Market Commentary
Market Commentary: Lightning
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Tuesday, April 12, 2022

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The Bitcoin 2022 conference brought good news to proponents of bitcoin, with Lightning Network integrations the beginning of the end for the “it’s not a medium of exchange” argument.

Key Takeaways:

  • The first week of the second quarter was not without volatility, as positive news from the Bitcoin 2022 conference was overshadowed by Fed Minutes and a surge higher in interest rates
  • Bitcoin and digital assets continue to be held hostage by macro sentiment amid rising correlations to the Nasdaq Composite
  • The Bitcoin 2022 conference offered lots of good news for bitcoin investors, primarily the integration of Lightning Network and bitcoin as a payment option in major e-commerce and retailers across the US

THE BIRD'S EYE VIEW

The first week of the second quarter was not without volatility as positivity around the annual Bitcoin 2022 conference was overshadowed by a surge higher in interest rates following the release of the Federal Reserve’s March minutes.

While market participants have been aware of the Fed’s initiative to combat inflation, some members of the FOMC proposed a shrinking of the balance sheet to the tune of $60bn in treasuries and $35bn in MBS per month. This, along with an op-ed written by former NY Fed President Bill Dudley claiming “if stocks don’t fall, the Fed needs to force them,” was enough to send risk-assets in a spiral lower.

So for now, bitcoin, ether, and digital assets continue to trade on macro sentiment. With the 10yr treasury rising 32bps to 2.7% last week, bitcoin’s 30D correlation to the Nasdaq also returned to annual highs of 0.75. The tech heavy Nasdaq Composite declined 3.9%, while bitcoin declined 7% (to $43,125) and ether declined 5.8% (to $3,290) on the week.

The market’s focus on the Fed’s balance sheet run-off as well any implications for Tuesday the 12th  CPI print ultimately overshadowed great news and remarks from the Bitcoin 2022 conference. Takeaways include:

  • The rise and growth of renewable energy mining
  • A presentation by (R-WY) Senator Cynthia Lummis outlining the bipartisan bill, The Responsible Financial Innovation Act, to further support innovation in the US
  • Further legal tender status across the globe (Madeira and Prospera no longer pay capital gains on BTC, and a bill has been proposed in Mexico based on El Salvador’s law)
  • Most importantly, retail and e-commerce integrations with the Lightning Network that make bitcoin a medium of exchange

LIGHTNING STRIKES

Bitcoin’s “Lightning Network” (LN) is a layer two application that is built on top of the network and allows for fast and cheap payments through its architecture. Transactions occur on the Lightning Network and are only settled on the Bitcoin network when users withdraw their funds. This results in efficient and low-cost transactions of bitcoin that are settled nearly instantly.

Last week, Strike announced that LN is now integrated with Shopify (e-commerce platform), Blackhawk (payment processor), and NCR (the world’s largest point-of-sale system supplier).

Why’s this matter? Well, a medium of exchange can now be added to bitcoin’s use-cases.

Retailers and consumers do not need to own bitcoin to receive or accept the asset as a payment. These applications can swap fiat for bitcoin, use Lightning to transfer, and swap bitcoin back to the currency of the receiver’s choice.

With incentive for retailers to accept LN such as the avoidance of credit card fees, the impossibility of chargebacks, and more personal loyalty programs, this is the beginning of the end of the argument that bitcoin is not a “medium of exchange.” Retailers such as the ones below can now implement bitcoin payments in the coming months:

TRACKING LIGHTNING

Tracking the performance and growth of Lightning Network can be done through monitoring the number of Lightning Network “channels” and its “capacity.”

Lightning Network “channels” enable users of the network to send and receive money to and from other participants. Any users can open channels to participate in the LN. Essentially, the Lightning Network is a web of these channels. If there is any channel route between two senders with sufficient capacity, payments can be sent through the network. There are nearly 83,000 channels to date.

Lightning Network “capacity” is the amount of bitcoin that is deposited into the LN and available for transactions. The larger the capacity, the more liquidity that is available for instant settlement. Currently, around 3,600 bitcoin is deposited into the Lightning Network, or ~$150,000,000.

While Lightning for now is better suited for smaller transactions, it complements Bitcoin’s layer one technology well, which has an average transfer size of ~$125,000.

BITCOIN HOLDING TRENDS REACH NEW HIGHS

While progress is being made on bitcoin as a medium of exchange, long-term holding trends also continue to strengthen.

Users continue to purchase bitcoin, remove from exchanges, and hold the asset in custody for longer and longer periods of time.

The percentage of supply held for longer than one-year has just hit an all-time-high of 63.7%.

A near all-time-high of 38.0% has been held for longer than three-years.

For long term investors, this reflects the continued and growing success of bitcoin as a “store of value.”

Click here for the full PDF. As always, please reach out with any questions or comments.

Stay tuned,

Joseph Orsini, CFA
Director of Research

Key Market Data

DISCLOSURES
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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