An Evolving Digital Assets Taxonomy

Jeff Dorman, CFA
Nov 29, 2021

What happened this week in the Digital Assets market

Week-over-Week Price Changes (as of Sunday, 11/28/21)
cryptocurrency price changes week over week nov28
Source: TradingView, CNBC, Bloomberg, Messari
 
Thanksgiving Volatility is Nothing New
Put down that turkey leg, turn on CNBC, and rush to your computer because markets are going haywire!  Oh wait, nevermind.  We hope you enjoyed your holiday and turned your screens off for a few days, because amidst all sorts of market chaos Thursday and Friday following a new Covid strain, a tanking oil market, and equity carnage, most digital assets ultimately did very little over “the break”.  Below are the closing levels for Bitcoin and Ethereum the Wednesday before Thanksgiving, and the Sunday night open -- a real snooze fest if you truly broke away for the holiday.
 
digital assets thanksgiving price chart
 
Of course, to get to this boring outcome, BTC and ETH rode a roller coaster that strengthened both bull and bear theses along the way.  The digital assets market traded heavily on Wednesday, decided to rip higher on Thursday for no apparent reason, then tanked on Friday following the Omnicron-induced risk asset bloodbath, only to completely recover by Sunday night as US equity futures turned positive.

digital assets thanksgiving price change chart
Source: Trading View
 
Now, avid Arca followers know that we don’t consider Bitcoin or Ethereum to be representative of the market.  In fact, if we broaden our graph to a more representative sample of sectors and token types, you can clearly see dispersion.  Layer 1 protocols were mixed as LUNA rose 18% while SOL, AVAX and DOT fell -5%, -6% and -10% respectively. In gaming, SAND and MANA continued their tear, rising +5% while AXS was flat and YGG fell -15%.  DeFi traded heavily, as it has for most of the 2nd half of the year, falling -5 to -15% across the board, though COMP bucked the trend, rising +1%.

 

digital assets trading chart- thanksgiving trends
Source: Trading View
 
Is this normal?  Well, kind of.  First, Thanksgiving is a very odd time for digital assets, given this market trades 24/7 with no breaks, whereas Thanksgiving is the only time each year where traditional markets are essentially closed for 4 days in a row with just a very brief trading session on Friday.  This creates a strange dynamic especially in the face of a few new macro headwinds, now that the digital assets market has become so liquid and so many traditional financial firms have direct access to trading digital assets.  While none of the news Thursday and Friday should have had any real impact on digital assets, Bitcoin remained open when no other risk asset was, turning Bitcoin into a 7-Eleven on Christmas Day. 
 
bitcoin institutionalization tweet
Source: Twitter
 
Second, let’s take a quick peek at how Bitcoin has performed historically around Thanksgiving.  While the data is inconclusive, there have been no shortage of volatile days around the holiday. 
 
Daily Bitcoin Returns +/- days from Thanksgiving
daily bitcoin returns  around thanksgiving chart
Source: CoinGecko/Arca
 
Third, weekends in general have been duds.  Turning a weekend into a long-weekend doesn’t change the fact that markets have generally been mean-reverting when traditional markets are closed.
 
jeff dorman tweet- mean reverting
Source: Twitter
 
So while there will be a lot of stories about how markets reacted these past four days, it will likely end up being much ado about nothing.  Coincidentally, prior to the new Omnicron variant data, the latest survey by Bank of America (which captures ~200 fund managers with more than half a trillion of aggregate AUM) revealed that fund managers were increasingly concerned about early rate hikes derailing the “everything rally”, while still mostly concerned about inflation.  If this new Covid strain does turn out to be a big problem, it will ultimately combat both of these fears.  
 
inflation and central bank hikes chart
Source: Cliffwater / BofA
 
So what does Thanksgiving price action really mean?  Ultimately, just that December is right around the corner.  And the average return from Thanksgiving until year-end has been +29%, with a powerful 72% rally in 2020.  
 
Bitcoin Returns +/- days from Thanksgiving
chart for bitcoin price changes around thanksgiving
Source: CoinGecko/Arca
 
An Evolution of a Digital Assets Taxonomy
Last year, we made our first attempt to categorize digital assets into four distinct types:
 
  1. Cryptocurrencies / Money 
  2. Decentralized protocols and platforms 
  3. Asset-backed tokens 
  4. Pass-through securities
While this was a nice start, the digital assets market has evolved even further over the past 18 months.  Earlier this year, our marketing team set forth to create an educational piece that outlined the types of tokens available today, in order to help dispel the notion that everything is a homogenous cryptocurrency. We came to the conclusion that our old classification system was not comprehensive enough, and certain tokens could actually end up in multiple categories - leading to more questions than answers. So we created a new taxonomy, where each token can now be mapped in a specific way. In its simplest form, one must now look at four elements to identify how to classify a token: 
 
  1. Governance Structure: Is the token centralized, decentralized or somewhere on the spectrum? 
  2. Governing Bodies: Who is issuing the token? Is it a centralized entity like a government, company, or individual? Or is it something completely unique to the digital assets space like a DAO or platform/protocol? 
  3. Digital Asset Type: What type of token is it? Is it a currency, a pass-through token, or an asset-backed token? 
  4. Value Accretion: What type of value does the token holder receive: Is there financial value like dividends or non-financial value like special perks? 
This is meant to be a high-level classification system for those who are not spending every minute investing in digital assets. For those who are looking for a more nuanced classification system,  we refer you to our friends at Messari, who have entire teams working to classify the digital asset ecosystem.  
 
But for the individuals who are looking to understand what’s available beyond Bitcoin and Ethereum, our new 4-step taxonomy is a simple, digestible way to get started. We welcome feedback.
 
What’s Driving Token Prices?
  • LUNA (+14) - Terra completed a burn of 88.675 LUNA from the community pool for $2.7B UST to fund insurance protocol Ozone, and its AMM Astroport announced the upcoming launch of lockdrop on 12/6 with one of the higher potential value new protocols going live on 12/20, propelling LUNA to near all time highs. 
  • AKT (-15%) - Akash announced a partnership with MATIC to migrate Polygon dapps from centralized cloud services (i.e. AWS, Google, Azure) to the Akash Network to promote full end to end decentralization and immutability of the ecosystem.
  • TOKE (+1%) - Reactor balancing begins in preparation for liquidity deployment.  Equal Amounts of TOKE and the accompanying asset will be staked in each reactor.  As TVL grows, staked TOKE will grow as well.  Liquidity deployment will be the beginning of Tokemak earning revenue as it generates fees from liquidity provision.
  • HNT (-9%) - Helium announced a partnership with DRONEDEK secured patents for a smart mailbox technology to make drone delivery a reality while beating out Amazon, UPS, and USPS.  DRONEDEK mailboxes advertise as a secure, convenient, affordable, and environmentally friendly option for package delivery. 
What We’re Reading This Week
 
 
 
 
And That’s Our Two Satoshis! 
Thanks for reading everyone!   
Questions or comments, just let us know.  
 
The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Katie Talati - Head of Research
Hassan Bassiri, CFA - PM / Analyst
Sasha Fleyshman -  PM
Alex Woodard - Research Analyst
Andrew Stein - Research Analyst
Nick Hotz, CFA - Research Analyst
Wes Hansen - Director of Trading & Operations
Mike Geraci -  Trader
Kyle Doane -  Trading Operations
David Nage -  Principal, Venture investing
Michael Dershewitz -  COO of Arca Funds
  
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068.
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