Q3 market review and outlook

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2018Q 3 M A R K E T R E V I E W A N D O U T L O O K
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Q3 Market Performance
During July, cryptocurrency market capitalization fluctuated between $243.6 billion (min) and $303.3 billion (max) (Fig. 1), i.e. a
range of $60 billion, starting the month at $257 billion and ending at $292 billion representing +13.61% growth. For its part, bitcoin
capitalization fluctuated from $106 billion (min) to $143.6 billion (max), i.e. within a range of $37.6 billion. There were a series of
events that caused this uncertainty throughout the market. On July 4 2018, Japan’s Financial Regulator Considers Revising Crypto
Exchange Regulation possibly changing the legal status of cryptocurrencies due to the security problems on the country’s
cryptoexchanges. Toward the end of the month we witnessed another negative event on July 27, 2018, where Bitcoin Slipped Below
$8000. This was due to the US Securities and Exchange Commission (SEC) Rejecting Bitcoin ETF Proposal from Winklevoss Twins
for the second time.
Despite this, the first month of Q3 saw Switzerland, together with Gibraltar and Malta, heading up the list of the most crypto-friendly
countries in Europe. With this came innovation. The Swiss Stock Exchange stated that they are Launching their own Cryptocurrency
Exchange and Binance Exchange Backs First-Ever Decentralized Bank in Malta. Founders Bank will be the first decentralized bank
in the world belonging to the cryptocurrency community. All of its token holders will be considered the owners of the organization.
On July 17, 2018 Coinbase Confirmed that they had received SEC Approval to List Digital Tokens as Securities. In order to do this
the company will purchase several dealers that work with securities and create new divisions. Three days later South Korean
government accepted Bitcoin and cryptocurrency into their economy. The Financial Innovation Bureau will be responsible for “new
developments, challenges, and cryptocurrencies,” as well as for regulating the fintech sector. These events helped increase the
24hour volume during mid to the end of July, as seen in the graph below. By July 24, 2018 Bitcoin passed the psychological barrier
of $7,800, and then $8,000, thereby consolidating the gains that were achieved throughout the previous week. Bitcoin Futures
Trading Volume Reached $572M on Wall Street where the average daily trading volume of bitcoin futures on the Chicago
commodities exchange (CME Group) equaled 12,878 contracts. On the other hand, its competitor Ethereum, was testing it's code for
it's next Hard Fork which is expected to improve the performance and lower transaction fees on the Ethereum network.
The value of a portfolio consisting of the top 10 cryptocurrencies by capitalization remained practically the same during July, showing
a 3.3% growth despite the fact that the price of six of the 10 cryptocurrencies fell. This was due to an increase in bitcoin dominance
and resilience on the cryptocurrency market from 42.6% to 48.1%.
The first week of August saw the latest downward adjustment to $253.8 billion. This was due to a series of events that occurred. On
August 3, 2018 during the G20 conference, it was said how the financial community does not have a uniform approach to the topic of
crypto regulation, meaning their implementation will change the crypto environment (first and foremost, by allowing institutional
players to enter the ecosystem). Furthermore, on the same day, John McAfee’s ‘Unhackable’ Crypto-Wallet was allegedly hacked by
crypto enthusiasts OverSoft, causing uncertainty in the market. Investors began to take 'Alt-coin profits' by moving into Bitcoin
positions. This caused an increase in bitcoin's dominance and a faster price growth compared to the prices of most Altcoins. This
time, however, bitcoin did not pull the entire market along with it, if anything the opposite, and by August 5th, capitalization had fallen
below the level at the beginning of July.
Q3 Market Review and Outlook | September 27th 2018

