#19 Web3 is Up 5.3% This Week, Propelled by DeFi Tokens

GM Architects,

A positive week for the Arch ecosystem and a neutral (or somewhat positive) week for most cryptos. Arch Ethereum Web3 token traded 5.3% higher than last week, while the Arch Blockchains token rose by 0.62%. Bitcoin lost 1.71%, while Ethereum traded over 1.88% higher than the previous seven days.

In this newsletter edition, we look at how the financial markets are performing, why some tokens and crypto projects are rising, and share move about the momentum investing strategy and how it applies to the crypto ecosystem.


🏦 DeFi rallies, cryptos recover, and TradFi markets are calmer

TradFi stocks rallied on Friday as traders were calmer as a fresh batch of bank earnings and strong sales for June were announced, alleviating some of the worries that the Federal Reserve may aggressively hike rates to control inflation.

The Dow is down 1% for the week, while the S&P and Nasdaq have slipped 1.55% and 2.3%, respectively.

The crypto space had an even more positive reaction to the news, with almost half of the top 10 cryptos by market cap trading higher than last week.

Bitcoin (BTC) continues to gain ground, reaching almost breakeven for the week. Ethereum rose after the network’s ninth shadow fork went live amid testing for its upcoming merge.

DeFi tokens, on the other hand, had significant price upticks after a round of good news on the sector made investors return to some of the protocols.


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πŸ“‰ Web3 traded 5.3% higher than last week and over 27.5% higher than last month

The Arch Ethereum Web3 token outperformed Bitcoin and Ethereum, with some tokens trading almost 60% higher than the last week.

  • Lido DAO (LDO) was this week's outperformer, trading over 52.4% higher than last week. The main reason for the rise is the Ethereum Merge is moving closer, and the successful merge on the Sepolia testnet on July 6. Since Lido provides liquid staking services for Ethereum, each step closer to the transition from PoW to PoS benefits it because Ether holders that want a less complicated way to stake their tokens can utilize Lido's services without worrying about token lock-ups. Another factor helping to boost the value of LDO has been the recovery of stETH price, which lost its peg to Ether over the past few months as distressed funds sold their stETH in an attempt to stave off insolvency.
  • Uniswap (UNI) price rallies after the popular retail investment app Robinhood announced that the UNI token is now available to trade on the platform. This exposed the asset to a large group of new buyers who don't necessarily invest in cryptos. In addition, the whale transaction count metric picked up a significant uptick in whale activity. There were as many as 23 transactions worth more than $100,000 in the last 24 hours of Thursday.
  • Aave (AAVE) continues its price surge after the announcement of GHO, a new collateral-backed stablecoin. The technical data also shows a strong bullish momentum, with the token breaking essential resistance levels. This also comes after Celcius ultimately paid off its debt to Aave, which was well within hundreds of millions of dollars.
  • Curve DAO (CRV) also had a positive week following a bullish rally and hitting a one-month high.

The top performers are all in the DeFi sector, showing investors are willing to return to the ecosystem after the Terra debacle.

β›“ CHAIN traded 0.62% higher than last week and 7.89% higher than last month

The Arch Blockchain token had its second positive week, trading over 0.68% higher than last week.

And while most of the tokens traded in the red, Polygon (MATIC) continues with its upward trajectory, trading over 21% higher than last week.

The rise comes after a series of institutional adoption; In the past few months, Polygon has established partnerships with Coca-Cola, which released a pride series NFT collection, and Reddit, which announced it was launching an NFT marketplace on the Polygon network.

Most recently, Disney announced that Polygon was the only blockchain included in the 2022 Disney Accelerator program, which catapulted MATIC to reach its higher price in a month.


🚲 Is there a momentum effect in crypto?

Momentum investing is a trading strategy in which investors buy rising securities and sell them when they seem to have peaked, i.e., betting on past winners.

This strategy has been academically studied since the publication of 'Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency' in 1993. (Jagadeesh & Titman, 1993) And it has yielded significant profits for investors. The MSCI-USA-Momentum-Index made 2.62% of annual excess return over its market-cap-weighted counterpart since 1994. (MSCI USA Momentum Index (USD) Factsheet)

In TradFi, this strategy works best in medium terms ranging from 3 months up to 12 months because trends may change significantly before the next rebalancing day for more extended rebalancing periods and thus negatively impact the performance.

Momentum in crypto?

In crypto markets, our analysis suggests a momentum effect may also exist. However, given the more volatile nature of the markets, we've found the persistence of the impact to be shorter – you've got to move quickly. Momentum appears to be overwhelmed by reverse momentum as the holding period increases. Other researchers, including (Zaremba, 2021), have documented these results.

Our prototype momentum index works well in the 14-day short rebalancing period (chart below).

Momentum (14-day rebalancing) doubles the return of the market-weighted strategy. Source: Arch Intelligence 

But the excess returns quickly disappear and enter negative territory as rebalancing periods increase (next chart).

Momentum effects dissipate rapidly. Source: Arch Intelligence

From a one-month rebalancing period onward, reverse-momentum becomes the more profitable strategy.

30-day rebalancing shows no encouraging results. Source: Arch Intelligence

The momentum and reverse momentum effects are intriguing, but can they be captured? What about trading costs? Let us know what you think.

--> πŸ“šπŸ€“ Take a deep dive into the momentum strategy and how it works on crypto markets.


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Disclaimer: The opinions expressed are for general informational purposes only and are not intended to provide specific advice or recommendations. The views reflected in the commentary are subject to change without notice.