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October 5, 2021
Bitcoin gained 25.6% in the third quarter of 2021, despite seasonal weakness in September and a monthly return of -7.6%. The price of bitcoin increased in 5 of the 9 months thus far in 2021 and ended the quarter with a year-to-date return of 49.8%.
In terms of price action, bitcoin gained 11.0% in the week ending Sunday, October 3, rallying from a low of ~$40,800 to a closing price of $48,464. Bitcoin has regained its 200D moving average of ~$45,000.
At time of writing, bitcoin has had a strong start to October, rallying above $50k on Tuesday, October 5.
This week, we discuss bitcoin’s dominance, stablecoin issuers as banks, spending at “no-cost”, and entities accumulating bitcoin.
Bitcoin’s dominance explains the ratio of bitcoin’s market capitalization to that of the total crypto market. While bitcoin is the most valuable digital asset today, the addition of Ethereum, layer 1s, DeFi protocols, NFTs, and gaming has resulted in declining market share over the last six years.
For quick history, bitcoin’s dominance found support following the 2017 rally and altcoin season at around 35-40% in 2018, subsequently moving to a high of ~72% in 2019 and 2020. Prior to the bull rally in 2021, bitcoin’s dominance was 72% in January, and price hit an all-time-high of April 15 at $63,410. Altcoins have outperformed year-to-date, but bitcoin’s dominance has found a bottom at 40% yet again:
While it makes sense that different innovations within digital assets take incremental market share from bitcoin over time, bitcoin’s dominance is at a crucial inflection level. Will bitcoin push back towards a 70% market share, and if so, in what manner? Only time will tell.
Stablecoin Issuers as Banks
Friday morning, news that stablecoin issuers will likely be regulated as banks crossed the tape, leading to an immediately bullish move in bitcoin’s price. With the many concerns around the reserves and backing of major stablecoins such as Tether, any regulation that supports the solvency and longevity of stablecoins is certainly a positive for bitcoin and digital asset markets.
Recommendations from the Biden administration will be included in the upcoming report by the President’s Working Group on Financial Markets, which should be published in late October.
Last week, President Joe Biden, Speaker Nancy Pelosi, and Press Secretary Jen Psaki claimed the $3.5 Trillion spending package comes at “no cost.” To most of us, $3.5 trillion is much larger than “zero”. Trillions are now everyday congressional vernacular, and the trajectory of spending has accelerated to a point where trillions are apparently, no cost. As always, the debt ceiling will be raised, more spending will occur in the coming years, and monetary inflation will continue to grow at a rapid pace. Fiscal austerity is an idea of the past, and MMT a growing philosophy among younger and now even older generations. This generational trend will likely continue over the next decade and beyond, and bitcoin’s fixed supply structure will become ever more attractive.
On-Chain: Entities With >1 BTC Continue to Accumulate
Assessing on-chain data, we see that supply held by entities with 1 to 1000 BTC hit an all-time-high on September 30, holding 8,600,000+ BTC in cold storage. This number increased by 59,500 BTC in the third quarter, or ~$2.5 billion using quarter-end prices.
Entities with greater than 1000 BTC purchased a net 196,000 BTC in the quarter, or $8.5 billion using quarter-end prices.
As always, please reach out with any questions or comments.
Joseph Orsini, CFA Director of Research
Price Volatility of Digital Assets – A principal risk in trading Digital Assets is the rapid fluctuation of market price. High price volatility undermines Digital Assets’ role as a medium of exchange as consumers or retailers are much less likely to accept them as a form of payment. The value of client portfolios relates in part to the value of the Digital Assets held in the client portfolio and fluctuations in the price of Digital Assets could adversely affect the value of a client’s portfolio. There is no guarantee that a client will be able to achieve a better than average market price for Digital Assets or will purchase Digital Assets at the most favorable price available. The price of Digital Assets achieved by a client may be affected generally by a wide variety of complex and difficult to predict factors such as Digital Asset supply and demand; rewards and transaction fees for the recording of transactions on the blockchain; availability and access to Digital Asset service providers (such as payment processors), exchanges, miners or other Digital Asset users and market participants; perceived or actual Digital Asset network or Digital Asset security vulnerability; inflation levels; fiscal policy; interest rates; and political, natural and economic events.
Digital Asset Service Providers – Several companies and financial institutions provide services related to the buying, selling, payment processing and storing of virtual currency (i.e., banks, accountants, exchanges, digital wallet providers, and payment processors). However, there is no assurance that the virtual currency market, or the service providers necessary to accommodate it, will continue to support Digital Assets, continue in existence or grow. Further, there is no assurance that the availability of and access to virtual currency service providers will not be negatively affected by government regulation or supply and demand of Digital Assets. Accordingly, companies or financial institutions that currently support virtual currency may not do so in the future.