Despite the uncertainty and unfavourable events occurring, the Bank of Thailand came out stating that they had been given the go
ahead to open subsidiaries for Crypto Dealings. The only set back was that they were not allowed to “perform cryptocurrency
transactions”. Japan followed suit allowing Japan’s Licensed Crypto Exchanges to formally apply a Self-Regulatory Body. This allows
for the cypto exchanges to establish industry rules for operating in this country.
On August 14th, the cryptocurrency market capitalization fell below $200 billion for the first time in 2018, reaching the level of
November 2017 (as seen in the graph above). 124 Foreign Crypto Exchanges were forced by Chinese Authorities to leave the
country due to ICOs and cryptocurrency trading being banned in China. Like China, Japanese authorities on August 31, 2018 began
to track all Bitcoin transactions causing further market uncertainty.
However, On August 27 2018, India’s Central Bank quietly formed a new cryptocurrency, blockchain research unit. The country’s
authorities want to use a different approach towards blockchain and have been trying to introduce regulations for the industry since
this spring, but for now only bans are in effect. Following suit, on August 30th, Barclays Bank announced it would be accelerate
transactions using Ethereum Blockchain. Following in its competitors’ footsteps, one of the largest British banks continues to
implement blockchain technology in its projects. Soon users of the Barclaycard app will be transferred to the new Crowdz platform.
The average portfolio return (Portfolio 10 crypto) in August for a portfolio consisting of equal shares of the top 10 cryptocurrencies
was negative and equaled -21.1%. The fall in cryptocurrency market capitalization by $12 billion was due to a depreciation of the
main cryptocurrencies, with the aggregate impact of altcoin depreciation on capitalization equaling $37 billion. Bitcoin dominance
increased significantly during August, from 48.1% to 53.2%. This indicates the high sensitivity of altcoins to negative news and the
shifting preference of backers from altcoins to the more stable bitcoin under bearish market conditions. The dominance of the four
and eight largest cryptocurrencies as of 03:00 UTC on September 1, 2018, equaled 75.7% and 82.8%, respectively. Ethereum was
one that was hit hard due to the massive sale of ETH by ICOs in August.
In the first week of September we saw an increase in 24Hour volume. Several events that may have influenced this to occur were the
following: Microsoft began to link its products to blockchain and began switching its services to blockchain. Now you can even send
information from Twitter to a distributed ledger, having first placed it in the company’s cloud services. Furthermore, the largest
retailer, Walmart, has been patenting new developments in the area of blockchain all year. The latest application consisting of a
management system for delivery drones.
Two days later, the Chinese Blockchain Pilot, which is backed by the People's Bank of China partnered with Hong Kong, Macau and
Guangdong. In the coming years, this credit institution intends to concentrate on researching innovations in cloud-computing, big
data, artificial intelligence, blockchain, and the Internet of Things.

On the downside, three events that occurred in the following days caused Cryptocurrency capitalization to fall by more than $30
billion, and several major altcoins, including Ethereum, hit new record lows for the year. Moreover, the Australian Securities
Exchange delayed their Blockchain plans by Six Months. On September 6th, 2018 Business Insider reported fake news about
Goldman rolling back on their Trading Desk Plans. The next day the world’s leading investment bank denied allegations and stated
that they rather wait for the introduction of coherent rules on the cryptocurrency market. For now, the organization will only develop
custody services aimed at large funds. During this week bitcoin dominance increased to 55.6%. The market dominance of the
four and eight largest cryptocurrencies as of 03:00 UTC on September 9th, 2018, equaled 76% and 82.8%, respectively. Since this
date, the market has continued to take a beating due to unfavourable events.
On September 10th 2018, the SEC Suspended Exchange-Traded Vehicles by CoinShare Holdings for Bitcoin and Ethereum. This
was due to trading in bitcoin exchange-traded notes tied to the US dollar in August. Prior to this they were only available in euros or
Swedish krona. Furthermore, on the same day, Vitalik Buterin stated how the Crypto Growth Ceiling was near, meaning that the
1000x growth seen last year won’t be seen again. Ethereum founder Vitalik Buterin believes the time has come to develop the
blockchain ecosystem through people who can use its products in their real lives. Researchers at Trustnodes believe that the fall of
Ethereum was strongly influenced by the actions of ICO projects liquidating their ETH positions. Over the past 30 days, startups have
sold three times more coin than they did last month. Lastly, on the 16th of September, the Head of the European Central Bank
announced that they “don’t see a need” for the Central Bank to issue a cryptocurrency.

