Week In Review

Notable Messari Enterprise Updates

1. Zilliqa team released v8.0.3 of its mainnet client.
2. Voting on a proposal to add Kyber DMM to KyberDAO
3. CGP-28 passed its referendum period which ended on May 13, 2021, and its proposed code changes were executed on May 18, 2021.
4. Sushiswap team announced that the native token launchpad, called MISO (Minimal Initial SushiSwap Offering) will be launched on May 20, 2021.

Sector Performance Overview

The week ending May 20th saw one of the biggest drawdowns in recent months. The market as a whole tumbled more than 40% from its peak with riskier tokens suffering even higher losses. Volatility reared its ugly head reminding everyone that crypto markets are not for the faint of heart. As performance during the week deteriorated, market volatility increased across the board. Additionally, asset correlations saw a massive spike across all sectors covered in this report driven by the market correction.

Over the week the currency sector suffered the least compared to other sectors. The sector – composed of Bitcoin, Doge, etc – ended the week with a -16% loss closely followed by DeFi which posted a negative return of -19%. Decentralized exchanges and Web3 suffered most severely with total weekly losses of -22% and -26% respectively.

There was no single catalyst that can explain the past week’s movements. The selldown began on the back of Elon’s tweets that Tesla was no longer accepting Bitcoin as a form of payment due to environmental concerns. Macroeconomic concerns also contributed, mainly from the higher than expected inflation print of 4.2% year-on-year sparking fears of tapering. Early in the week, newsflow of Binance facing regulatory scrutiny and reiterations from 2017 that China doesn’t accept crypto as a form of payment also exacerbated the issue.

The main culprit has been increased leverage. Binance, the world’s largest exchange, has seen positive funding rates for the past months:

ETH investors also saw climbing open interest, indicating that demand was not based on spot buying in recent weeks.

Towards the end of the week, funding rates were erratic, with some exchanges printing positive rates and others printing negative rates (see chart below). This showed that markets were still disorderly. Predicted funding rates also kept spiking at each dip, as long traders bought the dip. However, as prices moved down, traders increasingly bought until they triggered the next liquidation cascade, causing prices to dive further. An example is FTX (where there is more intra-day granular data) -- rates were still climbing on the week until it capitulated on May 20.

The activity was exacerbated on Wednesday as many centralized exchanges were congested, delaying clients from trading. The Ethereum network also saw heavy use, anecdotally printing $1,600 in gas fees for transactions, even to avoid liquidation. As a result of the trading friction, prices were slow to find footing.

Sector Drill Down - Risk and Performance Review

Top Assets

In the early days of the week, performance in the top ten assets (by market cap) fluctuated around zero with some assets performing well while others lagged. By mid-week, performance took a nasty turn, shifting a positive week into a bloodbath. By the end of the week, all top assets finished the session with double-digit losses. Cardano (ADA) and Dogecoin (DOGE) were the least affected in the group ending the week with returns of -13% and -26%. Ethereum (ETH), Chainlink (LINK), Uniswap (UNI), Litecoin (LTC), and Binance coin (BNB) suffered the most, losing over 40% over the week.

Unsurprisingly, volatility across the top ten experienced a sudden spike. On a 30-day rolling basis, volatility increased roughly 5% for most assets over the week. In previous weeks, volatility ranged between 5% and 9% however, volatility across the group is now above 10%. Bitcoin is the only exception with rolling volatility of 6%.

As the market came crashing down, correlations in the group went through the roof. As of yesterday, 30-day correlations among top assets are well above 50%.

Correlation with Bitcoin also increased dramatically over the week. Dogecoin’s (DOGE) correlation increased over 60% during the week while Uniswap (UNI) saw a jump of roughly 30%. All assets now have a correlation greater than 60% with some reaching highs of 80%.

DeFi

Following the same pace as the rest of the market, DeFi assets dumped heavily during the week. For the majority of the week, assets moved sideways without tilting towards any specific direction. On Tuesday, SushiSwap (SUSHI), Synthetic (SNX), and Aave (AAVE) had a nice rally which turned out to be short-lived. Similar to the top ten, DeFi assets ended the week with two-digit losses ranging from -23% to -51%. Uniswap (UNI) and PancakeSwap (CAKE) experienced the largest losses ending the week with negative returns of -45% and -52%. Arguably, they were also most held tokens as leaders in the decentralized exchange (DEX) segment.

Notably, total value locked (TVL) in the Binance Smart Chain (BSC) and Ethereum ecosystems were impacted. From the peak, BSC and ETH lost -62% and -27% of TVL in USD terms. This indicates that tokens in Ethereum DeFi largely were not withdrawn from protocols. BSC saw an exploit on BUNNY, perhaps worsening the performance of their overall TVL.

Volatility within DeFi increased past its 3-month high reaching levels above 10% across all assets. Notably, ThorChain’s (RUNE) Rune’s volatility doubled going from 7% to 14% in the span of three days. Within the group, SushiSwap (SUSHI) is the riskiest asset with rolling volatility of 16%. As of May 20th, volatility is ranging between 10% and 16%.

Correlation in the sector also reached new all-time highs. On average, the correlation between DeFi assets ranged from 10% to 50% in previous weeks. After the market drop, correlation in the group skyrocketed now ranging from 50% to as high as 89%.

