Written by: Yves, Head of Trading at Wirex
The year 2020 was the most exciting year for cryptocurrencies on record. Bitcoin delivered on the promise of performance (+278% YTD increase), and it is now delivering on the fundamental promise of a new digital currency, independent from any centralised entity, and adopted by individuals and institutions alike. The 2020 events have shaped the future of the cryptoeconomy and bridged the gap with the real economy. Today, it is impossible to ignore the giant step forward in integration and mass adoption of the main cryptocurrencies. Reluctant card payment companies, insurance companies or hedge funds could be missing out on an opportunity (FOMO), or worse, give their competitors a decisive edge.
Our 2020 review consists of two parts, covering the two semesters. We computed the 7-day annualised Bitcoin volatility over the year 2020, and selected the periods of higher volatility. These periods will be interpreted thereafter in light of the events that shook the cryptoeconomy.
1 - January 2020 - The birth of a regulated derivatives market:
The Chicago Mercantile Exchange (CME) announced on January 13th the launch of options on BTC future contracts.
The CME share of the total options Open Interest (OI) across exchanges has continuously increased since January. Even though the Deribit exchange’s share decreased in favour of the CME’s, its closest competitor, the options total OI by exchange registered a new record with almost every expiration date. The growth of the options market signalled the evolution of market participants in the crypto financial ecosystem towards larger institutional-grade investors.
2020 was certainly the year of derivatives. It marks the professionalisation of crypto trading and investment.
2 - March 2020 - The health crisis
The global sell-off across assets did not spare the cryptocurrency markets. On March 12th, the BTC/USD pair lost 48% of its value.
As Bitcoin was already considered by many as “digital gold”, its safe-haven status was naturally questioned after it plummeted in March. The main cryptocurrency recorded its worst performance since the crypto winter of 2018, testing the faith of many HODlers before the long-awaited “Bitcoin Halving” of May. The 7-days annualised volatility jumped to 350% and exchange-traded volumes measured in USD logically halved. Digital exchanges and leveraged crypto funds were at best under extreme pressure, at worst simply shutting down.
3 - April-May 2020 - The recovery:
Bitcoin recovered its losses in the span of 2 months
Volatility died down over the months following the March correction. The loose Central banks monetary policy increased the size of their balance sheets. It undermined the Quantitative Tightening (QT) initiated a few years back. The QT effort was meant to reverse the effects of the Quantitative Easing (QE) inherited from the 2008 and 2011 mortgage and credit crisis. QT was more specifically meant to control inflation. Eventually the health crisis this year triggered further cash injections. The Fed’s balance sheet grew by $2.7 trillions since March. If the injections helped to stabilise financial markets, keeping them under perfusion, they failed to raise the CPI (or PCE) inflation efficiently. The monetary policy became inexorably ineffective and the value of the US dollar fell continuously (DXY). The total size of US negative yield bonds was growing like a financial disease as the Fed was buying government bonds to inject more liquidity. Searching for alternatives, individuals, and soon institution-grade investors, including insurers looking for positive yields and returns, would slowly establish Bitcoin as a credible addition to their portfolios.
The April-May recovery is also an anticipation of the Bitcoin halvening in May…
4 - May 2020 - The Halvening:
The Bitcoin “Halvening” or “Halving”
The Bitcoin halvening finally took place on May 11th. Bitcoin analysts would soon be testing every theory they had laid out in the past three years over the consequences of this event.
The direct consequence is the decrease of the block production reward by half. The main Bitcoin producers and suppliers, namely the miners, were on the front line of the resulting shock as they had to adapt their supply to the new tokenomics. Effectively, miners decreased their supply, increased their inventories, and waited for an opportunity to sell their production at a profit. TokenInsight published an analysis on Bitcoin Mining noting “the decline in the proportion hash rate”. Before the start of the rainy season in China, and despite their ASIC hardware upgrade, miners were clearly struggling to make profits.
The Chinese government, notoriously anti-cryptocurrencies (their own fiat-backed stablecoins aside), would soon cut electricity rates to support the miners production. The exceptional rainy season would also help to turn a risky season into the best season for Chinese miners.
5 - June 4th, 2020 - A deeper slide into recession:
The Governing Council of the ECB increased the “pandemic emergency purchase program (PEPP) by 600 billion euros to a total of 1,350 billion”.
The health crisis worsened. John Hopkins reported more than 2 million confirmed Covid-19 cases in the US, and states reported a surge in the number of hospitalisations. The last week of May and the first week of June also mark a significant decline in the US dollar index: The DXY index dropped by nearly 4%, testing the public confidence in the Greenback. Still, the Bitcoin price correction in the first week of June was in line with the correction observed simultaneously in Equity markets, questioning again the cryptocurrency’s safe-haven status. The significant de-correlation between BTC/USD and the price of the S&P500 index observed in May needed further confirmation.
The events of the first part of 2020 laid down the foundation that made the 2020 Bitcoin price rally possible. The macroenomic context, the development of the derivatives markets and the third Halvening propelled the major cryptocurrencies to new heights. The clear winners of 2020, Bitcoin and Ethereum, overcame their many barriers differently, and overcame them brilliantly…
Stay tuned for part 2!