Volatility
Q3 and Q4 Performance History
If we apply the Elliot Wave Theory which consists of a form of technical analysis that traders apply to analyse financial market cycles
and forecast market trends by identifying extremes in investor psychology. The Elliott Wave theory (or principle), which is named
after professional accountant Ralph Nelson Elliott who developed the concept in the late 1930s, claims that markets enter periods of
mass pessimism (negative/depression) and euphoria (positive/hype) that drive prices. Looking at the previous two years of the
cryptocurrency industry, we are able to see how in the first quarter of the year, the market corrected itself with a downward price
adjustment. As it progresses towards the end of the second quarter, beginning of the third, we see an increase in market
capitalisation and 24hour daily volume. This can also be seen in this year's first three quarters. In both previous years, we have seen
the fourth quarter show the most promising statistics for investors.
Using the Elliot Wave Theory one may believe that history will repeat itself. With regulations being put in place globally, the market is
still a long way from saturation, and potential demand will increase. It is only a matter of time. The world-changing capabilities of new
technology are much broader, with only the bare bones of cryptocurrency market infrastructure currently being established.
Therefore, capitalization will increase over the long term, regardless of the risks, scams and project failures. Thomas Glucksmann,
head of APAC business at Gatecoin supports this statement as he believes regulation, the introduction of institutional capital, and
technological advances like the Lightning Network are the main factors in rising cryptocurrency prices. He stated how "There is no
reason why we couldn't see bitcoin pushing $50,000 by December." However, due to scalability problems there are pessimistic
opinions made by experts. One being Vitalik Buterin, co-founder of Ethereum and co-founder of Bitcoin Magazine. In a realistic
opinion, he stated how “Bitcoin is processing a bit less than 3 transactions per second… Ethereum is doing five a second. Uber gives
12 rides a second. It will take a couple of years for the blockchain to replace Visa.”. Meaning before the market can progress further,
there is need for improvements in global infrastructure before we live in a tokenised economy.
C

Percentage of Total Market Captalisation (Dominance)
The Monthly Volume Rankings reflect on the percentage of the total market capitalisation (dominance) as seen below. There is an
inverse correlation between Bitcoin and Ethereum. As Bitcoin declines in market share in the first quarter of 2018, Ethereum
increases. This is also reflected in the second quarter. However, looking at "Others" (Alt-coins) there is a positive correlation
between them and Ethereum. This is partly due to Alt-coins mainly using the Ethereum blockchain infrastructure (ERC 20). Moving
into the final quarter we may continue to see a inverse correlation between the Alt-coins and market leaders Bitcoin, as Ethereum
continues to improve its infrastructure. Since December 31st, 2017, the total number of cryptocurrencies and digital assets
presented on coinmarketcap has increased from 1,335 to 1,960. Over this period, market capitalization dropped from $572.5 billion
to $201.4 billion, i.e. by 65%. Despite the price depreciation of 460 of the top 500 cryptocurrencies, the largest growth was
captured by projects BitcoinDark (+255.5%) and Digitex Futures (+96%). The growth of Lympo (+83.15%), Niobium Coin
(+66.05%), Cosmo Coin (+56.65%), and Holo (+43.87%). This can be seen in Table 1.1 and the percentage of total market
capitalisation graph, below.
Q3 Market Dominance