Custody of Digital Assets – Under the Advisers Act, SEC registered investment advisers are required to hold securities with “qualified custodians,” among other requirements. Certain Digital Assets may be deemed to be securities. Currently, many of the companies providing Digital Assets custodial services fall outside of the SEC’s definition of “qualified custodian”, and many long-standing, prominent qualified custodians do not provide custodial services for Digital Assets or otherwise provide such services only with respect to a limited number of actively traded Digital Assets. Accordingly, clients may use non- qualified custodians to hold all or a portion of their Digital Assets.
Government Oversight of Digital Assets – The regulatory schemes—both foreign and domestic—possibly affecting Digital Assets or a Digital Asset network may not be fully developed and subject to change. It is possible that any jurisdiction may, in the near or distant future, adopt laws, regulations, policies or rules directly or indirectly affecting a Digital Asset network, generally, or restricting the right to acquire, own, hold, sell, convert, trade, or use Digital Assets, or to exchange Digital Assets for either fiat currency or other virtual currency. It is also possible that government authorities may take direct or indirect investigative or prosecutorial action related to, among other things, the use, ownership or transfer of Digital Assets, resulting in a change to its value or to the development of a Digital Asset.
About Eaglebrook Advisors
Eaglebrook is a tech-driven investment manager specializing in bitcoin and digital assets. The firm offers various Bitcoin and Digital Asset SMAs serving financial advisors, registered investment advisors (RIAs), family offices, and institutions. Eaglebrook is backed by wealth management executives and institutions.
Investment platform and investment advisory services are provided by Eaglebrook Advisors, Inc.
DIGITAL ASSET RISK DISCLOSURES There are several risks associated with digital assets and digital asset trading. By accessing and using the website www.eaglebrookadvisors.com, you as the investor hereby represent and warrant that you have read the following Digital Asset Risk Disclosure.
Investing in digital assets is speculative and investors need to be prepared to lose some or all of their investment in digital assets. Digital asset prices are highly volatile, and the value of digital assets can rise or fall dramatically and quickly. Investors should carefully consider their financial circumstances and risk tolerance before investing in digital assets and should not trade digital assets unless they have the financial capability to sustain significant losses. The price of digital assets may be influenced by many factors, including the performance of the economy as a whole, liquidity, legislative and regulatory changes or actions at the state, federal, or international level which may adversely affect the use, transfer, exchange, and value of digital assets; flash crashes, market manipulation, changing supply and demand for digital assets, social media environment, inflation, interest rates, national and international political and economic events, the presence of hacking or cybersecurity incidents, technological developments, and overall prevailing psychological sentiment toward digital assets.
Importantly, markets and exchanges for digital assets are not regulated with the same controls or customer protections available in traditional equity, option, futures, or foreign exchange investing. The features, functions, characteristics, operation, use and other properties of any specific digital asset is complex, technical, and may be difficult to understand or evaluate. Information regarding any specific digital asset may be unclear or opaque.
Digital assets are not covered by FDIC or SIPC insurance. Accounts at digital asset custodians and exchanges are not protected by the Securities Investor Protection Corporation (“SIPC”) and are not FDIC insured.
Digital assets carry significant liquidity risk. Investors may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a particular digital asset suddenly drops, or if trading is halted due to recent news events, unusual trading activity, or changes in the underlying digital asset system. In the event an exchange venue has limited liquidity, there will also be limited liquidity to trade investor assets. The greater the volatility of a particular digital asset, the greater the likelihood that problems may be encountered in executing a transaction.
Clients of Eaglebrook Advisors custody their assets with Gemini Custody, a New York Trust Company and qualified custodian licensed by the New York State Department of Financial Services. At present, all trading of an investor’s digital assets will be executed by only one exchange venue, currently Gemini. In the event that an investor’s digital asset custodian and exchange ceases operations, the investor will be required to transfer their digital assets to another custodian and doing so will cause delays in the ability to trade, liquidate or access their digital assets.
Digital assets are vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the digital asset’s blockchain or other underlying technology. In addition to normal market risks, investors may experience losses due to one or more of the following: system failures, hardware failures, software failures, network connectivity disruptions, and data corruption. There is no guarantee for continuous availability of quotes or trading for digital assets.
Eaglebrook Advisors and the exchange venues that trade digital assets also rely heavily on computer software, hardware and telecommunications infrastructure. These computer-based systems are vulnerable to disruption, delay or failure which can cause investors to lose access to the trading platform, delays or inability to receive quotes or may negatively impact all aspects of Eaglebrook Advisors service deliverables. As such, Eaglebrook Advisors’ systems and services are offered “As-Is”.