3 Nov 2022|RESEARCH

Alpha Navigator: Quest for Alpha [October 2022]

Crypto continues to outperform other asset classes in October. Is the Fed pivoting on rates tightening policy? ETH’s short-term correlations with equities reducing.

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Executive Summary

Risk assets mostly rallied in October, with crypto the best performer. BTC and ETH were up +6.08% and +13.80%, respectively.

There have been several narratives emerging in the market about a Fed pivot (i.e., change in tightening policy). The Fed raised rates by 75 bps, as expected, on 2 Nov. Messaging was mixed as it hinted at smaller future hikes but potentially a higher than previously expected ultimate rate level. There is also the U.S. inflation print coming up on 10 Nov.

Against this macro backdrop, crypto performed positively in the past 1-month. BTC is showing some technical indications of trend strength, holding the $20K level and with the recent rally resulting in a 10-day moving average cross of the 50-day to the upside.

ETH’s 1-month correlation of 0.43 with the Nasdaq 100 has come down compared to 0.84 in September, although longer-term correlations with equities still remain high.

Implied volatilities (vols) fell in October, potentially implying less cautious sentiment, although the lack of volatility made for a rather dull short-term trading environment. The low vols also potentially indicate relatively cheap prices for downside protection via options.

Put-call ratios for both BTC and ETH are hovering around yearly lows, potentially implying less cautious sentiment as well, although ETH’s has crawled upwards recently.

Market-Neutral Pair Trader hunts for strongly correlated tokens. Such pairs with price ratios that deviate from historical averages can be considered as candidates for a market-neutral pair trade (i.e., long the underperforming token and short the outperforming token, with equal dollar value positions in each token to enable market neutrality).

ETH has outperformed ADA over the past 1-month, driving the price ratio (ETH price divided by ADA price) up to the 2-standard deviation (SD) ceiling band. Per a report from DaapRadar, Cardano’s (ADA) Daaps are experiencing large increases in user engagement after the Vasil upgrade.

Our style-factor screens track momentum, value, growth, and risk for crypto tokens in the Layers 1 & 2, DeFi, GameFi, and NFT categories. Below we highlight our style-factor screen for the top crypto tokens by market cap in the Layers 1 & 2 category. Polygon (MATIC) had the best 1-month price performance at +22.3%. During October, Polygon launched its zk-EVM public testnet. zk-EVM is a type of Layer-2 scaling solution for the Ethereum blockchain.

Our event driven section shows recent and upcoming catalysts for selected tokens, as well as crypto-related conferences and important macroeconomic events.

Read the full Alpha Navigator report: Alpha Navigator [October 2022]