38% for Maker and 6.25% for Bytom. Although this sample of the Ethereum universe is incomplete, given that the 10 largest ERC20 tokens represent 23% of the market capitalization of Ethereum, a divergence in price exists amongst ERC20 tokens relative to the price action in Ethereum indicating strength in the market and the possibility of support for ETH. When zooming outside of the ERC20 universe and looking at smart contract platforms on a relative basis it is evident that over the last 90 trading days Ethereum has been the worst performing smart contract platform marking a loss of -60% while EOS was the best performing smart contract platform in this period underperforming by 51%.

Positioning

While Bitcoin and Ethereum do not trade in lock stop, the two cryptoassets are highly correlated to one another — The current correlation of the two cryptoassets is 79% over the last 365 trading days. Over the course of the past year, the short interest surrounding Bitcoin has experienced 3 new all-time highs. In the months following each all-time high in short interest, the price of Bitcoin rallied 75% respectively (October 2017 period) and 50% (April 2018 period) as Short interest ultimately hits a limit which is followed up by a squeeze in shorts from the market participants on the long side. Whether or not we currently stand at a potential turning point amongst the bulls and the bears, Ethereum has always benefited from large rallies in BTC as Ethereum is tightly correlated with BTC.

Dynamics of Ethereum Project Treasuries

Many Ethereum bears are proponents of the thesis that many ERC20 altcoins are on their way to 0 as they must sell their treasury holdings from their initial coin offerings to preserve their runways. Currently several projects within the Ethereum ecosystem are sitting on treasury holdings worth far more than the value of their market capitalisation.

In the event several project tokens do fall to 0 USD per token, it is clear that many projects across the Ethereum universe have ample runways to continue working on their projects regardless of market conditions; however, when taking a look at the activity actually transpiring in the treasuries of projects at the moment, an interesting picture is painted. It is likely that the majority of treasury selling of token projects has already taken place during the periods of April to August of this year as the cumulative treasury holdings in ETH during April was 4,463,226 ETH and dropped down by approximately 24% to 3,741,879 ETH in August. Although the month of September is not over yet, as of September 18th, the sale of ETH from these treasuries is marginal at 4% (3,577,119 ETH). Additionally, some projects with large warchests of capital like ICON are displaying signs of positive corporate governance by purchasing back tokens — on August 28th, ICON announced that they will buy back $5 million worth of ICX tokens.

Alongside the big picture view of the entire treasury holdings in the Ethereum Ecosystem, it is important to glean into the profiles and price action of the largest ERC20 constituents. As of today, the market capitalization of Ethereum is 22.6 billion USD — roughly 11% of the entire market capitalization of all cryptoassets. Of the entire Ethereum universe, the top 10 tokens represent 23% of Ethereum’s market capitalization so 2.25% on average of the overall crypto market. Some of the names included in the top 10 include, Binance Coin, OmiseGo, Maker, and 0x. Depending on what your definition of quality is may differ; however, each of these ERC20 tokens represent arguably some of the highest quality projects in the space, clearing Ethereum of a proverbially “run on the protocol” as neither of these projects are in dire need of selling large portions of their treasury holdings anytime soon.

During the bear market thus far, on average these 10 projects have experienced a pullback of approximately -85% from their all time high (ATH) falling in sync with ETH. However, it is interesting to note that Binance Coin and Maker have both experienced the smallest drawdowns, respectively -76.6% for Binance Coin and -79.5% for Maker. Binance Coin has also experienced the largest gain since the all time low in ETH on September 12th, gaining 65.9% as of September 18th marking a potential harbinger of safety and potential market strength in the broader ETH universe.

