Happy Easter! This month, we take a closer look at the impact of the collapse of SVB, Signature, and Silvergate, on the crypto world. We also take a look at how effective trend-following strategies are in crypto markets. And of course, we bring you our usual summary of the month’s crypto news.
Please feel free to forward to anyone you feel may find this interesting.
Broken US Banks – Good or Bad News for Crypto?
The collapse of the 3 US banks, SVB, Signature and Silvergate, has not only disrupted banking services this month, but it is becoming increasingly difficult for crypto firms to find banking partners. This month:
- A number of crypto companies, including Dapper, Circle, and Kraken suspended ACH (the US equivalent of BACS) transfers because of the collapse of Silvergate
- Silvergate closed its SEN network, and Coinbase stopped accepting Signet transfers. Both networks offered customers the ability to transfer funds to crypto exchanges in real time, 24×7
- Binance announced that it will suspend GBP payments on 2 May, because their banking partner, Paysafe, can no longer provide these services
- Natwest has imposed a limit of £1000 per day/£5000 per month limit on payments from its customers accounts to crypto exchanges, joining Nationwide and HSBC who also announced similar measures recently
- CryptoUK, a trade association for the UK cryptoasset industry, has written to the government asking for help in ensuring that UK banks permit customers to invest in crypto
- Circle’s stablecoin, USDC, depegged from the USD after it emerged that part of its reserves were held at SVB. However, it later regained its peg after Circle reassured the market that the reserves were safe and that it had a new banking partner, Cross River Bank
But, it is not all bad news. BTC/USD has rallied, from a low of 15,800 in Dec to over 28,000 following the collapse of the banks. Some of the reasons are:
- FDIC deemed that SVB and Signature Bank were “systematically important” and therefore they would be backing up deposits
- Many investors still see crypto as a hedge against the traditional banking system. Mike Novogratz, CEO of crypto investment firm Galaxy, said in March that he could see another credit crunch coming and that now was the time to get into gold and bitcoin
- Bad news is good news. Anything that makes an interest rate rise less likely is viewed positively
- Following the USDC depeg, investors moved out of stablecoins and into BTC
Legal & Regulatory
Grayscale has been keeping lawyers busy this month. Following a hearing earlier this month, Grayscale, who is suing the SEC for rejecting its application to create a Bitcoin ETF, appears to have the upper hand. Grayscale themselves are being sued by FTX over their Bitcoin investment trust, GBTC.
Talking of FTX, FTX Trading, the US entity controlled by liquidator John Ray III, is suing FTX Digital Markets, which is under the control of liquidators in the Bahamas. Ray claims that FTX Digital Markets was a corporate shell and has no ownership rights over FTX’s cryptocurrencies, intellectual property or customer relationships.
The sale of Voyager’s assets to Binance has been put on hold until the US Department of Justice’s objections have been resolved. This follows the approval of the sale earlier this month by a bankruptcy judge, despite the SEC claiming that Binance US is an unregistered exchange.
The SEC has charged Justin Sun, the founder of Tron, for selling unregistered securities. Celebrities Lindsey Lohan and Jake Paul were also charged for promoting TRX and BTT without disclosing that they were paid to do so.
The White House has published its annual economic report, which says that crypto has no fundamental value. The report goes on to say that distributed ledger technology is outperformed by existing tech for the use cases to which it is most suited. Meanwhile, in Europe, the EU’s Markets in Crypto Assets Act (MiCA), is scheduled for a final vote on 19 April. This follows the approval by MEPs for additional Anti-Money Laundering legislation, which puts a limit of a €1000 on crypto payments to anonymous payees.
Companies & Products
Coinbase has been busy this month. They have bought One River Digital Asset Management, an institutional asset manager, as part of their strategy to extend their customer base to corporates. This month they also launched their Wallet-as-a-Service (WaaS) product, which allows businesses to give their customers access to web3 wallets from their own apps. Coinbase is also considering extending its platform by creating on a non-US platform, and by adding perpetual swaps to their range of crypto products.
Deribit have announced that they will launch the industry’s first volatility futures. These futures reference DVOL, the Deribit Bitcoin Volatility Index, calculated using the implied volatility smile from options traded on Deribit.
