Market Commentary
Market Commentary: Planting the Safe-Haven Seed
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Tuesday, March 1, 2022

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Key Takeaways:

  • A seed has been planted for bitcoin as a safe-haven asset in times of geopolitical stress: weekend donations, alternatives to bank runs, and hideouts from FX volatility have significant use-case
  • Bitcoin has again rallied off the low $30,000s, closing at $41,655 at the end of February 2022
  • Sparks seen on Thursday and Monday reflect the lessening of “overhangs” that will ultimately end in the rear-view mirror
  • Amidst volatility, holding trends strengthen: 62% of circulating supply held greater than one year

The Focus

Last week, Russia launched a full-scale invasion in Ukraine, sending risk assets in a whirlwind of declines, reversals, and rallies.

It appears that a “sell the rumor, buy the news” event has occurred as bitcoin and risk assets bounced off lows seen overnight on Wednesday. Bitcoin hit a low of $34,337 just after the initial invasion, ultimately reversing higher to a close of $38,414 on the very same day (+12% from lows). Follow through occurred again on Monday with the asset closing at $41,655 or now 26% higher than the intraday lows of $32,970 prior to the January FOMC meeting.

Considering that the Nasdaq Composite has experienced the third-worst drawdown in the last decade, bitcoin has weathered a significant storm. The Nasdaq’s max drawdown of 18.8% compared to bitcoin’s max of 47.8% reflects that yes, bitcoin is down, but not out. The pullback is in “good company.”

Going back to 2021’s open of $28,996, bitcoin has tested and bounced sharply off intraday lows of $28,824 on June 22, 2021, $32,970 on January 24, 2022, and now $34,337 on February 24, 2022.

Each of these bounces and higher lows should remind investors that bitcoin is “here to stay.” Max drawdowns in the last three years range from 48% to 53% (see page two), and polarization between bulls and bears has been significantly reduced.

These sparks seen on Thursday and now Monday reflect the lessening of “overhangs” that have placed holds on the rallies of bitcoin, ether, and digital assets.

For investors that are on the fence and waiting for the “perfect entry,” we recommend a consideration of the following meme, which to us still reflects the very nature of many bitcoin investors:

Now with geopolitical uncertainty joining monetary uncertainty in the rear-view mirror, a “not all that bad” rally may be presented as participants ultimately realize that these concerns were “more bark than bite.”

Planting the Safe-Haven Seed

While recent volatility through this geopolitical turmoil illustrates bitcoin’s emerging nature, these events likely plant a seed for better trading throughout the next geopolitical turmoil event.

Just this past week, investors have learned:

  • Bitcoin made it possible to send $19m in donations to Ukraine on the weekend when banks were closed
  • Russian citizens, many of which opposed the invasion, were impacted by government decisions that ultimately led to bank runs and empty ATMs
  • The ability to sanction through fiat is crucial to national and global security but can lead to significant volatility in emerging FX

Bitcoin is non-sovereign, apolitical, and uncensored- so why in the future, wouldn’t it be considered a safe-haven for geopolitical risk?

With Bitcoin, Volatility is Your Friend

While bitcoin’s 90D realized volatility has improved, it still averages 62% since the beginning of 2019.

This reflects the emerging nature of the asset class.

With an annual perspective, bitcoin has experienced an average 55% drawdown per year, but annual returns are positive in 9 out of those 11 years.

So while bitcoin draws down, it certainly recovers.

For those with long-term conviction, this provides many attractive opportunities to buy bitcoin “on-sale.”

Strong Holding Trends Amidst Volatility

Bitcoin continues to be purchased, removed from exchanges, and placed in custody to be held for long-periods of time.

This reflects the continued success of bitcoin as a “store of value.” Long holding periods validate the use-case and confidence around the ability to both hold and monetize value stored in bitcoin’s network.

As of last week, 62% of circulating supply has been held for longer than one year, nearing the all-time-high of 63% placed in Q3 ’20. 38% of supply has now been held for longer than three years.

Holding trends continue to improve.

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

Stay tuned,

Joseph Orsini, CFA
Director of Research

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
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.
For more information, please contact us at +1 (202) 798-1880 or send an email to contact@eaglebrookadvisors.com.