This week, we discuss bitcoin’s performance as a risk-asset, the Fed, and China's crackdown.
Bitcoin lost 8.3% in the week ending September 26th, with early-week volatility setting the pace for the remainder of the period. While concerns around Evergrande and the Fed’s Wednesday announcement led to risk-off behavior, prices stabilized following the Fed's meeting into Thursday afternoon. Unfortunately, news of China bans resurfaced Friday, and bitcoin lost 4% on the day.
At Sunday’s close of $43,652, bitcoin has gained 26.2% quarter-to-date and 50.5% year-to-date. Traders and investors focus on the 200D moving average of ~$45,500, as well as holding $40,000 for signs of value.
Evergrande Reminds Investors Bitcoin Trades Like a Risk Asset
Concerns around potential contagion from Chinese property manager Evergrande led to risk-off markets early in the week, with the S&P 500 losing 1.7% on the day. While bitcoin declined 8.5%, we take the opportunity to remind investors that bitcoin trades like a risk-asset. Bitcoin is further on the risk curve and thus, typically underperforms equities on the downside but outperforms on the upside. We highlight bitcoin’s performance versus major assets in five of the most recent macro events:
When markets were worried about US-China trade deals, bitcoin lost 41.3% but gained 182.1% in the following six months. More recently, in the period from the S&P 500 high to low in the Covid-19 correction, bitcoin lost 33.3%, but has since gained 632.8% by the end of August 2021. While underperforming risk-assets on the downside, bitcoin often outperforms on the upside.
The Fed’s Announcement
Last Wednesday, the Federal Reserve announced the results of their September meeting. Jerome Powell indicated tapering details should come “soon,” with the program likely to end "mid-2022." This language likely means the Fed will provide details on the size (expectations are for ~20bn/month, bringing 120 to 0 in 6 months) and timing (likely beginning in December, but remaining flexible) in their next meeting on November 3. While the tapering announcement is highly anticipated, some critics mentioned a relatively faster pace of tapering than expected. The timeline is set for about six months from start to finish, for now.
Bitcoin and ether reacted similarly to other risk-assets during Powell’s Q&A, flip-flopping on a mix of hawkish and dovish indications.
When asked about CBDCs, Powell responded “I think it's more important to do this right than to do it fast. We are the world's reserve currency, and I think we're in a good place to make that analysis and make that decision."
Infrastructure, Spending, and the Debt Ceiling
U.S. politicians continue to play politics, with three key determinations coming this week: Infrastructure Bill ($550 million in new spending), 2022 Budget Resolution ($3.5 Trillion), and the debt-ceiling. Republicans are using the debt-ceiling to push back against 2022 spending, which could lead to a shutdown by October 1. While peak spending expectations are likely in place for the near-term, bitcoin investors seek any indication of further spending or political packages down the road. Naturally, an increase in the debt-ceiling supports further spending, which has had a one-way trajectory since the beginning of this administration.
Last Friday, the People's Bank of China reminded citizens that bitcoin, ether, and tether are not legal currency, and cannot be used as transactions in circulation. Multiple government agencies were included in the PBOC's announcement, representing one of the more serious crackdowns Beijing has announced thus far. While markets faced initial concern (BTC -3.8%, ETH -6.2% on Friday), prices have since stabilized.
Based on China’s global competitiveness, we wonder why (and even if) the country is giving up an edge in digital assets. As they seek control of monetary mediums, China is likely focused on a digital yuan being the only digital asset used by mainlanders.
Given that bitcoin is global, we expect the network to remain resilient, just as it did following China's ban on mining (see below). Nonetheless, we offer investors a timeline of China's crackdowns since 2013 and price performance since:
This Week On-Chain
As many remember, bitcoin placed a ban on mining in May, creating an immediate drop-off in hash rate as Chinese mining businesses essentially closed overnight. Hash rate has since rebounded, illustrating Bitcoin’s resiliency:
With the latest banning news, we expect a similar response to occur: the Bitcoin network will continue to run, and price will likely recover without the need for China.
Bitcoin is decentralized: no single entity can control the outcome of bitcoin. It is a global monetary network of over 130 million users in 200 countries, running on thousands and thousands of nodes across the world.As always, please reach out with any questions or comments.
Joseph Orsini, CFA
Director of Research