The next Ethereum 2.0 upgrade, Shaghai-Capella (aka Shapella), is planned for 12 April, following a successful dress rehearsal on the Goerli test network earlier this month. The upgrade will allow validators to withdraw their staked tokens.
Uniswap, the decentralised exchange, has had a strong month as investors embrace DeFi in the wake of the FTX collapse. The 7 day moving average volume on Mar 16th was $4.4 billion, around twice that of Coinbase. Uniswap, which already operates on Ethereum, Arbitrum, Optimism and Celo, also launched on BNB chain this month.
Big Tech companies too have been getting involved in Web3:
- Amazon is launching their NFT marketplace on 24 Apr
- Meta, on the other hand, is winding down its NFT business. However, they are building a decentralised app, codenamed P92, for sharing text updates
- It is rumoured that Microsoft is working on a non-custodial wallet for their Edge browser
March has also been a busy month for Layer 2. Arbitrum, a popular Ethereum Layer 2 protocol, has airdropped its native ARB token, with some wallets receiving as much as $20,000 worth of ARB. Polygon, Matter Labs, and ConsenSys all launched their zkEVMs within days of each other. zkEVMs are virtual machines that execute smart contacts in a way that is compatible with zk-Rollup, an approach to scaling that involves aggregating Layer 2 transactions and then sending a proof for that block to the Layer 1 chain.
Crime
An attacker managed to steal around $200 million worth of crypto from Euler Finance using a flash loan attack. The attacker later returned “all of the recoverable funds”. Whilst it is not clear why the funds have been returned, the hacker has apologised using blockchain messaging.
ChipMixer, a mixer site, was taken down through a co-ordinated effort from US and German authorities.Do Kwon, the co-founder of Terraform Labs, was arrested in Montenegro after he tried to board a flight to Dubai using forged papers. Kwon is wanted by US and South Korean authorities following the collapse of Luna and its linked stablecoin Terra last May, triggering a cryptocrash. It is alleged that he misled investors about the stability of Terra.
Do Trend Following Strategies Work in Crypto Markets?
This month, we investigate whether trend following strategies are effective for crypto by backtesting simple trend following strategies and comparing their performance to buy-and-hold.
Our approach was as follows:
- We concentrated on BTC/USD spot, as that has by far the most historical data available for backtesting
- We backtested simple moving average crossover and dual simple moving average crossover strategies for common periods (20, 50, 100, 200 days) and compared them to buy and hold
- We conducted the test for a daily timeframe, because of the availability of daily closing data
- The backtest is conducted for the date range 1 Jan 2016 to 31 March 2023, a period of just over 7 years. The start date was chosen by taking the first date for which OHLCV data is available, adding in 200 days to allow the moving average to be calculated at the start of the backtest, and then moving the date to the beginning of the next month
- We started with an initial investment of $100,000
- We used daily closing prices from Yahoo
The results of the backtests are shown in the table above. The best results are highlighted in orange. Things to note:
- The returns are spectacular. Even for buy and hold, the CAGR (Compounded Annual Growth Rate) is over 78%, compared to around 13% for the S&P 500 over the same period. By choosing the 50 day SMA crossover strategy, the CAGR can be boosted to almost 97%. A $100,000 investment in 2016 would be worth over $13 million dollars today
- The drawdowns are large. Even the best strategy here results in a maximum drawdown of over 57%, in an industry that considers 25% large. That is one of the biggest problems with trend following – sticking with the strategy throughout large drawdowns. Having said that, the maximum drawdown for buy and hold is even worse at over 83%
- The Sharpe Ratio, which measures reward/risk, is pretty good, even for buy and hold, given that the S&P 500 has a Sharpe Ratio of less than 0.4 over the same period
The results demonstrate that even unsophisticated trend following strategies outperform buy and hold. For daily trading, a simple 50 or 100 day moving average performed best.
About Us
DeQuantifi is a consultancy that builds bespoke software solutions for crypto traders. Our competitive advantage is that we leverage our proprietary crypto valuation library to reduce the time to market whilst delivering solutions tailored to you.
The material provided herein is for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.