Market Commentary
Market Commentary: Moving Along
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February 1, 2022

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Key Takeaways:

  • January Fed meeting now behind us; market pricing of five hikes likely to remain for some time
  • With six weeks until the next Fed meeting, market participants can focus on other thematics
  • President Biden will announce an “Executive Order” on crypto assets by mid-February
  • State crypto wars heat up; an ambitious but unlikely bill in Arizona proposes bitcoin as legal tender
  • Spot bitcoin continues to outperform Grayscale’s GBTC Trust
  • Bitcoin’s transfer volume surpassed Visa in 2021, solidifying the asset as a global settlement layer

The Focus

After significant focus on the Federal Reserve’s January FOMC meeting, both the announcement and Q&A are now behind us. In one of the most ambiguous meetings in some time, Fed Chair Powell left the door open for a variety of outcomes, including a 50bp move in March, as well as consistent hikes in each meeting of 2022.

Now, interest rate probabilities illustrate an expectation for five hikes this year, which allows the Fed to refuel their toolkit while also taking a wait-and-see approach after their first expected hike in March.

With six weeks until the next Fed meeting, it appears that sentiment has shifted in a positive manner. 

With a better understanding of the Fed’s process of normalization, the uncertainty that led to profit taking, pullbacks, and in some cases corrections across risk assets has now been reduced.

Moving past January’s FOMC meeting allows investors to focus on thematics other than the Federal Reserve process of normalization, which for now, is supportive for market sentiment across the board.

As both bitcoin and ether’s correlations to equities have risen, it’s positive to see the VIX index move off its highs of 38.9 last Monday, to a close of 24.8 on this most recent Monday.

Given the strong underlying fundamentals of digital assets, we continue to expect crypto to bounce alongside the eventual bounce in equities. While we do not update our Tantrum Table this week, we continue to monitor momentum, high beta, long-duration tech, and small caps for signs of a robust risk crypto rally.

From there, we look for new developments in correlations, as the potential for a focus other than the Fed’s plans could allow bitcoin and ether to decouple for the time being. 

White House Announces Upcoming Executive Order

Early last week news broke that President Biden will announce an executive order on digital assets as a manner of “national security”.

To us, this means the White House has recognized the need for a cohesive framework across Commerce, Homeland Security, Treasury, Department of Justice, and the Energy Department.

In terms of potential market impact, we believe the US understands the importance of winning the digital asset revolution, and thus, is unlikely to derail the innovation occurring within the United States. Potential tax changes are priced in given the previous expectations of Build Back Better.

We will continue to monitor these developments and keep our readers updated through our weekly commentary.

State Crypto Wars Heat Up

While unlikely to be passed, the state of Arizona has made a statement: State Senator Wendy Rodgers has proposed a bill to make bitcoin legal tender within the state. 

As we’ve seen nation states such as El Salvador classify bitcoin as legal tender, the move within the US is a much taller ask: the U.S. Constitution does not allow individual states to create their own legal tenders.

Nonetheless, state crypto wars have begun: alongside Arizona, Miami wants to be the hub of crypto investment, Wyoming recognizes DAOs as LLCs, Texas is leading renewable mining initiatives, and if elected, Texas Governor candidate Dan Huffines intends make bitcoin legal tender.

Year to Date, Spot Bitcoin Outperforms Grayscale’s GBTC

Spot continues to be the best option for investors, with Grayscale’s longstanding GBTC again underperforming. While bitcoin was up 59.8% in 2021, GBTC was up just 7.0%. Even more significantly, spot bitcoin has rallied 32.6% while GBTC is down -18.0% since the beginning of 2020.

Some believe the discount will diminish upon the approval of spot ETFs. Traders currently believe otherwise: a widening discount likely means there is little chance for the GBTC to convert to a spot ETF in the intermediate future. The discount hit an all-time high of 29.9% on January 21st.

Spot continues to outperform other alternatives.

Bitcoin Surpasses Visa Transfer Volume, Highlighting a new Global, Settlement Layer

Bitcoin continues to disrupt traditional payment processes and is now one of the largest settlement networks across the globe. By the end of 2021, the Bitcoin Network settled $13.1 trillion in transactions, up 470% from the year prior. This is greater than the $13 trillion settled by Visa, one of the largest payment processors in the world.

Bitcoin as a settlement layer and medium of exchange strengthens its use case as a storage of wealth. 

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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