Happy New Year!
What a year 2021 was for digital assets. Bitcoin opened at a price of $28,996 and closed at $46,333 for a 59.8% gain, while ether gained 399.1% from $739 to $3,688. Bitcoin’s market cap crossed $1 trillion but ended the year at $876 billion, while Ethereum's market cap rose to $438 billion.
2021 was defined by key thematics: inflation, regulation, financial and corporate adoption, and increasing investment accessibility. Bitcoin and ether outperformed all major asset classes yet again, garnering the attention of a wide range of investors, from young to old and modern to traditional.
For a quick recap, the rally took off in October 2020 on expectations that the fiscal and monetary response to the pandemic would create inflation. This, paired with the growing consensus for a “blue-wave,” or a Democratic sweep of the Oval Office, House of Representatives, and the Senate led to further expectations of social spending. As a result, inflation expectations, interest rates, and inflation-sensitive assets such as commodities, energy, materials, and financials moved higher, and bitcoin naturally followed suit. The asset rallied from ~$11,000 in October to $65,000 by April 2021.
With a blowout in US money supply (+24.8% in 2020) aided and abetted by another round of quantitative easing by both the Federal Reserve as well as central banks across the globe, it's no wonder that a hard-coded, fixed supply monetary system became increasingly attractive to long-term investors.
As price surpassed 2017’s high in late 2020, previous warnings of a “bubble” disappeared, and it became clear that bitcoin and digital assets are here to stay.
Thus, bitcoin became a macro asset in 2021. Popular hedge fund managers such as Paul Tudor Jones announced investments as a response to the “Great Monetary Inflation.” Many previous bears, such as some bulge-bracket banks in the US, began approving investment solutions in the digital asset space.
2021 was the beginning of financial integration – institutional investors have begun to warm up to the idea of strategic asset allocations to bitcoin and digital assets.
This year, we’ll learn how bitcoin and digital assets fare during a monetary “tightening,” and if and how this influences the rapidly expanding adoption of bitcoin and digital assets across the globe. The next Fed announcements come on January 26th and March 16th, where market participants will gain further insight into the Fed’s intentions of the pace and speed of their process of normalization.
We discuss much of this in our annual outlook that will be published later this month, followed by a webinar and a Q&A session. We will discuss the macro environment, on-chain developments, and key thematics for 2022.
Please be on the lookout for details and registration requests, coming soon.
“Chancellor on the Brink”
Yesterday, January 3rd, we celebrated the 13th anniversary of the “Genesis Block,” or the first block ever mined on the Bitcoin network.
Within the notes of this block, Satoshi included a headline from London newspaper "The Times." The message read: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” As fiat currencies were debased through monetary stimulus and banks were deemed "Too Big to Fail," Nakamoto provided an alternative money technology for a changing world.
Twelve years later, at the end of 2021, here is where we find ourselves:
- ~716,000 bitcoin blocks have been mined
- ~700 million on-chain transactions summing to nearly ~$67 trillion in transfer value
- ~$1 trillion in market capitalization created
As 13 years is small in the grand scheme of things, bitcoin is just getting started.
Updated Periodic Table of Investment Returns
With the 2021 year behind us, we update our periodic table of investment returns. We illustrate that bitcoin is again the best performing macro asset of the year, now in 9 out of the last 11 years of data.
While past performance does not indicate future results, this persistent and dominant trend illustrates the durability and significance of the digital asset class. Digital assets deserve and command the attention of not just investors and innovators, but investment fiduciaries.
Click here for the full PDF of these asset class returns. 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.