21Shares Research Newsletter - Issue 61

Market Outlook

Historically, Bitcoin has maintained a noticeably low correlation with traditional assets such as stocks and bonds. For example from 2017 to now, Bitcoin’s average correlation with the S&P500 has been 0.04 and -0.017 with treasury bonds. This remarkably low correlation has been a driving factor behind institutional interest in Bitcoin due to its characteristics as an alternative store-of-value asset.

During the mid-March market crash, correlations between Bitcoin and traditional assets increased as the market experienced a pronounced flight-to-cash period. This was due to the likely movements of multi-strategy funds and large Bitcoin holders with positions in stocks, bonds, and Bitcoin selling off all their positions for cash. The entire market, cryptoassets included, crashed in tandem. However, the return profiles of Bitcoin and other assets coming out of the downturn were noticeably differentiated. To demonstrate this point, BTC has returned 86% since March 12 (the date of the crash) compared to 21.3% for the S&P500, 32% for DAX, 21.4% for SMI, and 25.9% for the EURO STOXX 50.

While Bitcoin’s correlation with other assets peaked during the flash crash, this phenomenon even affected other “safe haven” assets such as Gold which went from a -0.688 correlation (rolling 30d MA) with the S&P500 on February 21 to a correlation of -0.00193 on May 16. For brief moments during flash crashes correlations of all assets, including safe havens, can change but it’s important to look at the bigger picture. What is clear is that since the crash, correlations between Bitcoin and other assets have noticeably decreased and Bitcoin has produced noticeable excess returns above other asset classes. We expect this trend to continue even if markets take another brief turn for the worse.

The crypto market faced a tough week as Bitcoin edged closer to the $9K mark. The sell-off could be argued to have been driven by the unwinding of positions held following the expiration of $1B+ of Bitcoin and Ethereum options on Deribit. The performance of the top five cryptoassets were as follows: BTC (-4.45%), ETH (-6.13%), XRP(-6.02%), BCH (-6.21%), and BSV (-10.23%)

News - Iran Issues Warrant for Trump Over Killing of Top General | Reuters

What Happened?

Yesterday, the Iranian government issued an arrest warrant for President Trump and other US officials over the assassination of top general Qassem Soleimani in a targeted U.S. drone strike near the Baghdad airport in early January 2020. Tehran prosecutor Ali Alqasimehr sought help from Interpol to enact murder and terrorist charges against Mr. Trump to no avail as the justification for such a warrant was claimed to not threaten national security or international peace.

Why Does It Matter?

The Dedollarisation of various financial systems, specifically in emerging economies, has had a profound impact on the mining industry. The 21Shares research team recently discovered a pattern hindering the accessibility of Bitcoin through geographical restrictions imposed by 100 cryptoasset exchanges. It turns out that the most banned locations are countries sanctioned by the United Nations such as Iran or countries embargoed by the United States such as Venezuela and Cuba.

On the lookout for substitutes to the US dollar, leaders from Iran alongside other countries have expressed interest in using cryptoassets for bilateral trade agreements. Since accessing cryptoassets from crypto exchanges is undoubtedly impossible for users in countries like Iran, setting up mining operations to earn Bitcoin presents another viable option. As such, the surge in hash rate originating from Iran is unlikely a coincidence — especially since the US tightened the sanctions on Iran's oil exports in May 2019.

As per the Bitcoin Mining Map, the participation from Iran-based miners has more than doubled in less than a year, from 1.75% of the global hash rate in September 2019 to almost 4% as of June 2020. In light of a warrant issued by the Iranian government accusing Mr. Trump of killing general Qassem Soleimani, the pace of Iran's Bitcoin mining might significantly accelerate in the aftermath of worsened US-Iran tensions.

Learn more here.

News - 83 Tons of Fake Gold Bars: Gold Market Rocked by Massive China Counterfeiting Scandal | ZeroHedge

What Happened?

Yesterday, ZeroHedge reported the biggest gold-counterfeiting scandal in modern history with 83 tons of fake gold bars discovered in Wuhan, China — equivalent to 22% of China’s annual gold production and more than 4% of China’s gold reserve as of 2019. A dozen financial institutions, chiefly trust companies or shadow banks, loaned 20 billion yuan or $2.8 billion over the past five years with pure gold as collateral to Wuhan Kingold Jewelry Inc.— the largest privately-owned gold processor in China’s Hubei province. It was later found out that the gold was in fact gold-plated copper.

Why Does It Matter?

Bitcoin's core attributes, such as openness, unforgeability, and predictable supply, make such issues impossible. Openness and unforgeability are quintessential features for the integrity of the Bitcoin blockchain. For example, without these attributes, it would have been easier for Craig Wright to falsify his claims of ownership of Bitcoin addresses and change their timestamp to prove he is Satoshi Nakamoto. As a result, this makes Bitcoin a superior asset to Gold in many aspects.

Bitcoin’s most important characteristic is its scarcity due to its limited supply of 21 million. Its monetary policy follows a predictable schedule wherein the new bitcoin created halves every four years, until the year 2140 — in other words in 120 years. Currently, 6.25 bitcoins are created every 10 minutes. Additionally, Bitcoin relies on private keys to sign, seal, and prove ownership — preventing counterfeits. The best analogy is, a private key is to Bitcoin what a secret code is to a safe where cash or precious metals are stored. To unlock the safe or bitcoins, one needs the secret code/private key.

In light of the biggest gold counterfeit scandal in recent history, the question remains over other such amounts of gold bars held by various financial institutions around the world do in fact meet their purported high-quality standards. Only time will tell but at 21Shares, if this does not hold true, we anticipate that smaller financial institutions will start shifting to safer and digital-native assets such as Bitcoin for the previously-mentioned reasons.

Learn more here.