Fading The $LINK Marines...

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TLDR;

• The efficient-market hypothesis (EMH) states that asset prices reflect all publicly available information, including anticipated news.

• This means that expected news is already included in the price of assets, and results in ‘sell-the-news’ price action.

• Recent history is littered with examples, such as the large moves and sell-offs of Shiba and Stellar into announcements.

• Since September 1st, LINK has outperformed a basket of Oracle projects significantly, gaining 25% on a relative basis against $BAND, 34% vs. $API3, and 32% against ETH. This kind of outperformance prior to a major event is a clear sign that the market is front-running any announcements, and more often than not, tends to revert once the event is over.

• For these reasons, we believe that the risk of a sell-off in $LINK following the Smartcon conference is high. Traders should be cautious of this risk and consider managing their positions accordingly.

The Efficient Market Hypothesis

The efficient-market hypothesis (EMH) states that ‘asset prices reflect all publicly available information, including anticipated news’.

This means that expected news is already included in the price of assets.

For example, if a team announces a new product launch, the market will price this news before the product is released. Markets are forward-looking, and therefore traders will place a premium on the asset value relative to its peers. Knowing the feature is to be rolled out ahead of time gives ample opportunity for this pricing to happen, and by the time the feature rolls out, the asset already reflects this new paradigm, and therefore the next marginal buyer is nowhere to be seen.

Recent history is littered with examples. In the last 2 months, Shiba and Stellar have both experienced large moves into announcements, before selling off aggressively since the event, as illustrated below.

Whilst there are always exceptions to this rule, as traders, our job is to stack the probabilities in our favor. 80% of the time, the market rewards those who fade anticipated news.

For this reason, we’re always on the lookout for similar opportunities, and we feel $LINK is setting up for another sell-the-news-type event.

Intra-sector Correlations

In the context of crypto, intra-sector correlations refer to the tendency of tokens in the same sector to move together. For example, AAVE and SUSHI - both tokens in the DeFi space, are likely to be highly correlated. Therefore their prices tend to move up and down at the same time.

This is because both tokens are exposed to the same factors that affect the DeFi sector, such as changes in interest rates or the adoption of new protocols.

Whilst whole sectors tend to move together 95% of the time, specific events impacting a single name can cause short-medium term price distortions that have a large tendency to correct. In order to profit from these discrepancies, we first need to identify situations where a specific sector basket is mispriced, and profit from this by buying the underpriced asset(s) and selling the overpriced one(s). A powerful approach to profitability can be gained by mixing this kind of analysis, with the sell-the-news model as suggested by the efficient market hypothesis.

Introducing Oracles

An Oracle project in crypto is a third-party service that connects smart contracts with the ‘real’ world. Oracles provide a way for the decentralized Web3 ecosystem to access existing data sources, legacy systems, and advanced computations.

In a nutshell, they are used to provide smart contracts with access to real-world data. This data can be anything from the price of Bitcoin to the weather in London. Oracles allow smart contracts to be more versatile and responsive to real-world events.

There are a number of different projects in the space, each with its own strengths and weaknesses. Some of the most popular Oracle projects include:

Chainlink: Chainlink is the most popular Oracle project in crypto. It has a large network of Oracle nodes that provide data from a variety of sources. Chainlink is also very secure, as it uses a decentralized network of Oracle nodes to prevent data manipulation.

Band Protocol: Band Protocol is another popular Oracle project. It is similar to Chainlink, but it uses a different consensus mechanism. Band Protocol is also more focused on providing data for DeFi applications.

API3: Decentralized Oracle project that is focused on providing data for DeFi applications. API3 uses a unique approach to oracles, in which data providers are directly compensated by smart contracts for providing data. This makes API3 more efficient and cost-effective than other Oracle projects.

Smartcon 2023

As flagged in our October Alpha post, SmartCon 2023 is a popular event for the Web3 community, bringing together developers, entrepreneurs, and investors from around the world to learn about the latest innovations and trends in the space. Founded and run by the Chainlink team, the event is closely watched by $LINK holders and features a keynote address from Chainlink CEO Sergey Nazarov, as well as talks from other leading figures in the Web3 industry.

This year, the event will be held in Barcelona from October 2-3, with pre-conference workshops and activities taking place on September 30th and October 1st.

In the build-up to prior SmartCon events, $LINK experienced strong price performance in anticipation of major announcements. The most recent - 2022, saw around a 35% move in the price of $LINK into the keynote speech, as traders front-ran a staking announcement, before rolling over afterward.

Positioning

Since September 1st, $LINK has outperformed a basket of Oracle projects significantly, gaining 25% on a relative basis against $BAND, 34% vs. $API3, and 32% against ETH - widely seen as a proxy of the general market. This kind of outperformance prior to a major event is a clear sign that the market is front-running announcements, and more often than not, tends to revert once the event is over.

In the same period, $71m in notional $LINK open interest has been added to the contract. This makes it the largest monthly open interest gainer - showing objectively that traders have positioned aggressively long into the Smartcon event.

It is our view that these new buyers will be forced to sell should the event disappoint, or fall short of these enormous apparent expectations. Furthermore, despite the market rallying 35% from the lows, $LINK remains firmly within a larger daily range which has held since June 2022. This kind of value acceptance often requires a huge catalyst to break higher, and given the rollout of CCIP is already widely known and accepted - we fail to believe this is not already baked into the current price.

Wrapping Up

In conclusion, we believe that $LINK is setting up for another sell-the-news event into October's Smartcon conference. This is based on the following factors:

• The efficient-market hypothesis states that asset prices reflect all publicly available information, including anticipated news. This means that expected news is already included in the price of assets, and results in sell-the-news type price action.

• Recent history is littered with examples of assets selling off after anticipated news is released. For example, Shiba and Stellar both experienced large moves into announcements, before selling off aggressively since the event.

• $LINK has been outperforming other Oracle projects significantly since September 1st. This kind of outperformance prior to a major event is a clear sign that the market is front-running any announcements.

• In the same period, $71m in notional $LINK open interest has been added to the contract. This makes it the largest monthly open interest gainer - showing objectively that traders have positioned aggressively long into the Smartcon event.

For these reasons, we believe that the risk of a sell-off in LINK following the Smartcon conference is high. Traders should be cautious of this risk and consider managing their positions accordingly.

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