Alternative Markets Update November 2020

Alternative Markets Update November 2020
Since the presidential election, the market has got quieter, with equities raising again, after they had experienced volatile weeks and mostly declining stock prices. The DJIA reached the 30k mark several times since then but falling below it again multiple times. Figure 1 shows the YTD (as of October) of different asset classes over the last 25 years (the entire table is here). U.S. Large Cap Stocks have gained only 1.5%, which seems low, due to the tech stocks’ raise and the media coverage they have received. Nevertheless, other industries had more difficulties in dealing with the crisis. Gold has performed very well, topping 2020 by far with a YTD of 21.9%. Figure 2 shows the performance of different hedge fund strategies. Arbitrage strategies have done best in 2020 so far with an average return 6.44%, which are low number in comparison to most previous years. Unsurprisingly, the other two most successful strategies are Long / Short Equity and Macro strategies. 

Our most successful global macro strategy, Discretionary Global Macro, has yielded 52.27% in 2020 so far. Event Driven strategies have suffered the most with a loss of 2.62%, which is a solid result, especially when considering Figure 1 and the returns of other asset classes.

Figure 1 and the returns of other asset classes.

Figure 2: Ranking of Hedge Fund Strategies from 2012 until October 2020, Source: EurekaHedge, November 2020

The rapidly increasing value of BTC is largely associated with the recent announcement of PayPal to accept BTC as currency, giving access to BTC to more than 300 million users, compared to only 100 million prior BTC users. According to Pantera Capital, this has had a major impact on BTC. Figure 4 below shows the increase in BTC purchases from itBit, the provider that PayPal uses for crypto transactions. Currently, Paypal and other providers are buying more than 100% of all newly issued bitcoins, creating additional demand with it. As highlighted in the figure below, the volume of transaction is shown, which remained stable during the year, but increased tremendously since PayPal enabled BTC transactions. Given the huge surge during the last two weeks, the demand is likely to increase even more, indicating that the current surge is not over yet. Moreover, if BTC surpasses its record high from 2017, it will cover the news even more, another indicator for an even higher price.

Figure 4: Implied PayPal Bitcoin Purchases, Source: Pantera Capital, November 2020

