With the end of the year right around the corner, market participants look to close their books, head home for the holidays, and enjoy time with friends and family.

It has been a solid year for bitcoin and digital assets: bitcoin opened at a price of $28,996 is currently trading at $46,742 as of Sunday’s close, ether opened at $739 and was $3923 by Sunday’s close. Even with a tough month thus far down -18% and -15%, the two remain +61% and +430% YTD. Assets rallied from a breakout in October 2020 to April of this year, pulled back until July, and have rallied since; new highs were placed in November, and the market has recently pulled back to ~$46,000, a higher low from the $41,000 dip seen in September.

Both bitcoin and ether have remained incredibly resilient despite “fear, uncertainty, and doubt” since the second half of this year - narratives around China, Tesla, Tether, stablecoins, and the likes have led to buying the dip, with little follow through from bears on any real pullback. Drawdown trends continue to improve as digital assets becomes more institutionalized.

While the Fed’s process of normalization remains forefront, some uncertainty has been reduced with the December meeting.  Fed Chair Jerome Powell increased the pace of tapering to $30 bn a month and signaled for three rate hikes in 2022, indicating a commitment to keeping inflation at bay. A number of central banks across the globe increased interest rates last week, notably, the Bank of England delivered a surprise 15bp hike to their respective policy rates. Back to the Fed, markets now focus on their ability to hike three times next year – as we know, based on their recent resume, it’s only fair to question this ability.

As markets often do, focus has again shifted: this time, towards rising Omicron cases, Joe Manchin’s stand on Capitol Hill, and the prospect for a “Santa Claus Rally” – one that takes place in the last five days of the year and into the second two days of January.

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Manchin Takes a Stand; Build Back Better on Pause

With what started as a very optimistic $3.5 trillion Build Back Better plan has been reduced to $1.75 trillion, however West Virginia Democrat Joe Manchin will vote NO and give up hopes for a deal by the end of the year. With record amounts of both fiscal and monetary stimulus in 2020 and 2021, concerns over inflation remain forefront, and Joe Manchin can’t find any middle-ground with progressive Democrats.

While this implies less fiscal spending, bitcoin has not been fazed. The debt ceiling was recently raised by $2.5 trillion, the most in US history - if blowout spending doesn’t occur now, it will in the future.

Most importantly for bitcoin and digital investors is that this delays crypto wash-sale regulation. Without a signed Build Back Better Plan – tax changes across the board will not be implemented, bitcoin included. Thus, existing wash-sale allowances (bitcoin, ether, and many digital assets are commodities that are treated like properties) will remain in place, benefitting many investors who take advantage of these opportunities.

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Santa Claus Rally?

The “Santa Claus Rally” occurs in the last five days of the year into the first two days of January as participants look for Santa Claus to mark up their books as a holiday gift. For bitcoin, the last six years of performance from December 25's close to January 2’s close averages 1.9%. We note that this may not overlap with traditional trading days, bitcoin of course trades 24/7.

We will not be sending out a market commentary next week, so we say Happy Holidays and a Happy New Year to our readers, clients, prospects, investors, friends, and family.

We have very exciting updates for 2022. Please be on the lookout for active strategies, webinars, improvements to Eaglebrook IQ, and of course, more partnerships.

As always, please reach out with any questions or comments.

Stay tuned,

Joseph Orsini, CFA
Director of Research

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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.