VolatilityRating
C+C
Sifrdata.com provides another index (seen below) which puts the correlation amongst assets and the degree to which they move in
tandem. The values range between -1 and +1, where a value of -1 means that the returns move in opposite directions (e.g. BTC up
0.2% and ETH down -0.2%) and a value of +1 means the returns move in the same direction (e.g. BTC up 0.2% and ETH up 0.2%).
A value of zero denotes no (linear) dependence between the assets.
The results can be interpreted as follows:
0.5 to 1: Strong positive relationship
0.3 to 0.5: Moderate positive relationship
0.1 to 0.3: Weak positive relationship
-0.1 to 0.1: No linear relationship
-0.1 to -0.3: Weak negative relationship
-0.3 to -0.5: Moderate negative relationship
-0.5 to -1.0: Strong negative relationship
According to the resource sifrdata.com, this close correlation between assets seen below has been seen over the past six months
between the indicators of crypto market leaders Bitcoin, Ethereum, Ripple, Bitcoin Cash, and Litecoin and the other cryptocurrencies
(area highlighted in red). This is a key area of quantitative analysis on the crypto industry. The devaluation of BTC can have severe
effects on other smaller projects (as well as other stakeholders) as their valuation can go from £30 million after ICO sale to a £3
million valuation instantly. However, in the blue zone we can see there is no correlation between traditional asset classes and the
crypto industry. Therefore, no direct dependency between the cryptocurrencies and the S&P 500 Index (^ SPX), the CBOE volatility
index (^ VIX), the shares of SPDR Gold (^ GLD), and CBOE 10-year treasury bonds (^ TNX) was seen over the past 180 days.
Volatility and Correlation
The cryptocurrency volatility index seen on the left has been
composed of six currencies: BTC, ETH, XRP, LTC, DASH, and
XMR. The volatility index is weighted by the market
capitalization of each currency which is updated daily. The
historical volatility has been calculated using the returns from
the previous 90 days. The projection is an ARIMA process
(autoregressive, integrated, moving-average) based on the
historical data. To put the volatility of cryptocurrencies in
perspective, the annualized historical, long-term average of
realized volatility of the S&P 500 index is roughly 15%/year.
The cryptocurrency industry's volatility ARIMA currently stands
at around 60%/year. The Annualized Volatility and Future
Projection has been predicted to range between 40% to 80%
during the first weeks of Q4.

Market Review and Outlook | Market Overview | June 5th 2018 Traditional Markets
Continuing with the traditional aspect, below we are able to see a plotted graph which provides the reader with Q3 market analysis of
the FTSE 100, NIkkei 225, Nasdaq and the VIX. The volatility measure can be seen plotted on the graph below in blue. The yellow
line represents the FTSE 100, the green represents the Nikkei 225 and lastly, the red represents NASDAQ.
The VIX is a metric measure often termed as the 'fear index'. Produced by the Chicago Board Options Exchange (CBOE), the
measure provides an expected price fluctuation in the S&P 500 index options over the next 30 days. Looking at NASDAQ's market
performance we are able to see how it is positively correlated to the VIX. When the volatility increases the market performance
decreases. These indices are of course highly correlated to one another as they track companies impacted by the same business
cycle and other important macroeconomic factors. In the coming quarter, the chemical sector is the strongest sector and Industrial
transportation is the weakest. In the coming months, Americas industrial transportation may see improvements as the trade war with
China settles. Exports from EU to Asia was bigger than that to the U.S. in 2017 and, more significantly, EU’s exports to Asia in the
last decade have been growing almost twice as fast as its exports to the U.S. While Asia’s exports to the EU in 2017 was still slightly
lower than that to the U.S., but it is also faster growing, making the EU increasingly more important to Asia, according to the IMF's
Direction of Trade data. Nikkei 225 on the other hand can be seen to have an inverse correlation with VIX. Exports, meanwhile,
continued to post positive figures in August, mostly due to solid shipments to China. Despite this, the Nikkei will also suffer negative
impacts on there economy as their top 60% of Japanese companies will be affected by the US and China trade war. Japan's $69
billion trade surplus with the United States, nearly two-thirds of it from auto exports, has caught Trumps attention and wants a two-
way agreement to address it. The FTSE 100 also has an inverse correlation with the VIX, however in Q3 we are able to see how the
market has decreased. Economic growth was robust in July, driven by the services sector and unemployment rates are still at a
record low. As few as 630 UK-based finance jobs have been shifted or created overseas with just six months to go before Brexit, a
far lower total than banks said. Recently there was an increase of 0.5% on interest rates placed by the central bank. This has
indirectly affected the FTSE100 as it discourages consumer spending and borrowing is more expensive.
Despite this market uncertainty seen, commodities such as Gold and Crude Oil have not been affected to the extent of the named
financial markets. Due to the global supply and demand of these assets, prices remained consistent throughout the year.

