Bitcoin Market Commentary
Bitcoin Market Commentary: Considerations of Bitcoin's Pullback
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Monday, December 6, 2021

A second week of risk asset volatility on uncertainty related to both Covid and the Fed’s process of normalization led to further downside for bitcoin and digital assets, with a test and an eventual break of $50,000 late Friday night into early Saturday.

While reaching a low of $42,269 in overnight trading early Saturday morning, price has since found support around the 200D moving average of $46,250, bouncing off the lows and closing the week at $49,230 by Sunday evening (a -12.6% weekly decline). Ether, which has outperformed bitcoin as of recent, declined just 2.5% last week, closing at $4,149. Such outperformance has driven the ETH/BTC pair to 0.85, a three-year high.

Given strong digital asset performance year-to-date, it’s no surprise that macro uncertainties have led to profit taking from those beginning to close their books for 2021.

Even after last week’s pullback, bitcoin and ether remain up 70% and 461% year-to-date, reflecting strong fundamentals and continued demand for new, innovative investments. Bitcoin and ether continue to surprise investors with resilience through much of the uncertainty seen since the summertime.

Some key considerations for this most recent pullback:

1) This is not bitcoin-specific:

We bring up the macro environment in almost every weekly piece as current market thematics often drive near-term price action for bitcoin and digital assets. Most recently, concerns over the Fed’s process of normalization have remained forefront, and recent hawkish comments given the potential supply chain disruptions from Omicron have led to concerns of a faster than expected tapering and hiking schedule.

This uncertainty has led to volatility across the board, for example:

  • Within interest rates: 2yr yields up 34bps in Q4 while the US 30yr treasury hit a year-to-date low of 1.67% on Friday, a form of yield curve bear-flattening
  • A pullback in momentum equities: iShares Momentum ETF (MTUM) off 8% from Nov highs
  • Underperformance in small-caps: Russell 2000 down 11.6% from highs, and particularly small-cap growth, with Russell 2000 Growth down 15% from its highs
  • A fall in crude oil: futures down 19% from highs on six straight weeks of declines

These factors have certainly played a part in bitcoin's decline as we know the risk-asset often faces the brunt of near-term volatility.

2) Bitcoin’s correlation to equities has risen since September:

Bitcoin’s short-term correlation to equities has increased since the fiscal and monetary response to the pandemic in March of 2020, as a flood of quantitative easing has increased intermarket correlations in a variety of assets. These correlations have slowly declined through much of 2021, however, have since risen since the beginning of September on growing macro uncertainty.

However, at just a 0.35 rolling correlation (which we point out has tended to flip between positive to negative over different market environments) bitcoin remains a diversifier but still sensitive to developments in equities and broader markets. Tactical allocators looking to understand short-term movements should monitor these developments:

3) Leverage has been reset:

Open interest in the form of futures across several exchanges such as CME, Binance, and Kraken has been reduced significantly in this pullback, reflecting an overall healthier environment for bitcoin’s derivatives market.

Approximately $5bn in leverage, by the USD amount, has been reduced since bitcoin’s decline last week, but more importantly, nominal exposure of approximately 59,000 BTC has been closed out. As seen below, open interest moved higher prior to the pullback as shorts entered the market; however, this has since been reduced as traders have likely taken profits and bearish bets off the table:

4) ETH outperforms as of recent:

Ether has outperformed bitcoin in recent weeks, likely driven by increased interest for its decentralized applications in sectors such as Media & Entertainment (metaverse, virtual reality, gaming) and NFTs. Interestingly, ether held up better in last week's decline, whereas normally, bitcoin is seen as the digital asset safe haven. Bitcoin’s decline of 12.5% and ether’s decline of 2.5% led to the ETH/BTC pair reaching a three-year high of 0.085, with renewed conversations of a long-term expansion in ETH relative to BTC:

5) Long-term thesis intact:

While bitcoin always remains susceptible to macro and headline risk, the long-term thesis remains intact. Bitcoin is an emerging store of value that continues to take market share from gold and other traditional investments, supported by positive network effects that drive a feedback loop of adoption and investment.

Over 200 million people now own bitcoin and digital assets, which has driven market capitalization to over $1 trillion for bitcoin and nearly $3 trillion for the entire asset class. Even so, bitcoin and digital assets remain in the very early innings of full portfolio adoption.

With price nearly 30% off of its highs, an attractive opportunity remains available for long-term investors.

As always, please reach out with any questions or comments.

Stay Tuned,

Joseph Orsini, CFA
Director of Research

DISCLOSURES
Investment advisory and management services are provided by Eaglebrook Advisors, Inc., a registered investment advisor. Information presented is for educational purposes only. Past performance is no indication of future results. Please see our Form ADV Disclosures and Privacy Policy in our website.
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