End of Month Report: August, 2020 - Mine Digital
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End of Month Report: August, 2020

September 1, 2020 • 
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End of Month Report
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August saw some stability in markets with indications of a change in market conditions developing in the last week of the month.

Data in August

Our end of month report, we see some assets take a break from their trends, such as the VIX, U.S. dollar index, gold and bitcoin essentially trading sideways throughout the month.

In other areas we saw equities trade higher as well as most soft commodities in which we see an emerging inflation.

Contributing to the threat of inflation was energy, trading higher over the month with Gas, Ethanol, Oil, Gasoline and Heating Oil trading higher together.

As a result, most assets were higher on the month, as shown by the green on the board.

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Capital Markets

With VIX, U.S. dollar index, gold and bitcoin trading sideways but commodities and equities trading higher, we started to see some interesting movement towards the end of the month.

One of the first pieces of the puzzle emerged in the AUD/Yen which broke out higher last week and potentially leading the next leg of global markets.

A bid in

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The bid in the Aussie/Yen preceded a break-out in the VIX index which went on to break-out late last week.

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With both of these changes in markets, the S&P500 began to trade upto the underside of its trend-line. Some analysts have been describing the potential for weakness from this level and it was our original target for the market – now with a tiny hammer candle marking the most recent high and the touch of the trend-line.

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Although the Russel 2000, typically a leader in the space, is yet to challenge it’s All Time Highs, struggling through most of August.

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And the NASDAQ trading at stratospheric heights

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So overall, a picture has been painted where markets have arrived in a spot where a decision must be made. It is easy to imagine equities selling off from here, especially with a market structure that must be very top-heavy.

The considerations of this potential include the implicit fed-put and the policy response that would likely devalue USD – the store of value, and the effects that this would have on the S&P500 (since March a weaker USD has been associated with a higher S&P500)

One place that mitigates the effects of this policy risk on the USD and other assets by default is the S&P500 priced in gold.

It had been a very reliable way to frame the equity markets so far in 2020, deviating in the second half of August in what could be considered a bubble blow-off type move.

The chart is already showing us a turn-around in the equities. With this framing, both equities can trade lower and gold can trade higher to successfully represent the effects of the diminished prospects for companies post-coronavirus as well as the extensive policy-responses by the US Fed.

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With gold surprisingly stable so far given the unprecedented, extreme expansion of money supply to add to incredibly monetary and fiscal policy during a time of record economic underperformance,

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Our feeling is that if the economic reality should impose itself onto equities that the path of least resistance includes a solid appreciation in gold.

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Digital Assets

In digital assets it was trading in decentralised finance tokens that saw the incredible gains for the month with Bitcoin lagging markets, leading to speculation that there was money entering the space, but potentially not with Bitcoin as the first port of call into digital assets – this would be a meaningful change in the mechanics of the digital asset space.

Chainlink also entered the top 5 as an oracle token, representing a major re-structuring of where the perceived value in digital assets was. Polkadot was released a fortnight ago and received well, trading significantly higher already after its predecessor token Kusama traded 230% higher over the month and yearn.finance was digital assets fastest unicorn, trading 644% higher over the month.

During August, de-centralised finance tokens emerged as the most exciting assets in the space. The major winners over the month were:

Aave up 157%

Chainlink up 114%

Compound up 58%

Ethereum up 22%

Kusama up 230%

Nexus up 488%

Reserve Rights up 186%

Synthetix up 83%

Yearn.finance up 644.5%

Some top performers were tokens that were only released during the month – Serum up by 57% in 14 days and Polkadot about 100% in 11 days.

Within de-centralised finance, yield-framing took off – the practice of lending and borrowing tokens to achieve yield in liquidity pools offered by the new defi tokens. Yield farmers have reported incredible gains in mixing and matching their tokens, with added layers of intrigue within digital assets that use experimental game-theory to create tokenomic frameworks. These progressed rapidly from the longer-standing Ampleforth token – with the potential to become a transactional token down the line, to more experimental games, some zero-sum in Nuggets, Yam, Tendies, Shrimp and Zombie.

One asset, yearn.finance, has stood out amongst this rapidly growing industry as a yield aggregator token and in doing so has become one of the more promising tokens.

And with all that said, perhaps the most unbelievable notion is that this incredible fury of action in digital assets is occurring under the radar for most of traditional finance. The teams who have been covering this the last couple of years will be spurred into action as their work so far bears fruit, as well as a significant amount of new activity that will no doubt result in some very interesting developments in decentralised finance over the next 12 months.

Bitcoin

Bitcoin has spent August going sideways, probably longer than what we had expected. With the recent moves in markets, we expect to see movement in the next 2-4 weeks.

BTC/USD Chart – Daily

The daily chart shows the trend-channel Bitcoin had made after breaking the $10k level, making what is essentially a double-bottom after breaking out of it, and still in the early days of what looks like a break of the swing-high as well as the major level at $12k.

The next major levels in the orderbook are $12,500, $13k and then $14k.

The next major level on the chart is $13,250.

Volume

Volatility

Sentiment

BTC Dominance

BTC dominance is still trading lower, with 60% (where it is currently) a previous swing-high.

Money

After entertaining a counter-trend during the month (USD potentially forming a low), it has ended with markets showing the potential of continuing the post-coronavirus move lower in U.S.D. and higher in gold and bitcoin.

One of the more interesting potential developments in the coming month is where the equity markets have the potential to selloff. Recent correlations saw equity weakness with USD strength, however we are currently seeing USD weakness with a market that may be starting to roll-over.

If equities do start to sell, potentially having a decent pull-back, there is an implied US Fed intervention with monetary policy – an historical policy arc that would contribute to a weaker USD.

So if equities sell-off and USD also sells off, it would be a significant change in correlations between assets.

And if not, where the markets stand right now, something has got to give.

DXY

Gold

Written By: Thomas Kuhn, CFA

Thomas is a 12-year veteran of financial markets working to bring digital assets into the fold of traditional financial markets.  With an interest in fundamental analysis with a technical overlay, Thomas actively takes positions in the markets he covers.

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