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Key Takeaways:

• Despite the number of headlines, bitcoin and ether traded relatively flat on the week (+1.3%, -4.0%)​
• While market participants took January’s accelerating inflation in stride, Fedspeak from St. Louis Fed President James Bullard sent markets in a reversal lower​
• Digital assets stole the spotlight at the Superbowl, another mass public awareness event​
• Department of Justice’s recovery of 94,000 bitcoin illustrates “crypto is not a safe haven for criminals”​

The Focus

Despite the number of headlines that were both bullish and bearish for digital assets last week, bitcoin and ether traded relatively flat by Sunday’s close (+1.3% and -4.0%),

Most of the focus and trade last week was in preparation or response to January’s CPI report, which illustrated another acceleration in inflation with a 7.5% increase, the highest number in many decades. While algorithms and high frequency traders initially sold the news, a mixture of short covering and further reassurance of a Fed hike in March was enough for markets to turn positive shortly thereafter.

But on that very same day, Fedspeak from St. Louis President James Bullard crossed the tape as the voting member advocated for 100bps in hikes by July and a run-off to occur sooner rather than later.

This, coupled with growing concerns of Russia and Ukraine tension, was enough to send risk assets ultimately lower by market close.

Despite another round of equity volatility in which the VIX index moved from a low of 19.9 to a high of nearly 31 on Friday, bitcoin and ether again remained resilient.

The two are 19.4% and 21.8% higher than their closing lows on January 23rd and January 27th, respectively. 

Again, digital asset investors can be reassured of bitcoin and ether’s ability to bounce when conditions warrant: max drawdowns of 47.8% for bitcoin and 50.8% for ether have now diminished to 37.7% and 40.1%.

Bitcoin regained its 50D moving average of $42,000 as well, closing the week at $42,229.

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Digital Assets Take Superbowl Spotlight

This year crypto stole the Superbowl spotlight, with commercial features from Coinbase, Crypto.com, and FTX.US pushing further awareness of digital assets. 

We remind our readers that just four years ago a number of media outlets banned advertisements that had anything to do with digital assets.

Now, digital assets have taken front and center stage, capturing the attention of over 100 million across the globe that watched the 56th NFL Superbowl. 

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Crypto Not A Safe Haven For Criminals

Bitcoin’s public and verifiable blockchain was again highlighted last week with the Department of Justice recovering over 94,000 bitcoin stolen in a hack of exchange Bitfinex in 2016, approximately $3.6 billion at the time of seizure.

This situation, along with the widely followed Colonial Pipeline ransom attack in 2021, highlights the transparency and auditability of bitcoin’s public ledger. Transactions are recorded, wallets are public, and the entire history is stored for public viewing.

Previous perspectives of bitcoin’s use in illicit activity continue to be debunked: according to Chainalysis, illicit addresses represented just 0.15% of total crypto transaction volume in 2021. This compares to a United Nations report that estimates 2-5% of global GDP is tied to money laundering and illicit activity.

As Deputy Attorney General Lisa Monaco said last week, “cryptocurrency is not a safe haven for criminals.”

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Nine Straight Months of 5%+ Inflation…& the Fed is Technically Still Printing

QE will end shortly, but let’s look at the bigger picture: masked behind “transitory” and “average inflation targeting,” the Fed has continued to take part in quantitative easing even as headline inflation grew 5% or more for nine months in a row.

Since the first 5% year-over-year number in May of 2021, the Fed’s balance sheet has grown another 12%, rising from $7.9T to now $8.9T.

It wasn’t too long ago that Ben Bernanke said on 60 Minutes in December of 2010, “We could raise interest rates in 15 minutes if we have to.”

Well, it’s been a long 15 minutes.

To us, the increased willingness for the U.S. central bank (and even CBs across the globe) to provide stimulus despite its impact on inflation is a significant thematic for long-term bitcoin investors.

This subjective policy making highlights the importance of an objective, hard-coded store of value alternative such as bitcoin.

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Correlations Decrease From Highs

While significant focus on the Fed’s process of normalization has resulted in increasing correlations between bitcoin and equities since late 2021, these correlations have moved lower in recent weeks.

30D correlations between bitcoin and the S&P 500 have declined from a high of 0.80 at the end of January to now 0.47 by Sunday’s close. Bitcoin’s correlation to the VIX index has moved away from nearly a 5-year high of -0.72 to now -0.54.

These developments continue to be monitored for signs of decoupling.

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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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.

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