Notable Messari Updates
Helium team released a post mortem of the May 29, 2021 blockchain outage.
A proposal to allocate 1M UNI from the Community Treasury to fund a political defense organization to defend the protocol and DeFi from legal and regulatory threats and help ensure the promise of DeFi has passed the temperature check and is now up for a consensus check vote (the last step before an official DAO vote).
The Public Network Protocol 17 Upgrade vote will begin as scheduled on Jun. 1, 2021, at 15:00 UTC.
The Gnosis team, the development team behind the OpenEthereum client, announced that they would no longer be maintaining the client’s codebase after the London upgrade scheduled for mid-July.
Sector Performance Overview
The week ending on June 3rd was the first positive week since the market crash of mid-May. Following Messari’s sector convention, all five sectors covered in this report ended the week with positive weekly returns. The smart contract platform sector led the way posting a 7-day return of 3.11% propelled by the performance of assets such as Kusama (KSM), Nervos Network (CKB), Polkadot (DOT), Solana (SOL), and Cosmos (ATOM). The DeFi and DEX sectors followed closely, ending the week with a 2.7% return. Web3 finished with a 0.12% return making it the worst-performing sector of the group.
Sector Portfolio Methodology
Similar to last week, this week’s report focuses on comparing the performance, risk, and correlation structure between different sectors. To achieve this, we constructed market-weighted “sector portfolios” by selecting the top assets (ranked by market capitalization) from each sector covered in this report. The sector portfolio allocations are the following using market capitalization data as of June 3rd.
Sector Drill Down
Performance during the week ending on June 3rd was a bit bumpy. All sector portfolios had a small rally starting on March 27th which quickly reverted as the week continued. Asset prices across the board tumbled by mid-week resulting in losses of 10-25%. Starting on May 30th, portfolio returns found some footing as prices bounced back regaining some of the performance from earlier in the week.
Sector portfolios moved in tandem over the past 7-days following a nicely laid out V-shaped pattern. Although sector performance was relatively tight across all portfolios during most of the week, by the end of the week, the Web3 and DeFi portfolio began to lag the rest finishing the week with losses of -5.5% and -3.7% respectively. The losses of the Web3 portfolio were driven mostly by its relatively high allocation to Chainlink (LINK) which ended the week with a -6% return. Uniswap (UNI) and Aave (AAVE), which posted negative returns of -3.6% and -4.7%, drove most of the performance of the DeFi portfolio.
Volatility, defined as the standard deviation of daily returns, remains elevated across all sector portfolios following the spike that was triggered by the market crash in mid-May. Before the crash, volatility across sectors was roughly the same, ranging from 3-6%. After the crash, sector volatility has become widely dispersed.
The DEX and DeFi portfolios are currently the ones with the highest risk both running 30-day rolling volatility of 13%, a 2x increase compared to levels before the mid-May market crash. In contrast, the Top Asset and Currency portfolios have experienced the least increase in volatility moving roughly 3-4% higher compared to previous levels due to their higher allocation to Bitcoin.
Following the market crash, all asset correlations continue to move higher. The animation below highlights this trend over the past four weeks. The correlation matrices shown below are computed on a weekly basis using a 30-day lookback to capture the evolution of the correlation structure between sectors.
As seen below, correlations between sectors are well above 85% with certain pairs reaching levels as high as 95%. In markets like this where all assets move in unison, investors can get direct directional exposure by simply owning any crypto asset, the only difference is the amount of risk they are willing to take on.
The correlation between the sector portfolios and Bitcoin continues to steadily increase. The upward trend started in the beginning of May as the markets entered turbulent waters. As of June 3rd, all sector portfolios have a correlation to Bitcoin higher than 80%.
The increase is most noticeable for the DeFi and DEX portfolios which saw a jump of more than 45% in the past 30 days. The Web3 and Smart Contract Platforms portfolios followed a similar pattern increasing roughly 20% over the same period.
The correlation between Ethereum and all sector portfolios is now equal to or above 90%. Aside from the portfolios that have a hefty allocation to Ethereum (Smart Contract Platforms and Top Assets), the DeFi and DEX portfolios are the ones with the highest correlation coefficients standing at 94% and 93% respectively.