Market Commentary
Market Commentary: Don't Miss the Best Days
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October 12, 2021

Bitcoin gained 14.4% in the week ending Sunday, October 10. October has seen an incredibly strong start (bitcoin gained 11.0% in the week prior), with the asset up 27.6% month-to-date and now 91.2% year-to-date.

After a drawdown from a closing price of $63,410 on April 15 to a low of $29,866 on July 20, price has now reached five month highs, testing levels seen this past May. Bitcoin has remained incredibly resilient as bears gained little traction on uncertainty related to China, Tesla, Tether, and tapering in the last couple of months.

At a weekly closing price of $55,435, price is just 14.8% from all-time highs, with traders and investors focusing on $50,000 as support. This would be a major milestone in bitcoin's history.

This week, we discuss the importance of buy and hold, the futures curve's impact on potential bitcoin ETFs, and long-term holder supply reaching new highs.

Don’t Miss the Best Days

As we've experienced, bitcoin often moves higher at a rapid pace, with daily returns of 5% or greater the usual when bitcoin gains momentum. When this occurs, many investors looking for lower prices find themselves flat-footed, both disappointed of missed performance and hesitant of chasing larger moves higher.

As it sounds, this isn't a viable investment strategy. For an asset that moves as quickly as bitcoin, there is a large cost of mistiming the market, especially for those that are long-term bulls.

Taking a look at October, much of this month’s 27.6% return has come from just three days:

— October 1st, +10.8%
— October 5th, +5.0%
— October 6th, +6.7%

Without these three days, month-to-date gains are just 2.7%.

When looking back at the last three years, the resulting underperformance is even more drastic:

Over the last three years, a buy-and-hold investor gained 562%. Those that missed the five best days gained 214% and those that missed the ten best days gained just 64%.

This large cost of mistiming bitcoin’s advances is why we recommend “time in the market” rather than “timing the market.”

Futures Curve Highlights Negatives of Futures-Based ETFs and Mutual Funds

With the market positive on the potential for a futures-based ETF by the end of the year, basis spreads have increased, pushing futures prices higher relative to spot bitcoin. The CME futures curve has also moved to a positive slope, with investors bullish on the prospect of higher prices in the future.

While this ETF approval is a milestone for US investment access to bitcoin, futures-based ETFs come with downside: contango.

“Contango” is defined as a positively sloping futures curve, where futures contracts are priced higher for each month of expiration.

We illustrate this contango in the futures curve as of the close on Sunday, October 10, 2021:

On Sunday, the second month futures closed at $55,590 versus front month futures at $55,180.

When the futures curve is in contango, these ETFs must sell cheaper futures ($55,180) and purchase more expensive futures ($55,590) each month to roll-over their contracts without receiving cash delivery. Currently, this is a 74 basis point difference.

If the spread between first and second month futures stays relatively the same over time, this annualizes to a negative 9% roll return.

While these futures-based ETFs could be attractive for trading, a long-term investment in bitcoin through these vehicles will likely detract significantly from client performance. These ETFs offer zero direct ownership in bitcoin and thus, futures-based ETF products are much different than actually owning bitcoin.

Caveat Emptor.

On-Chain: Long-Term Holder Supply Hits New All-Time-High

Long-term holder supply is defined as the number of coins that have not moved in 155 days or longer.  On Thursday, this number hit an all-time-high of 13,277,144, increasing by 1,404,580 since the end of the second quarter. Despite concerns related to China, Tesla, Tether, uncertainty around regulation, and a 50% drawdown since the highs of $63,000+, bitcoin owners continue to accumulate at a rapid pace. 71% of circulating supply is now held long-term.

We illustrate long-term holder supply below:

Carson Excell Conference, Las Vegas, NV

Tuesday, Wednesday, and Thursday of this week, Eaglebrook will be attending the Carson Excell conference in Las Vegas, NV. Please stop by our booth for a demo and bitcoin market talk!

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

Stay Tuned,

Joseph Orsini, CFA
Director of Research

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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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.
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