Similarly, the correlation between DeFi assets and Ethereum is close to its all-time high. Previously, the sector’s correlation was relatively high but a bit dispersed. Now, correlations are concentrated on the high end of the spectrum ranging from 70% to 80%.

Currencies

Although currencies performed the best amidst the bloodbath, the sector still experienced a turbulent week. All of the currencies covered in the report saw losses of more than 20% during the week. Dogecoin (DOGE) and Ripple (XRP) withheld downward pressure better than most of the sector finishing the week with a -26% return. On the other hand, Monero (XMR) and Dash (DASH) ended the week with losses of more than 50%, totally wiping their gains from previous weeks.

Volatility in the sector increased to levels higher than 10% for most currencies. Interestingly, on a rolling basis, Dogecoin’s (DOGE) volatility decreased considerably since its wild price movement in late April and early May. DOGE’s volatility remains one of the highest in the group right behind Bitcoin Cash (BCH) which has been consistently increasing since May reaching a new high of 17%. The rest of the volatilities range from 6% to 14% with Bitcoin being the least volatile asset in the sector.

Correlations between currencies were already relatively high over the past few months. The one notable change over the week is Dogecoin (DOGE). The token’s correlation with the rest of the group increased approximately 50% week-on-week.

Likewise, the correlation between currencies and Bitcoin has been trending up since mid April. Correlations in the group are now concentrated between 80% and 86%. Dogecoin’s (DOGE) correlation increased from 6% to 62% in the past two weeks.

Smart Contract Platforms

Smart contract platforms suffered the same faith as all the assets in this report. The week seemed to be good for Cardano (ADA) and Polkadot (DOT) which by mid-week were clearly outperforming the rest of the group. By the end of the week, all assets tumbled down in unison. Cardano (ADA) and Solana (SOL) had the smallest losses in the sector ending the week with negative returns of -13.7% and -23.3% respectively. EOS and Binance Coin (BNB) ended the week at the bottom of the pack with returns of -48.9% and -49.7% respectively.

Volatility in the sector increased roughly 4% to 5% across most assets. Solana’s (SOL) volatility saw the biggest jump in the sector going from 5% to 13% over the week. EOS’s volatility reached a new all-time high of 21% making it the riskiest asset in the smart contract platform sector.

In previous weeks, correlations in the sector were relatively low when compared to the rest of the sectors in the report. Solana (SOL) was consistently uncorrelated with the rest of the assets in the group. However, as the whole market crashed down correlations inevitably increased. In Solana’s case, correlation increased roughly 60% with the rest of the assets week-over-week. Correlations in the sector are now ranging from 40% to as high as 96%.

Correlation with Bitcoin had been constantly increasing since mid April. After this week, the trend accelerated pushing correlations close to all-time highs reaching levels above 75% for the majority of the assets in the sector. Solana’s (SOL) correlation went from negative to positive during the week experiencing a jump of approximately 60%.

Decentralized Exchanges

Decentralized exchanges were one of the worst-performing sectors of the week. The sector was down 21% in the past seven days. Similar to the rest, DEX’s performance went south starting Wednesday, tumbling down to double-digit losses. SushiSwap (SUSHI) had the least amount of losses of the group ending with a -23% loss. The rest of the DEXs suffered losses greater than 30% with PancakSwap (CAKE) and Curve (CRV) losing more than -50% over the week.

Volatility in the sector moved from a 4-9% range to an 8-15% range. On the lower end are Bancor (BNT) and Uniswap (UNI) with rolling volatility of 8.8% and 9.3%. On the high end is SushiSwap (SUSHI) with a volatility of 16%.

Apart from an overall increase in correlations driven by the market correction, the only notable change week-over-week happened with Uniswap (UNI), PancakeSwap (CAKE), and ThorChain (RUNE). All three assets had been on the low positive end of the correlation spectrum but after last week’s market moves, their correlation with the rest of the group reached a new all-time high. As of yesterday, correlations in the sector are all greater than 60%.

DEX’s correlation with Bitcoin didn’t see a massive jump over the week. Uniswap (UNI), PancakeSwap (CAKE), and ThorChain (RUNE) are the exceptions seeing an increase in their correlations with Bitcoin of approximately 30%.

Web3

During the week, Web3 was the worst-performing sector across all sectors covered in this report. The group ended the week with an average loss of -25.7%. Compared to other sectors, Web3 assets moved very close to each other throughout the week. All assets began to experience losses Sunday, May 16 with only Helium (HNT) recovering slightly in the following days. The whole sector went south with the rest of the market on Wednesday suffering heavy losses ranging from -27% to 51%. HNT came out on top of the group, losing -27% during the week. Siacoin (SIA) and Stacks (STX) were underperformers standing at -49% and -51%.

Web3 assets saw similar jumps in volatility as the rest of the sectors. On average, volatility increased roughly 4% across the group. Volatility in the sector now ranged from a low of 9% to a high of 12%.

Correlations in the group increased as a consequence of the market crash. Notably, Livepeer (LPT) and Arweave (AR) went from having negative-to-muted correlations to positive correlations over the week.

Following the same pattern as the rest of the sectors, Web3 assets experienced an uptick in correlation to Bitcoin. While most are in the 70% to 85%, Livepeer (LPT) and Arweave (AR) have lower correlations both hovering at 44%.

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