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November 30, 2021
News that a new variant may cause economic disruption crossed the tape on Friday, with bears taking advantage of low liquidity on a holiday-abridged Thanksgiving week.
This new reason for markets to worry led to both profit taking and ultimately further downside as algorithms and short-term reactionary traders sold a variety of risk-assets including bitcoin, ether, and altcoins. For reference, the S&P 500, the Nasdaq Composite, and Crude Oil declined -2.3%, -2.2%, -13.1% on the day, with bitcoin falling -8.2%, and ether declining -9.6%.
The good news so far is that over the weekend, market participants found time to digest the new information. Initial reports are that while the variant is likely more contagious, symptoms have been mild, and thus, markets have bounced off their lows on the premise that Friday’s reaction was overdone.
But even so, the potential disruption from Omicron now lies forefront. Ultimately, investors and traders question how this may affect the Fed’s process of normalization, given existing disruptions in the supply chain. In Fed Chair Jerome Powell’s written testimony to the Senate Banking Committee, Powell noted that Omicron could further disrupt supply chains, and thus, contribute to higher inflation. If this were to play out, a faster pace of tapering and a quicker hike schedule would be on the table, and investors remain weary of these recent hawkish comments.
But as we’ve seen in the past, variants so far have had little effect on markets after initial reactions. These mutations have been “more bark than bite” in cases such Delta and others, and those making bearish bets with the thesis of Covid have continued to lose against any indication of another Fed Put.
Bitcoin and ether have remained incredibly resilient through much uncertainty in 2021, illustrating the overall strength of these markets as portfolio adoption takes hold. Both investors and traders continue to buy the dip, with many near-term macro uncertainties dismissed given significant prospects for digital asset growth.
Bitcoin and ether have essentially made a round trip from the highs on Thursday night to the Monday’s close, outperforming a variety of risk assets as well as a so called safe-haven, gold:
US Agencies Provide Roadmap of “Crypto-Assets” Regulatory Clarity
We also note that last week, the Federal Reserve, the FDIC, and the OCC issued a joint statement on “crypto-asset” policy initiatives and next steps. While this report provides a roadmap, the statement in itself further legitimizes the digital asset ecosystem.
The group plans to provide greater clarity for banking organizations related to legality, expectations, consumer protection, and compliance, with a focus on digital asset custody, services, brokerages, loans, issuance, stablecoins, and crypto balance sheets.
This initiative provides both blockchain innovators and digital asset investors with further clarity on the various regulatory stances these agencies have taken thus far. As we always say, such clarity provides both runway and growth for digital assets and is always welcomed by digital asset investors.
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.
About Eaglebrook Advisors
Eaglebrook is a tech-driven investment manager specializing in bitcoin and digital assets. The firm offers various Bitcoin and Digital Asset SMAs serving financial advisors, registered investment advisors (RIAs), family offices, and institutions. Eaglebrook is backed by wealth management executives and institutions.
Investment platform and investment advisory services are provided by Eaglebrook Advisors, Inc.
DIGITAL ASSET RISK DISCLOSURES There are several risks associated with digital assets and digital asset trading. By accessing and using the website www.eaglebrookadvisors.com, you as the investor hereby represent and warrant that you have read the following Digital Asset Risk Disclosure.
Investing in digital assets is speculative and investors need to be prepared to lose some or all of their investment in digital assets. Digital asset prices are highly volatile, and the value of digital assets can rise or fall dramatically and quickly. Investors should carefully consider their financial circumstances and risk tolerance before investing in digital assets and should not trade digital assets unless they have the financial capability to sustain significant losses. The price of digital assets may be influenced by many factors, including the performance of the economy as a whole, liquidity, legislative and regulatory changes or actions at the state, federal, or international level which may adversely affect the use, transfer, exchange, and value of digital assets; flash crashes, market manipulation, changing supply and demand for digital assets, social media environment, inflation, interest rates, national and international political and economic events, the presence of hacking or cybersecurity incidents, technological developments, and overall prevailing psychological sentiment toward digital assets.
Importantly, markets and exchanges for digital assets are not regulated with the same controls or customer protections available in traditional equity, option, futures, or foreign exchange investing. The features, functions, characteristics, operation, use and other properties of any specific digital asset is complex, technical, and may be difficult to understand or evaluate. Information regarding any specific digital asset may be unclear or opaque.
Digital assets are not covered by FDIC or SIPC insurance. Accounts at digital asset custodians and exchanges are not protected by the Securities Investor Protection Corporation (“SIPC”) and are not FDIC insured.
Digital assets carry significant liquidity risk. Investors may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a particular digital asset suddenly drops, or if trading is halted due to recent news events, unusual trading activity, or changes in the underlying digital asset system. In the event an exchange venue has limited liquidity, there will also be limited liquidity to trade investor assets. The greater the volatility of a particular digital asset, the greater the likelihood that problems may be encountered in executing a transaction.
Clients of Eaglebrook Advisors custody their assets with Gemini Custody, a New York Trust Company and qualified custodian licensed by the New York State Department of Financial Services. At present, all trading of an investor’s digital assets will be executed by only one exchange venue, currently Gemini. In the event that an investor’s digital asset custodian and exchange ceases operations, the investor will be required to transfer their digital assets to another custodian and doing so will cause delays in the ability to trade, liquidate or access their digital assets.
Digital assets are vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the digital asset’s blockchain or other underlying technology. In addition to normal market risks, investors may experience losses due to one or more of the following: system failures, hardware failures, software failures, network connectivity disruptions, and data corruption. There is no guarantee for continuous availability of quotes or trading for digital assets.
Eaglebrook Advisors and the exchange venues that trade digital assets also rely heavily on computer software, hardware and telecommunications infrastructure. These computer-based systems are vulnerable to disruption, delay or failure which can cause investors to lose access to the trading platform, delays or inability to receive quotes or may negatively impact all aspects of Eaglebrook Advisors service deliverables. As such, Eaglebrook Advisors’ systems and services are offered “As-Is”.