Market Review and Outlook | Market Overview | June 5th 2018 Traditional Metrics in Digital Markets
In traditional markets, investors follow an economic or business cycle. The same applies for the cryptocurrency industry. Currently
we are in a contraction period where the markets have seen a downward trend in the past two months. Emotions are causing
investors to be fearful of the market. With fear comes greed as can be seen by the Fear and Greed index produced by Ledger
Capital. Looking at an article on Medium published by Vikram Arun, a partner of Ledger Capital, we are able to see how traditional
financial metrics are being adapted for the Digital world. All metrics are normalized for their respective time period and then re-
scaled and given a score between 0 (fearful) to 100 (greedy).
In this current crypto economic cycle, we are facing a fearful phase due to the decrease in market value. The fearful are selling away
their assets causing the market to fall further, causing more opportunities for the smart investor to buy cheap whilst the market is
down. This is reflected below in months February and May where the market turned greedy for a short period of time as investors
injected more capital into the crypto industry causing the index to surpass 60 points. Entry of new Institutional investors and cheap
digital assets were potentially the main causes of this spike. However, what caused the market to depreciate further were ICO
projects selling their raised ETH to finance their respective projects. Looking at the Fear and Greed index and the graph below, the
market has slowly been recovering from a very fearful quarter, and seems to be on its way up to Q3 peak. Smart investors such as
Warren Buffet, would make the most of these market conditions as he believes that it is crucial to “be fearful when others are greedy
and greedy when others are fearful”. As we enter Q4, one must be optimistic and hopeful that investors will follow Warren Buffets
ideology. This would positively influence another Q4 bull market rally as seen in previous years, which would align with the Elliot
Wave Theory.
The resulting index value is an average of the 6 metrics consisting of; Momentum (a cap-weighted index consisting of Bitcoin and
Ethereum to represent the health of the digital asset market, similarly to the S&P 500 for equities.), Strength (top 100 coins by
marketcap and see how many just achieved all time highs for a given time period.), Breadth (look at the difference in the volume of
the top 100 coins on the rise and the volume of those that are declining.), Margin Long/Margin Short (looks at the percentage of
margin longs to margin shorts on Bitfinex for Bitcoin and Ethereum.), Speculation (comparing the returns of an equal-weighted index
of Bitcoin and Ethereum to the returns of an equal-weighted index containing the top 100 coins excluding them.) and Safe Haven
Demand (When investors are scared in crypto, they exit completely).
Foreign Exchange

Market Review and Outlook | Market Overview | June 5th 2018 Up Coming Events in Q4