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RESEARCH PERSPECTIVE VOL. 144 November 2020 Alternative Markets Update November 2020 Since the presidential election, the market has got quieter, with equities raising again, after they had experienced volatile weeks and mostly declining stock prices. The DJIA reached the 30k mark several times since then but falling below it again multiple times. Figure 1 shows the YTD (as of October) of different asset classes over the last 25 years (the entire table is here). U.S. Large Cap Stocks have gained only 1.5%, which seems low, due to the tech stocks’ raise and the media coverage they have received. Nevertheless, other industries had more difficulties in dealing with the crisis. Gold has performed very well, topping 2020 by far with a YTD of 21.9%. Figure 2 shows the performance of different hedge fund strategies. Arbitrage strategies have done best in 2020 so far with an average return 6.44%, which are low number in comparison to most previous years. Unsurprisingly, the other two most successful strategies are Long / Short Equity and Macro strategies. Our most successful global macro strategy, Discretionary Global Macro, has yielded 52.27% in 2020 so far. Event Driven strategies have suffered the most with a loss of 2.62%, which is a solid result, especially when considering Figure 1 and the returns of other asset classes. Figure 1: Ranking of Asset Classes by Historical Returns from 2013 until October 2020, Source: Visual Capitalist, November 2020 Figure 2: Ranking of Hedge Fund Strategies from 2012 until October 2020, Source: EurekaHedge, November 2020 During the last two weeks cryptocurrencies have skyrocketed. Bitcoin (BTC) was increasing tremendously since the start of the Covid-19 crisis in early March 2020. BTC started in 2020 with a price of $7,203 and fell to a low of $3,867 on 12th March 2020. It saw multiple jumps in price during the year, such as when Paul Tudor Jones called BTC a great speculation and revealed that he holds around 1-2% of his capital in BTC, which led to increase in almost $1,000 immediately after the statement. Another jump was at the end of July, during which BTC rose from around $9,000 to $11,000. From August until mid-November, BTC remained relatively stable at the $11,000 mark. However, since then, BTC has experienced multiple jumps that lead to almost its record high with $20,089 reached in December 2017. It is currently trading at $19,113 (as of 25th November). Despite not reaching the record price level of 2017, the market capitalization has surpassed this record from 2017 by $27bn and is as of today at $354bn. Figure 3 shows the price and market capitalization of BTC from early 2017 to November 2020. BTC has yielded a performance of 165% and when starting from where it has been in mid-March, its performance is 394%. Based on these results, it is not surprising that four of our top 5 strategies are all cryptocurrency related.  The Token strategy returned 243% YTD, whereas the two Bitcoin based strategies reached a performance of 91% and 89% returns. Lastly, the Digital Asset Discretionary / Systematic Long Short achieved a growth of 99%. Figure 3: Bitcoin Price and Market Capitalization from January 2017 to November 2020, Source: CoinMarketCap, November 2020 The rapidly increasing value of BTC is largely associated with the recent announcement of PayPal to accept BTC as currency, giving access to BTC to more than 300 million users, compared to only 100 million prior BTC users. According to Pantera Capital, this has had a major impact on BTC. Figure 4 below shows the increase in BTC purchases from itBit, the provider that PayPal uses for crypto transactions. Currently, Paypal and other providers are buying more than 100% of all newly issued bitcoins, creating additional demand with it. As highlighted in the figure below, the volume of transaction is shown, which remained stable during the year, but increased tremendously since PayPal enabled BTC transactions. Given the huge surge during the last two weeks, the demand is likely to increase even more, indicating that the current surge is not over yet. Moreover, if BTC surpasses its record high from 2017, it will cover the news even more, another indicator for an even higher price. Figure 4: Implied PayPal Bitcoin Purchases, Source: Pantera Capital, November 2020 Nevertheless, the negative price reactions after 2017 highs are not forgotten. However, the ecosystem around cryptocurrencies has increased massively since then. There are several major reasons. Firstly, the markets have gotten substantially more efficient. This includes derivative exchanges and much wider distribution of possible options to acquire cryptocurrencies. Secondly, the asset class has established a reputation of “true” asset class and not just as speculative asset. This is further supported by the increasing interest from institutional investors. An example is Grayscale with $9.8bn worth of crypto assets. Several outlooks for BTC were released, from various sources, ranging from targets of $20k up to $500k. Additionally, based on derivative exchanges on BTC, 29% of traded derivates implicate a price of above $20k for BTC at the end of 2020. Most other cryptocurrencies have increased in value as well, but not to the extent that BTC had with a few notable exemptions, such as Ethereum (ETH). ETH is currently trading at $601 (25th November), despite its decline today. It remained above $600 during the last two days, before dropping again below $600. ETH has reached a market capitalization of $67bn. ETH achieved a stellar performance, as it started tremendously undervalued in comparison to BTC, as visible in Figure 5. At the start of the year, ETH was valued at $130. YTD, ETH is up 351% and if starting from mid-March, during which it experienced this year’s low at $90, its performance is 518%. ETH has, aside from the generally enhanced acceptance of crypto assets, also benefited from developments specifically related to ETH. The rapid growth in DeFi is a major factor, as most DeFi application are mostly based on the ETH blockchain. Moreover, ETH 2.0 is about to launch beginning of December. Figure 5: Ethereum Price and Market Capitalization from January 2020 to November 2020, Source: CoinMarketCap, November 2020 When looking at altcoins, they have started a positive rally as well. When looking at the return of the last seven days, the average gains lies around 20%. No cryptocurrency in the top 10 (by market capitalized) was below 0%. By far the best performing one is Ripple (XRP) when looking at last week, yielding 137% and increase the currency’s market capitalization to $31bn. Figure 6 shows the development of XRP during the last week. XRP soared to $0.68 as of 25th November, while it was only $0.28 seven days ago. It started the year with being worth $0.19, therefore, it did not increase a lot during the year (only relatively little increase in comparison to other cryptocurrencies). XRP achieved a growth of 258% YTD. Figure 6: Ripple (XRP) Price and Market Capitalization During the Last Month, Source: CoinMarketCap, November 2020 STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). 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