Market Commentary
Market Commentary: Overhangs
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February 22, 2022

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Key Takeaways:

  • Geopolitical uncertainty was much of the focus last week, with weakness into and through the long three-day weekend in the United States (bitcoin -9.5%, ether -9.6% on the week)
  • While gold has outshined bitcoin recently, a broken clock is right twice a day. The asset failed to outperform through the greatest inflationary period in forty years
  • Hash rate hits new highs, illustrating increasing network security and the importance of decentralization

The Focus

Last week’s focus was heavily on Russia and Ukraine tension, with geopolitical risk weighing on risk assets across the board. While broader consensus was for an unlikely invasion during the Winter Olympics, President Biden said on Thursday that an invasion was highly likely. This sent risk assets lower, bitcoin and ether included.

To us, it’s no surprise that selling continued into Friday as traders reduced risk ahead of a long weekend in the United States. And as we’ve just learned on Monday, these forecasts were indeed true: Russia has recognized Donetsk and Luhansk as independent states, and troops have entered the regions. 

This weakness seen over the weekend reminds investors that for now, bitcoin remains a risk asset through geopolitical uncertainty. The apolitical, uncensored, and decentralized asset is still “emerging” and a result, remains in price-discovery mode.

But as we often put current thematics in long-term perspectives, this volatility due to geopolitical concerns offers another opportunity for investors to buy the dip.

We remind our readers of Russia’s invasion of Crimea in early 2014: the drawdown in the S&P 500 Index was relatively short lived, with a max drawdown of 5.8% and just a 17-day recovery period. 

Now, geopolitical risk adds to the (diminishing) monetary uncertainty. 

But for one, peak hysteria stemming from monetary policy is likely behind us as investors are now aware a multitude of possibilities. Markets have seven hikes this year priced in, and even 50bps in March and 100bps by July in the back of their minds.

We saw last week that Canada, a nation that prides itself on its democracy, is now taking part in financial censorship when desired. This event further highlights crypto’s ability to avoid censorship as transactions can occur without the need for a central intermediary. 

While the current environment for now is an overhang to markets, an attractive opportunity is presented as the underlying fundamentals remain incredibly strong:

  • pullbacks have occurred but remain relatively tame
  • members of congress and states across the US are becoming increasingly pro bitcoin
  • regulatory bodies have been reasonable
  • hash rate has hit all time highs and renewable mining is now a thematic
  • bitcoin is now considered a “macro asset”

Gold Outshines Recently, But Bitcoin Likely to Have Last Laugh

While gold completely failed to outperform in anticipation of and eventually throughout the greatest inflationary period in forty years (spot gold down 3.6% in 2021), gold has found some light and is now up 3.9% year-to-date. While gold can have its day, we believe digitalization, technology, and changing investor preferences (among many others) will ultimately result in bitcoin having the last laugh. Gold’s performance relative to bitcoin since inception:

Tantrum Assets Rally in Tandem

We update our “Tantrum Table” that monitors a variety of risk assets impacted by uncertainty around the Federal Reserve’s process of normalization. While many of these lows are in sync around January’s FOMC meeting (see our last report here), markets have pulled back from bounce highs, and some assets have created new lows.

We update this table to highlight the resilience of bitcoin and ether, both of which remain 4.8% and 9.4% above their recent lows. As of Monday, February 21st: 

Hash Rate Hits New Highs

Hash rate, or the aggregate computational power of bitcoin miners, hit all-time highs last week.

As one may remember, China banned mining in the mainland in mid-2021 which led to hash rate dropping over 50%.

As we often explain, this led to the great migration of bitcoin miners westward; the United States now holds over 35% of global hash power.

This hash rate has again hit new all-time highs, a sign that more miners are securing the network by verifying bitcoin’s transactions.

Decentralization works.

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

Stay tuned,

Joseph Orsini, CFA
Director of Research

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