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- Markets become more hawkish, with 50bps in March and 4+ hikes the new conversation
- BTC and ETH have held up well thus far, holding $40,000 and $3,000 despite macro headwinds
- Even so, the number of ETH addresses with 1+ ETH hits an all-time-high
- Bitcoin’s short-term correlations with equities remain elevated, a trend to be monitored
- Bitcoin’s Fear & Greed Index remains in “Extreme Fear” – an attractive opportunity for long-term position building
Weakness early in the year for bitcoin, ether, and digital assets continue as concerns of the Federal Reserve’s process of normalization weigh on risk-assets. As of Monday’s close, bitcoin and ether are down 9.9% and 14.2% year-to-date, respectively.
It was no help to markets that the tone and verbiage from many members of the Senate Banking Committee in Jerome Powell’s confirmation hearing last week portrayed a strong preference for the central bank to combat decade high inflation. After all, inflation has hurt many citizens across the United States, particularly low and middle-class citizens in which food, shelter, and gas consume a large part of their income.
Tightening monetary policy is now the expectation for markets, with four hikes priced in as the base case scenario. Last week, a prominent bulge-bracket CEO offered the potential for seven hikes this year, and a popular hedge fund manager even recommended the Fed to hike 50 basis points in their March meeting.
What a rapid change in sentiment since Jerome Powell’s December 15th Q&A.
This 50bp hike by the Fed hasn’t been done since May of 2000, under the wild days of Alan Greenspan, so it’s no wonder the market is concerned about their punchbowl. What the Fed giveth, the Fed can taketh.
But even so, bitcoin and ether have performed well despite renewed uncertainty around monetary policy. The assets continue to hold the psychological $40,000 and $3,000 level, and both remain higher than last year’s opening prices. Highs in November coincide with highs in inflation expectations, long-duration technology, momentum, and small-caps, which we highlighted in last week’s report. This to us continues to illustrate the broader, macro-nature of this pullback, rather than anything crypto-specific.
As investors, we know that long-term tailwinds ultimately outweigh short-term headwinds. Bitcoin and ether’s theses remain intact, and today’s macro concerns are unlikely to be the “end” of digital assets.
Consider this alternative: strength and resilience through this uncertain macro period could be a bullish sign for digital assets. Tightening monetary policy may not be enough to derail the rapidly expanding interest adoption of digital assets in traditional portfolios, and the avoidance of a long, drawn-out bear market (which we do not foresee at this moment) would likely fuel further investor confidence in digital assets. Long-term investors should certainly take note of this potential.
ETH Addresses with 1+ ETH Hits All Time Highs
Despite the macro picture, small Ethereum accounts continue to grow. The number of on-chain addresses that hold 1 ETH or more has recently reached an all time high of 1,397,598. While this does not include those that hold ether on exchange, it is a strong proxy for true Ethereum adoption. When utilizing the Ethereum ecosystem of decentralized applications, users must have ETH in their custodial wallets, and the number of owners with more than 1 ETH continue to rise on growing interest around DeFi, NFTs, and gaming.
Correlations with Equities Remain High
Over time, we find that bitcoin’s correlation to equities fluctuates throughout different market environments, which reduces correlations over longer-term periods. While the average 30D rolling correlation between bitcoin & the tech-heavy Nasdaq since the beginning of 2018 is just 0.18, correlations have risen to 0.74 by the end of last week.
We believe this a reflection of increasing institutional investment, but more significantly, the market’s recent focus on the potential impact of Fed’s process of normalization.
For now, this provides investors with further understanding of recent market action. If equities bounce on less uncertainty around Fed policy, bitcoin, ether, and altcoins are likely to follow-suit.
Crypto Fear & Greed Index Illustrates Opportunity
Like the traditional Fear & Greed Index, the Crypto Fear & Greed Index provides investors with an understanding of current market sentiment, often used as a contrarian indicator for long-term investors.
The Crypto Fear & Greed Index is a multifactorial index built by alternative.me, and considers volatility (25%), momentum/volume (25%), social posts (15%), bitcoin dominance (10%), surveys (15%), and search trends (10%).
Currently, the crypto-index is in “Extreme Fear.”
When color-coding bitcoin’s price by Crypto Fear & Greed Index, we see that these periods have historically been attractive for long-term position building.
Click here for the full PDF. 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.