The price of bitcoin rallied nearly 30% in the month of October as the floodgates opened to push digital assets mainstream (Chart 1.0).

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Chart 1.0: The price of bitcoin rallies 27.93% in the month of October

PayPal’s entrance into the digital currency space, allowing users to buy, sell and hold several cryptocurrencies in their PayPal wallets, caused traders to bid up the price of bitcoin as it caused them to reprice the possibility of digital assets being available to over 300 million users on the PayPal platform. …


After releasing the first liquidity mining token model back in June, Compound Finance has paved the way for parabolic growth in the DeFi space. Since the total value locked (TVL) in DeFi has ballooned from around $1B to over $9.5B or a +850% increase in three months. Liquidity mining, or incentivizing platform users with token airdrops for participating in the network, has caused several DeFi projects to garner mass adoption. Aave Lend, a non-custodial money market platform, has seen its total value locked (TVL) increase +4700% YTD, Curve Finance, a decentralized liquidity pool, has seen its TVL increase +1200% YTD and Synthetix Network, a tokenization platform, has seen its TVL increase +500% YTD. All three platforms now have nearly or more than $1B total locked on their platforms. …


As we continue to make our way through the second half of 2020, COVID-19 continues to propagate fear, uncertainty and doubt (“FUD”) throughout the world. The United States’ unemployment (see Figure 1) along with several other labour statistics have rebounded off of their March lows as the continuous lockdown of global economies, stemming from no other than the Leviathan’s response to the virus, is forcing structural deflationary pressures on the global economy.

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Figure 1: United States Unemployment Rate. Source: Tradingeconomics.com

In response, Central Banks across the world are continuing to expand their balance sheets in an attempt to support the economy. As it currently stands, the Federal Reserve, European Central Bank, Bank of Japan and People’s bank of China have acquired a total of $25 trillion worth of assets on their combined balance sheets (see Figure 2). …


This month DeFi markets experienced unprecedented growth as the total value locked in DeFi surged from just under $979 million to $1.57 billion. In other words, the total value locked in DeFi has grown an astonishing +60% in June.

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Total Value Locked (USD) in DeFi — DefiPulse

Make no mistake, this parabolic growth in DeFi markets was no coincidence. What spurred this rapid inflow in the DeFi markets was Compound’s launch of its token on June 15th. What makes Compound’s token so special is that not only does it allow holders of the token to participate in Compound’s decentralized governance, but lenders and borrowers on the Compound platform get rewarded a portion of COMP for participating in the network and currently… rewards in COMP are substantial. At the current market rate, the total amount of COMP distributed each day equates to $576,000 — half goes to COMP suppliers and the other half goes to COMP lenders (For More Info). …


Bitcoin’s halving, which is expected to occur on May 11, 2020, is potentially going to disappoint many traders as it is most likely to be not just a “non-event” for the price bitcoin, but a bearish event. On one hand, market dynamics reveal short term bearishness for the price of bitcoin meanwhile, the price of bitcoin continues to trade in a range on both a daily and weekly time horizon. To take advantage of bitcoin’s current market environment, one could either sell volatility or “fade” the price of bitcoin going into the halving and post-halving.

Market Dynamics

The rally we are currently seeing in bitcoin is most likely a short squeeze being propelled by retail Fear of missing out (FOMO) and “smart money” buying into the news. When the halving commences, not only are we going to see a wave of selling by “smart money” traders, but we could also see a wave of selling propelled by small bitcoin miners as they must sell bitcoin in order to fund operations as they see their revenue getting cut in half. As a result, both institutions and miners selling into the halving should cause the price of bitcoin to fall leaving “FOMO” retail traders caught holding the bag. …


Initial Stages of the Outbreak — December 31, 2019 — February 11, 2020

On December 31, 2019, Chinese Health officials inform the World Health organization that 41 people had contracted mysterious pneumonia in Wuhan, China. Thinking that the outbreak originated from a popular Huanan Seafood Wholesale Market, a day afterward, Chinese officials issue an order to close the Huanan Seafood market. In the following two weeks, officials identify the virus as a new strain of the Coronavirus. On January 11th, China records its first death linked to the virus outbreak. Both society and financial markets remain unreactive during the initial stages of the outbreak. US equities continue their post-global financial crisis bull market, meanwhile, digital asset markets get squeezed signaling to investors that digital asset markets could potentially rally into bitcoin’s halving. …


Coronavirus fears, which initially seemed to be nothing more than an afterthought, have finally materialized as COVID-19 has turned into a global pandemic. This black swan event has caused global markets to sell off sharply causing investors to abandon risky assets for safe-haven securities. In less than two weeks, the S&P 500 has fallen from its all-time high an unprecedented 27%. Digital asset markets are no exception, as bitcoin has dropped 20% more than the S&P 500. Meanwhile, in energy markets, a sudden Russia-Saudi crude oil price war added to the pandemic fears and produced a sell-off causing the commodity to fall as much as bitcoin. On the other hand, gold remained nearly flat, as market participants seeking safety fled to US Treasuries causing the price of government-backed bonds to appreciate around 10%. In response to the capitulation, the Federal Reserve initially cut interest rates 50 basis points hoping to get the bulls back off the sidelines. However, traders just sold the news as the capitulation continued. Now hoping for a Deus Ex Machina rally, the Federal Reserve has unleashed the bazooka, a $700 billion bond buyback program along with a hallmark interest cut designed to target a Fed Funds rate between 0 and 25 basis points. As the monetary authorities continue to intervene to stimulate the economy, the Federal Government is also pondering a stimulus package of its own, which includes a tax rebate, a payroll tax cut, small-business grants and loans, expanded unemployment insurance and relief for the airlines and other hard-hit industries. …


Alpha is defined as the excess return on an investment given the expected risks taken to generate those returns. Alpha is often referred to as “skill” or “edge”. On the other hand, beta is defined as risk premiums given by the market. In other words, “beta” is what you get for passively holding the “market” (Referring to S&P500 in traditional finance).

There is no denying that passively holding bitcoin, capturing “beta” in digital asset markets, has been extremely profitable as a digital asset investor. Since its inception to the end of 2019, bitcoin has had a compound annual growth rate (CAGR) of 232% and during its last three years, around the time crypto went mainstream, bitcoin has had a GAGR of around 120%. Meanwhile, in the last 3 years, the S&P 500 had a return of only 15%. That means if a traditional investor were to hold only 3% of their assets in bitcoin and the rest in the S&P500, for simplistic purposes, over the last three years, he or she would increase his or her CAGR by +3% a year from just passively investing in bitcoin. …

About

BKCoin Capital LP

BKCoin Capital LP is a New York-based digital asset quant hedge fund dedicated to delivering consistent uncorrelated absolute returns.

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