Graphing Digital Assets
Month in Review — November 2023
A Step in the Right Direction
On November 21, the U.S. Department of Justice announced a long-awaited settlement with Binance in which the exchange agreed to pay $4.3 billion in fines to settle criminal charges and Changpeng Zhao agreed to step down as CEO after pleading guilty to money laundering violations.
Somewhat counterintuitively, the settlement was perceived as a victory for the crypto industry. It reduced overall uncertainty around the exchange and the systemic risk from a looming potential Binance collapse.
Throughout the year, Binance's spot market share of volume has gradually declined. Despite an increase in total spot trading volume on Binance from $201.6 billion in October to $310.1 billion in November (top graph), its monthly market share continued to decrease (bottom graph).
As the largest centralized cryptocurrency exchange globally, Binance's enduring presence is evident. Yet its diminishing market share signifies heightened competition among exchanges, a positive shift for the industry as platforms are compelled to improve safety and compliance standards in order to compete.
U.S.-based company Coinbase (COIN), recognized for its generally-compliant approach to crypto exchange operations, saw an uptick in the aftermath of Binance’s settlement, rising by 19.9% from the date of the DOJ’s announcement through the end of the month. This surge in Coinbase's stock is a reflection of increased confidence and positive sentiment surrounding compliant and regulated players in the crypto space.
Activity in November speaks to the strength of the digital asset industry as the market remained relatively unphased following the DOJ decision. Binance was able to withstand the penalties without noticeable interruption to business while the crypto market continued to surge. We’ll continue to watch how market shares evolve as regulations become more clearly defined and more users enter the market.
Source: The Block – Cryptocurrency Monthly Exchange Volume
Low Volatility Digital Asset Investing
As an increasing number of institutions turn their sights to digital asset investing, we examined how opportunities within the crypto space stack up against those in a traditional portfolio. Contrary to the widespread belief that all cryptocurrency investing bears great risk, the data revealed that market-neutral crypto hedge funds deliver outsized returns with bond-like volatility.
Designed to generate returns independently of market direction, market-neutral strategies shield investors during downturns while seeking gains in all market conditions. In the cryptocurrency landscape, marked by market inefficiencies, these strategies perform especially well. Over the specified timeframe, market-neutral crypto hedge funds had an annualized return of 20.38%, significantly outperforming market neutral equity hedge funds, which returned 2.53%.
Utilizing tactics commonly found in traditional hedge fund investing, such as statistical arbitrage and market-making, as well as funding rate arbitrage and DeFi yield strategies, market-neutral crypto funds strategically capitalize on market inefficiencies and volatility. Notably, they excel during periods of heightened market movement and trading volumes, as we observed in the last two months. If December sees increased price action, in line with seasonal trends, an attractive opportunity window for these strategies is likely to persist.
Data as of October 31, 2023. U.S. Equities as represented by S&P 500 TR Index; U.S. Bonds as represented by iShares Core US Aggregate Bond ETF, which seeks to track the Bloomberg US Aggregate Bond Index; Gold as represented by S&P GSCI Gold Index; Market Neutral Crypto Hedge Funds as represented by VisionTrack Crypto HF Market Neutral Index; Market Neutral Equity Hedge Funds as represented by the Eurekahedge Market Neutral Hedge Fund Index.
BTC Perps Support Bullish Sentiment
Following a substantial price surge in the latter part of October, BTC maintained its upward trajectory throughout November, rising 8.78% to end the month heading towards $40k. Concurrently, funding rates for BTC perpetual contracts aligned with this ascent since October, remaining positive throughout the entire month of November. The top graph illustrates these positive funding rates while also revealing notable fluctuations, underscoring the dynamic nature of the market during this period.
Funding rate arbitrage strategies are designed to capitalize on the funding rate spread between different exchanges or platforms. As these strategies tend to see more abundant opportunities during periods of heightened market movement or increased volatility, they benefited from recent fluctuations in funding rates for perpetual contracts across various cryptocurrencies.
Moreover, positive funding rates can serve as an indicative measure of positive sentiment in the market, with higher funding rates typically reflecting increased interest in long leveraged trades.
The bottom graph further illustrates this optimistic market outlook by showing that perpetual swaps have recently been trading at a premium compared to the spot price of BTC, marking a significant shift after trading at a discount for months. This suggests an expectation among traders that the price of BTC will continue to rise.
Sources: Coinalyze BTC Aggregated Funding Rate; TradingView Data Bybit BTCUSDT Spot vs. BTCUSDT Perpetual Contracts.