26 Oct, 20

Weekly Crypto Market Wrap #43, 2020

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Zerocap

Week in Review

Winners & Losers

  • Bitcoin and Ethereum closed at the high end of their price range with strong positive correlations last week, driven by the news that PayPal is going to integrate crypto payments on its platform. It should be noted that ETH had a moderate negative correlation with the equity and bond market, and zero correlation with the gold market last week. We see further decoupling of its correlation with bitcoin over time.
  • Traditional financial markets await the US election; a final deal on the stimulus package for the U.S. economy and the response to the second wave of COVID infections in Europe. Equity markets fluctuated in a narrow price range, ending the week with a small negative return. 
  • Gold maintained a stable trend last week. The volatility index VIX presented a high standard deviation but ended with a near-zero return, echoing uncertainty and impact surrounding the US election. The index held negative correlations with crypto, equity, bond and commodity markets.

Macro, Technicals & Order Flow

Bitcoin

  • Our take last week was that if bitcoin could hold above $11,150, a break above $12,000 was likely. Not only did we see $12,000 arrive, but $13,000 followed soon after.
  • Bitcoin has formed an ascending triangle, which saw a small false break of the July 2019 highs at 13,200 on Sunday 25th Oct. Technically we’d expect price to retest the $12,500 prior resistance, however given strong fundamentals (PayPal, Fidelity releases and the balance sheet hedging occurring with Microstrategy, Square, Mode Global), we see the false break as a low liquidity Sunday move that will be followed by more upside this week.
  • The futures basis skew has gone wildly positive, further encouraging positive moves.
  • The only thing holding bitcoin back this week could be swings in polls leading up the US election and associated intermarket flows.

Ethereum

  • Ethereum is not following the same structure as bitcoin, forming a descending triangle with a bit of chop required to break Sep 2020 highs. However, we feel that ETH will still break near-term highs ($420) if BTC breaks out of its ascending triangle. 
  • The market is speculating that PayPal as the reason for the latest moves – but if this were the sole reason, we’d see ETH forming a similar if not more bullish scenario than BTC given its payment and smart-contract capabilities. 
  • Ethereum basis skew is bullish, although less so than the bitcoin basis.
  • Our view is that fundamentals around broader bitcoin adoption as an asset class is providing the foundation for these moves, with newsflow such as PayPal providing short-term triggers to up and down swings.

What to Watch

  • Will the move from PayPal accepting cryptocurrencies as a payment method drag cryptocurrencies out of their niche into real-world payments? Is this move setting up stage for PayPal’s future when fiat currencies go digital? How many new users will be attracted to PayPal in this increasingly competitive landscape?  
  • Chicago Mercantile Exchange (CME) has surpassed prominent retail platforms to become the second-largest bitcoin futures exchange by open interest last week. Is this a sign of increased institutional participation in the cryptocurrency? Will more institutions announce their involvement into cryptocurrencies this week? 
  • CME data revealed that institutions were going long with BTC while hedge funds were aggressively shorting BTC last week before PayPal’s announcement. What are the reactions of institutions and hedge funds after the PayPal news?

* Index used:

Bitcoin Ethereum Gold Equities High Yield Corporate Bonds Commodities
BTC ETH PAXG S&P 500, ASX 200, VTI HYG CRBQX


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FAQs

1. What Were the Significant Developments in the Cryptocurrency Market for the Week of October 26th, 2020?

Answer: Major developments included PayPal’s announcement to allow investors to invest, trade, and shop with cryptocurrencies, nearly $900 million in venture capital going to crypto companies in Q3 2020, the Federal Reserve’s cautious approach to digital currency, Mode Global Holdings PLC’s decision to convert up to 10% of cash reserves into Bitcoin, China’s regulatory draft on the Digital Yuan, and Ethereum’s milestone of becoming the first crypto to settle $1 trillion this year.

2. How Did Bitcoin and Ethereum Perform, and What Were the Correlations with Traditional Markets?

Answer: Bitcoin and Ethereum closed at the high end of their price range, driven by PayPal’s integration news. Bitcoin broke above $13,000, forming an ascending triangle. Ethereum formed a descending triangle, with potential to break near-term highs. ETH had a moderate negative correlation with equity and bond markets and zero correlation with gold. Traditional markets fluctuated, awaiting the U.S. election, stimulus package, and response to COVID-19’s second wave in Europe.

3. What Technical Insights Were Observed for Bitcoin and Ethereum During the Week?

Answer: Bitcoin formed an ascending triangle, breaking the July 2019 highs at $13,200, with potential for more upside. Strong fundamentals like PayPal’s integration and balance sheet hedging by Microstrategy, Square, and Mode Global supported the bullish outlook. Ethereum’s descending triangle indicated a potential break of near-term highs if BTC breaks out, with bullish Ethereum basis skew, but less so than Bitcoin’s.

4. What Are the Key Questions and Watch Items in the Cryptocurrency Space for the Week?

Answer: Key questions include the impact of PayPal’s move on real-world cryptocurrency payments, the future of fiat currencies going digital, and PayPal’s competitiveness. Watch items include the Chicago Mercantile Exchange (CME) surpassing retail platforms in Bitcoin futures exchange by open interest, potential institutional involvement in cryptocurrency, and reactions of institutions and hedge funds to PayPal’s announcement.

5. How Did Macro Events and News Such as PayPal’s Integration Affect the Cryptocurrency Market?

Answer: PayPal’s integration had a significant impact, driving Bitcoin and Ethereum’s price and forming technical patterns. The announcement acted as a short-term trigger for market movements, while broader Bitcoin adoption as an asset class provided a foundation. Other macro events like the U.S. election and intermarket flows could influence the market, and the correlation between cryptocurrencies and traditional markets showed further decoupling.

Disclaimer

This document has been prepared by Zerocap Pty Ltd, its directors, employees and agents for information purposes only and by no means constitutes a solicitation to investment or disinvestment.

The views expressed in this update reflect the analysts’ personal views about the cryptocurrencies. These views may change without notice and are subject to market conditions. All data used in the update are between 4 Oct. 2020 0:00 UTC to 10 Oct. 2020 23:59 UTC from TradingView. Contents presented may be subject to errors. The updates are for personal use only and should not be republished or redistributed. Zerocap Pty Ltd reserves the right of final interpretation for the content herein above.

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