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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.

Nov 03, 2022
Alpha Navigator Institutional Report

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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.
Asset Class Performance
  • 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.
Eth Vs. Asset Class Correlations
  • 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).
Token Price Correlations
  • 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.
Event Driven 1

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


Author

Andrew Ho (Senior Research Analyst)


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