Market Commentary
Market Commentary: Greenlight
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March 15, 2022

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Key Takeaways:

  • President Biden’s Executive Order on digital assets took center stage last week, offering a greenlight for growth, innovation, and investment in the United States
  • While this most recent war in Ukraine illustrates that bitcoin is for now a risk-asset, central bank interdependence is risky. Bitcoin can be a solution
  • While headline CPI reached a new four-decade high last week at 7.9% year over year, the Fed is expected to hike interest rates for the first time in over three years at this week’s FOMC meeting

The Focus

Last week, bitcoin and digital assets experienced a flurry of rallies and pullbacks, as positive news around President Biden’s executive order on digital assets was met with continuing concerns over the humanitarian and economic impact of war in Ukraine.

Economically, the US reported February CPI in which headline grew 7.9%, the highest since 1982, and the tenth straight month of year-over-year price inflation greater than 5%. After months of debate on the Federal Reserve’s path and process of normalization, market participants are likely to find the Fed hiking for the first time in over three years in the upcoming announcement on Wednesday the 16th.

So as markets find themselves in a crossroads – with many moving pieces creating reason for uncertainty – it becomes ever more important to maintain conviction, discipline, and patience when investing in digital assets.

For now, the group continues to trade alongside risk, but recent strength should not be ignored. While equity sectors and factors such as technology, growth, and momentum have reached new year-to-date closing lows, both bitcoin and ether remain higher than January FOMC levels.

While questions remain around the Fed’s ability to curb four-decade high inflation as well as the impact of geopolitical war in Europe remains forefront, any hesitation or concern related to President Biden’s digital asset executive order is now behind us.

Executive Order on Ensuring Responsible Development of Digital Assets

Last week, we provided a flash update on our views around the executive order. Some key takeaways we’ve found after digesting information over the weekend:

  • Greenlight: The US acknowledges that total crypto market cap surpassed $3 trillion in November, up from $14bn four years prior, with nearly 16% of American adults having traded crypto in the past. With this rapidly emerging asset class, the government now must protect citizens, investors, business, climate, and economic stability, and the order calls on various agencies to coordinate and provide input on their views.
  • Not Jumping the Gun: Not one regulation is put in place throughout this entire report, and bitcoin, ether, and stablecoins are far from “banned.” Rather, the order calls on the expertise of various agencies to outline the benefits and risks of digital assets, most of which are due within 180 days.
  • What Branches?: The interagency process will include sixteen different departments, such as State, Defense, Treasury, Commerce, Labor, Economic Advisers, Homeland Security, and the Attorney General. The Fed, CFPB, FTC, SEC, and CFTC are invited to attend but are not ordered to publish any reports. Still, these agencies are likely to utilize the findings to improve current perspectives.
  • US Central Bank Digital Currency (CBDC): With over 100 countries researching a potential CBDC, the US now places urgency on research and development for the US. The market has illustrated through nearly $175 billion in market capitalization that dollar based stablecoins are of utmost interest. The US must consider, research, and evaluate pros and cons of a state-issued CBDC and how it may impact dollarization and the country’s reserve status.

While not yet conclusive, this EO is likely to accelerate both innovation and investment going forward. Those that were concerned with the potential “banning” can rest assured: bitcoin and crypto are here to stay.

Gold Outshines Bitcoin, For Now

Despite a continuation of decade-high inflation numbers, gold’s outperformance relative to bitcoin has led some investors to ponder why the asset has underperformed in this recent environment.

Given that bitcoin is still emerging, it continues to trade like a risk-asset. When volatility rises, bitcoin often declines, illustrated by a predominantly negative correlation to the VIX index. While gold completely failed to outperform as an inflation hedge in 2021 (spot gold -3.6%, BTC +59.8%), the asset more often than not has a positive correlation to equity volatility. Non-sovereign, decentralized, and free from credit risk, gold is considered a safe-haven asset in times of geopolitical turmoil.

But wait, doesn’t bitcoin have these same characteristics? Yes, it does. As education around bitcoin’s value and use-cases rise, it’s only a matter of time before the asset is viewed as a safe-haven in times of geopolitical stress.

Reserve Currency?

Since Bretton Woods, central banks across the world have stacked reserves to utilize in times of financial and economic stress. These reserves have primarily been in the form of gold, currencies, and commodities. While BW I was a gold-based system, BW II led to free floating currencies backed by “full faith and credit.”

As countries have built up reserves over time, central banks now own the currencies – and therefore liabilities - of many economic competitors. If reserves can be used as a battleground, such as the selling of liabilities or the freezing of assets, how defensive are reserves in times of turmoil? The need for central banks to diversify away from interdependence and “trust” has now been highlighted. Bitcoin can be a solution.

Click here for the full PDF. 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.
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
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