A hawkish tilt from the Fed and concerns over Chinese crackdowns provide near term firepower for bears.
After moving above $40,000 early last week, a hawkish Fed and further details into China’s crackdown on Bitcoin resulted in a breach of both $35,000, and $30,000 (as recently as yesterday, the 22nd) in the price of asset. While short-term headlines are expected to drive price volatility, the long-term thesis remains intact.
The Federal Reserve Indicates Two Rate Hikes in 2023
An update on the FOMC's outlook on the economy and the path of short-term interest rates was released at 2pm on Wednesday of last week, followed by a press conference with Chairman Jerome Powell. With some investors surprised by the Fed officials’ median forecast moving towards two rate hikes in 2023 (up from 2024) risk assets declined three days in a row, with the S&P 500 losing 1.9% in the week. Commodities, likely on expectations that earlier rate hikes will curb inflation, pulled back 4.3%, and bitcoin was not immune to this risk-selling. The digital asset declined 8.8% on the week, with ether losing 10.6% in same period. Gold, the market's current store of value, declined 6%.
Hash Rate Falls on China Headlines
The timing of further details into the Chinese crackdown on miners led to further volatility in the price of bitcoin, with news breaking late Sunday night that regulators in the country have begun to shut down miners in the hydropower-rich area of Sichuan. China’s newfound concerns of the environmental impacts of Bitcoin’s proof-of-work has weighed on sentiment, as an estimated 90% of China’s bitcoin mining capacity is now estimated to have shut down for the time being. As a result, hash rate, or the amount of computing power contributed to the network through mining, has declined to levels seen in Q4 2020. Price has followed the decline in hash rate as illustrated in the chart below.
While a short-term blip in the progress of the Bitcoin network, we remember that bitcoin is a decentralized asset that does not rely on any single entity to run. The competitive nature of owning bitcoin should increase hash power over time, while ultimately, regulation should benefit Bitcoin as it legitimizes the asset and creates further runway for growth.
Bitcoin’s 90D Volatility Remains Elevated
Bitcoin remains vulnerable to headlines and volatility with 90d annualized standard deviation of ~75%. While we expect price to fluctuate given recent, rapidly changing headlines, we look for 90D volatility to subside in coming weeks as negative news moves towards the rear-view mirror.
Despite a number of negative headlines in the past two months, Bitcoin continues to hold the $30,000 level. Not unlike equities, Bitcoin climbs a constant “wall of worry” as skeptics, bears, and the media jump to narrate any short-term fluctuations in price. As long-term investors, we know that Bitcoin’s thesis remains strong. The asset is a decentralized, emerging store of value with use case and increasing institutional and retail adoption. Recent volatility in the price of bitcoin is not unusual, and investors historically been compensated with positive risk-adjusted returns. The digital asset is an opportunity for long-term investors looking to diversify traditional portfolio holdings.
About Eaglebrook Advisors
Eaglebrook Advisors is a tech-driven investment manager that provides independent financial advisors with streamlined, secure, and compliant access to bitcoin and digital assets. The firm has created the first bitcoin and crypto separately managed accounts (SMAs), which are designed to seamlessly integrate with an advisor's current portfolio management systems and workflows. The company is backed by leading wealth management executives and financial institutions.