Relative Returns

The month of March 2020, will go down as one of the most volatile and also one of the worst performing months in the short history of digital assets. On March 12th the S&P 500 recorded one of the quickest declines in prices ever and ended up losing about 9.5% on that day alone. The following 15 hours saw most digital assets losing value in the region of 50%. The beginning of the month was looking up after the sell-offs in February, with ETH close to regaining 10%, however that didn’t last long. Around March 8th assets across the board went on a nosedive.

The initial drop wiped out about 10-20% of value for most projects, however the fall a few days later was of even larger magnitude. During that time we can see that volatility has spiked to levels that are rarely seen, even in the crypto markets. The 15 hours after the S&P started falling led to one of the biggest drops in the recent months, with some attributing this to rumours about a wire being unplugged at BitMex. Others blame it on the heavy leverage offered on some crypto exchanges, potentially resulting in cascading margin call liquidations. In either case major liquidations happened during those times with many of them heavily leveraged. It is common to have leverage in traditional finance as well, however most of the time that leverage is in the 2-3x region with only a select few brokers offering higher leverage. However, in crypto it has become the norm to see leverage in the 50x or even 200x region.

Many traders use leverage to increase their upside potential, but a large number are not managing the downside properly. In times of extreme volatility, many get wiped out and will see their positions liquidated, starting a frenzy of sell-offs from like-minded traders. The amount of leveraged positions on Bitcoin alone had spiked in mid February to about $5.4 billion with many of them being wiped out in March. It is safe to assume that traders across the board will be more careful in including leverage into their trades in the future.

Most digital assets were able to recoup some of their losses during the remainder of the month, with Bitcoin leading the recovery. Spreads widened throughout the remainder of the month as well, potentially indicating that another period of uncertainty is on the horizon. At the end of the month, BTC and XRP were the top performers, by only losing roughly 30% of their value.

March 2020, Biggest Changes

10-Hour Rolling Volatility

The Mount Everest of volatility spikes happened during the massive sell-offs around March 12th 2020, with volatility readings jumping above the 0.1 mark.

This is a well known scenario, major sell-offs or run ups, increased volatility coupled with major losses and sometimes major wins. This time the case is definitely losses, besides for the lucky ones that were shorting the market. The volatility spike is of different magnitude, not to mention the losses again. In the past, volatility spikes affected most assets but one or two would often experience spikes of much smaller magnitude. In this case, almost all assets experienced the major spike the same way, which coincides with all asset values dropping in similar fashion.

The rest of the month still exhibited higher volatility than the previous months on average but the same phenomenon is visible here. Usually the volatilities of the projects exhibit the same overall shape of the volatility curve, however they usually differ quite a lot in magnitude. This month, the volatility of them is much more aligned with each other. This could very well be attributed to the sheer size of the drop in prices. After such an abnormal move the market is still very unsure where the prices are going and thus are all somewhat mimicking each other.

The remainder of the month still exhibited higher volatility than the previous months on average but the same phenomenon is visible here. Usually the volatilities of digital assets exhibit the same overall shape of the volatility curve, however they usually differ significantly in magnitude. This month, the volatility of the assets are much more aligned with each other. This could very well be attributed to the sheer size of the drop in prices. After such an abnormal move the market is still very unsure where the prices are going and thus could be somewhat mimicking each other’s price movements.

Correlations

How closely the price movements across assets have followed each other becomes obvious when examining the monthly correlations between them.

Last month, the correlations between XLM and XRP were around 0.85, and that being the highest reading that month. This month, 0.85 is smaller than the smallest correlation reading. For March, XLM and XRP are sitting at a correlation of 0.94 which is the highest value, also shared with ETH and BTC as well as LTC and ETH. With readings like this the whole market currently becomes a valid combination of pairs trading. Some could even go so far as using an index as one of their pairs, similar to what has been done in traditional finance for years.

It will be interesting to follow these correlations closely in the coming weeks, if some of these maintain their link throughout that time, they may overtake the current candidates for pairs trading until another major market move occurs that changes the overall behaviour again.

Notable News & Announcements

Bitcoin Mining Investments Strong - BTC Hashrate Surpasses All-Time-High

Why Bitcoin ‘Cannot be a Reliable Safe-Haven-Asset’?

Telegram Ruling Creates Frankenstein Monster in Crypto Law

Bitcoin Halving is Less Than 10000 Blocks Away, Will Prices Soar?

About Consilium

Consilium Crypto is a big data company that provides quantitative and qualitative insights to market participants in the digital asset space, including funds, family offices and exchanges.

Consilium analyzes 17,000 trading pairs, over 1000 assets, across 50+ exchanges, and tracks trading activity to the millisecond. Our system monitors raw transaction data, as well as complete price and liquidity information from order books around the globe. These data pipelines power our core products, designed to help funds find alpha and place large orders efficiently in times of thin liquidity.

For more information, send an email to info@consiliumcrypto.ai

DISCLAIMER: Consilium Crypto Inc. research and recommendations are meant for educational purposes only and the opinions expressed do not constitute investment advice. Independent advice should be sought where appropriate. The information in this report is provided "as is" and "as available". All information and opinions expressed herein are current as of publication and are subject to change without notice. Consilium Crypto Inc. does not warrant the accuracy of the materials provided herein, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or fitness for a particular purpose. This document is provided for informational purposes only and should not be used for investment decisions. This is not an offer to sell or a solicitation of an offer to buy any security referenced in this document. Consilium Crypto Inc. does not provide financial or trading advice. For any questions or clarifications, please contact info@consiliumcrypto.ai.