Exploring the latest research and news of the crypto world
Adaptive Analysis Newsletter • April 26th, 2019
Tether and Bitfinex have been brought back into the spotlight as the New York Attorney General sues the company behind both businesses. The hash rate of the Bitcoin network strangely drops despite the price increasing. More statistical significance found from studies completed by the Messari team.
A potential upcoming ban on cryptocurrency mining in China may be spurring miners to transition operations to new locations
Bitfinex and Tether are being sued by the New York State Attorney General
The prices of some major altcoins are found to undergo a significant drop from the date of testnet and mainnet launches to the date one week after
A peculiar event happened this week.
From the 21st to the 23rd, the hash rate for the bitcoin network dropped from 51 EH/s to 36 EH/s. A solid drop of almost 30%.
On its own, not so strange. The hash rate has dropped significantly over a short span many times before.
The strange thing is that the price has been increasing. The above chart shows the 7-day moving average of hash rate superimposed with bitcoin price.
With the price generally being the most important factor in mining profitability, you would expect that the hash rate would be going up as opposed to down.
Hence the question, where art thou hash rate Bitcoin?
The hash rate has recovered since but what happened from the 21st to the 23rd? It is anybody’s guess really but there is one theory which makes sense.
China’s National Development and Reform Commission (NDRC) has proposed to ban cryptocurrency mining. The resolution is open for public comment until the 7th of May but Reuter’s note that miners may need to shut down operations immediately after this date.
Miners may be already moving their operations in anticipation of the ban. With 60% of global mining estimated to be based in China, even a fraction of these coming offline for a number of days would have a material impact on the hash rate.
Quick Bits (and Bitcoins)
Are Bitfinex and Tether Unravelling?
The New York State Attorney General is pursuing legal action against iFinex Inc, the company behind cryptocurrency exchange BitFinex and USD-pegged stablecoin USD Tether (USDT). The existence of funds backing USDT’s peg to the USD has long been under scrutiny. The company is being sued based on accusations that BitFinex has facilitated trading with New York customers without a licence, that the exchange has mixed client funds with their own capital, and that reserves to back the stablecoin were used to cover losses incurred by the exchange. The stablecoin dropped below 0.96 on the news.
Will the New York State Attorney General be the final straw for USDT?
More Statistical Significance from the Messari Team
Last week, we broke down Qiao Wang’s (@QWQiao) research on the statistical tie between Google Trends data for “Buy Bitcoin” and the price of bitcoin. There was more statistical goodness included in the Messari newsletter this week.
This time, analyst Jack Purdy (@jpurd17) looked at the relationship between the price of a crypto asset and their testnet and mainnet launches. This is a typical example of an event-based strategy.
Event-based strategies far predate the crypto market. A similar example in equities markets would be buying on the launch of an IPO.
There are countless event-based investment hypotheses which can be put together in the crypto markets. Many mystical ideas can be contemplated of how events such as the following impact price:
The problem with event-based strategies is it is hard to pin down exactly how an event relates to price. Results can be mixed and how to execute strategies is often arbitrary.
It is very easy to link an event to a prior price increase but that doesn’t mean that a quantifiable investment edge exists. This is even more so the case when the number of times the event has happened are limited and the impact on price has been mixed.
And of course, network launches are one type of event-based strategy which is applied. But is there an investment strategy which can be applied that has a quantifiable investment edge?
The investment hypothesis is straightforward and logical. Projects that successfully launch testnet or mainnets are meeting important development milestones and the price should increase to reflect this.
Purdy explored the relationship between the price both before and after network launches (the relationship for both mainnet launches and testnet launches were explored separately). Four different scenarios were examined and the results for USD and BTC returns are presented in the tables below.
Scenario one involved purchasing one week prior to the launch and selling on the day of the launch. Although the returns were positive, the results were neither statistically significant for mainnet launches or testnet launches.
Scenario two examined buying the day before the launch and selling on the day of the launch. The returns recorded for this scenario were also not statistically significant.
Scenario three involved buying on launch day and selling a day after.
What about scenario three? You guessed it, also not statistically significant.
Scenario four was the only statistically significant relationship of the four examined. This scenario involved buying on launch day and selling one week after.
The relationship was negative with a -7.5% USD median return and a -8.9% BTC median return for mainnet launches. Testnet launches recorded a median return of -17% for USD returns and -4.4% for BTC returns.
What does this mean?
It is generally accepted that markets price in publicly available information such as scheduled network launches. This makes it very difficult to gain any long-term edge by buying an asset leading up to an event.
The results here, however, indicate that an edge can be exploited by selling post-network launch. Currently, there are limited short markets available for altcoins and 4-hour rollover fees typically apply to those that do exist.
Once fees for holding short positions are taken into consideration, the edge may have vanished.
The general direction of the market is also something which needs to be taken into account. With bitcoin averaging a 2% price decline each week of 2018, a strategy shorting altcoins post network launches may not outperform by a large margin a strategy shorting in general.
That’s a wrap
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Disclaimer: Nothing in this newsletter constitutes financial or investment advice. You are completely responsible for your own decisions, obviously. Read the full disclaimer here.