Alternative. (2018). Crypto Fear & Greed Index. Available: https://alternative.me/crypto/fear-and-greed-index/. Last accessed 27th Sept 2018.
Coin Market Cap. (2018). Global Charts. Available: https://coinmarketcap.com/charts/. Last accessed 27th September 2018.
Coin Speaker. (2018). Monthly Cryptocurrency Market Analysis [August 2018]. Available: https://www.coinspeaker.com/2018/09/04/monthly-
cryptocurrency-market-analysis-august-2018/. Last accessed 27th Sept 2018.
Coin Speaker. (2018). Monthly Cryptocurrency Market Analysis [July 2018]. Available: https://www.coinspeaker.com/2018/09/04/monthly-
cryptocurrency-market-analysis-july-2018/. Last accessed 27th Sept 2018.
Coin Speaker. (2018). Weekly Cryptocurrency Market Analysis [September 2-9, 2018]. Available: https://www.coinspeaker.com/2018/09/12/weekly-
cryptocurrency-market-analysis-september-2-9-2018/. Last accessed 27th Sept 2018.
Coin Speaker. (2018). Weekly Cryptocurrency Market Analysis [September 9-16, 2018]. Available: https://www.coinspeaker.com/2018/09/19/weekly-
cryptocurrency-market-analysis-september-9-16-2018/. Last accessed 27th Sept 2018.
Dirk Hofschire. (2018). Quarterly market update: Q3 2018. Available: https://www.fidelity.com/viewpoints/market-and-economic-insights/quarterly-
market-update. Last accessed 27th Sept 2018.
Juan M. Villaverde. (2018). Crypto Platforms of the Future: More Intrinsic Value Than Stocks?. Available:
https://weisscryptocurrencyratings.com/news/crypto-platforms-future-intrinsic-value-stocks-770. Last accessed 27th Sept 2018.
Kent Thune. (2018). Stock Market and Economic Cycles. Available: https://www.thebalance.com/stock-market-and-economic-cycles-2466840. Last
accessed 27th Sept 2018.
Matt Weller. (2018). The State of Bitcoin and the Cryptoasset Market, Q3 2018. Available: https://www.forex.com/en-us/market-analysis/latest-
research/the-state-of-bitcoin-and-the-cryptoasset-market-q3-2018/. Last accessed 27th Sept 2018.
Mike Belshe. (2018). Commentary: What cryptocurrency can learn from traditional markets. Available:
http://www.pionline.com/article/20180823/ONLINE/180829998/commentary-what-cryptocurrency-can-learn-from-traditional-markets. Last accessed
27th Sept 2018.
Sifr Data LLC. (2018). Cryptocurrency Correlation Matrix. Available: https://www.sifrdata.com/cryptocurrency-correlation-matrix/. Last accessed 27th
Sept 2018.
Sifr Data LLC. (2018). Cryptocurrency Volatility Index. Available: https://www.sifrdata.com/cryptocurrency-volatility-index/. Last accessed 27th Sept
2018.
Reuters. (2018). Britain's FTSE steadies near 3-week highs; Boohoo jumps. Available: https://finance.yahoo.com/news/britains-ftse-steadies-near-3-
092643387.html. Last accessed 27th Sept 2018.
Reuters. (2018). Nikkei extends rally to 8th session as U.S. rate hike hopes lift large caps. Available: https://finance.yahoo.com/news/nikkei-extends-
rally-8th-session-073139473.html. Last accessed 27th Sept 2018.
Tony Sagami . (2018). Blockchain Bootcamp, Central Banks Embrace Digital Coins, and More. Available:
https://weisscryptocurrencyratings.com/news/blockchain-bootcamp-central-banks-embrace-digital-coins-779. Last accessed 5th June 2018.
Vikram Arun. (2018). Introducing the Crypto Fear & Greed Index. Available: https://medium.com/ledgercapital/introducing-the-crypto-fear-greed-index-
c959a6c272b0. Last accessed 27th Sept 2018.
Yuwa Hedrick-Wong. (2018). How The U.S.-China Trade War Will Transform The Global Economy. Available:
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accessed 27th Sept 2018.
Disclaimer
Digital Asset Management Limited is a Gibraltar Company with registered number 116618 in the final stages of
regulatory authorisation as a Distributed Ledger Technology Provider by the Gibraltar Financial Services Commission in
accordance with the Financial Services (Investment and Fiduciary Services) Act 1989. Investments in Digital Assets are
high risk and we would suggest that you review our Risk Notice available on our website www.dam.gi from time to time.
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Q3 market review and outlook

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