Over the past 30 days, 3 of the 10 ERC20 tokens experienced drawdowns greater than 10% (Tron, OmiseGo, and 0x), 5 recorded negative returns of less than 10%, while the remaining tokens — Maker and Bytom — posted positive returns of 3.38% for Maker and 6.25% for Bytom. Although this sample of the Ethereum universe is incomplete, given that the 10 largest ERC20 tokens represent 23% of the market capitalization of Ethereum, a divergence in price exists amongst ERC20 tokens relative to the price action in Ethereum indicating strength in the market and the possibility of support for ETH. When zooming outside of the ERC20 universe and looking at smart contract platforms on a relative basis it is evident that over the last 90 trading days Ethereum has been the worst performing smart contract platform marking a loss of -60% while EOS was the best performing smart contract platform in this period underperforming by 51%.

However, on a relative basis, this lead in underperformance by Ethereum is important to note as it might be indicating that the platform is oversold relative to its peers over the last 90 trading days and might outperform its peer group in the following 90 days. Historically, over the last 3 years — excluding the massive bull run of 2017 — Ethereum has posted positive returns during the final quarter of the year. In the chart below one can take a look at the seasonality of returns for both Ethereum and Bitcoin over the last 12 quarters.

Where we came from, Where we’re at, and Where are we going?

On the opposite end of the spectrum stands the question that despite 2018 thus far having been a year long bear market across all cryptoassets, does the current market capitalization today of 203 billion USD justify the fundamentals of the all the assets currently when most assets are on average down 75% from their all time highs? To make sense of the total market capitalization surrounding all cryptoassets it’s helpful to understand the price action that has unfolded up until this point.

On January 1st, 2017 the total market capitalization of all cryptoassets stood at roughly 18 billion USD. By June 8th, the market experienced a 555% increase and was valued at 101 billion while the number of transactions in the most dominant and developed cryptoasset, Bitcoin, did not experience such dramatic increase but rather increased 69% from 180,346 transactions on January 1st, 2017 to 305,128 on June 3rd, 2017.

However, the 555% increase in the cryptoasset market capitalization in the first half of 2017 was a drop in the bucket relative to what happened at year end of 2017 and early January 2018 where the market capitalization experienced an additional 819% increase in value where 559% was added in the last 3 months alone topping out at 828 billion at the peak. During this period, the transaction count of Bitcoin once again did not experience any meaningful gain to justify this spectacular rise in value peaking out at 424,393 transactions per day in December representing a 35% gain — a massive divergence in the fundamental adoption of Bitcoin relative to the gain in price.

Today the price of Bitcoin (the harbinger of safety for the cryptoasset universe) currently trades range bound between between $6500 USD and $6100 USD over the last two trading weeks as the market is sitting at a trendless standstill. On a long term basis from a technical perspective, Bitcoin needs to cross the $7500 level to enter bull market territory again.

While many highly regarded market participants have made calls like “#callingabottom”, the total market capitalization of all cryptoassets today have yet to revert back to the mean of the first half of 2017. It is anyone’s game as to whether or not they will at all; however, given the current price action of Bitcoin trading in its current range along with the SEC’s scheduled decision of the CBOE’s Bitcoin ETF on September 30th, it would be wise for any market participant to tread extremely lightly when executing any new positions in cryptoassets with a well thought out risk management plan when engaging in short to medium term trading as each decision by the SEC surrounding Bitcoin ETF’s to date have been negative events on the price of BTC and the cryptoasset universe as a whole.

Conclusion

This article has taken a closer look at several factors at play in the cryptoasset markets today. Predictions are often fickle; however, it is important to objectively assess the most pertinent factors and cut through the noise to develop conviction when investing or trading. While there are signs of a potential bottoming in Ethereum, the price action of Bitcoin leads Ethereum and all Cryptoassets. Until Bitcoin defines a clear trend above $7,500 USD or below $6,000 USD, cryptoassets will likely trade range bound with increased volatility as we near the SEC’s decision on the CBOE Bitcoin ETF next week.

End of weekly research report

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This article is intended for informational purposes only. The views expressed herein are not and should not be construed as legal or investment advice or recommendations. Recipients of this article should do their own due diligence, considering their specific financial circumstances, investment objectives, and risk tolerance before investing. The individuals contributing to this article have positions in some or all of the assets discussed. This article is neither an offer, nor the solicitation of an offer, to buy or sell any of the assets mentioned herein.