Market Commentary
Market Commentary: Supply Shocks
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April 5, 2022

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Bitcoin outperformed equities and fixed income through a tumultuous first quarter; while underperforming commodities, the price impact of “supply shocks” are now apparent.

Key Takeaways:

  • With the first quarter of ’22 in the rear-view mirror, we compare returns (BTC -1.2%, ETH -10.5%) to major assets
  • Commodities have broadly outperformed year-to-date, many of which experienced a “supply shock” – a great illustration of what can occur with bitcoin’s perfectly inelastic supply and increasing scarcity
  • We roundup the top public holders of bitcoin – an example of increasingly “strong hands” and further “illiquid supply” held as long-term investments


The first quarter of 2022 comes to an end with bitcoin remaining relatively unscathed through broader equity, fixed income, commodity, and currency volatility.

The same themes we’ve written about at length - such as the process of the Fed’s normalization, the overhangs of market uncertainties, and the maturation of bitcoin and digital assets as long-term investments in traditional portfolios - are likely to remain key themes in the second quarter and beyond.

Bitcoin has remained resilient through macro uncertainty: while participants have found many reasons to be bearish for months now, bitcoin’s ability to bounce off the lows is certainly a signal that the asset is maturing quite rapidly. Bitcoin spends less time in deep drawdowns, and realized volatility has declined from peaks of ~80% in prior pullbacks to just ~55% ann. (just 1.9x more volatile than the Nasdaq).

As we wrote last week, bitcoin is no stranger to the “wall of worry” - a characteristic that should bode well through the remainder of 2022.

In Q1, bitcoin declined just 1.2% versus S&P 500 (-4.6%), the Nasdaq Composite (-8.9%), and Barclay’s Agg (-5.9%). Bitcoin underperformed gold through macro uncertainty (gold spot +5.9%) but has held up better than both US equities and bonds through a tumultuous first quarter, which is no small feat for an emerging asset that is just 13 years old.  

While the Ethereum merge in late Q2 or early Q3 serves as an upcoming catalyst (which we will begin to discuss more frequently), the asset underperformed bitcoin in the down quarter. The more levered play to technology and growth declined 10.5%, performing more in-line with the Nasdaq Composite (-8.9%) and the Russell 2000 growth (-12.6%).

A comparison of Q1 2022 returns:

Most interestingly, this quarter illustrates what can occur when commodities experience a “supply shock,” or a structural (and often unexpected) reduction in output. War in Ukraine has led to the supply of natural gas, nickel, crude oil, corn, wheat, and aluminum being reduced significantly, which has driven prices higher at a rapid pace.

For bitcoin, it's perfectly inelastic supply has set the stage for a similar “supply shock” as seen recently in commodities. While bitcoin’s demand is growing, its supply is structurally reduced every four years. As more bitcoins are held by those with little or no tendency to sell, we can expect a similar “shock” to occur, which we discuss on page two.


Bitcoin’s known, fixed, and immutable supply structure is a unique characteristic in which supply cannot increase upon growing demand – the asset is “perfectly inelastic.” While 19 million bitcoins have now been mined, one million more will be made available by April ’26, with the final to be mined in ~2140.

As we know, bitcoin’s scarcity is driven by both “halvings” (or the 50% reduction in miner rewards ever four years) as well as the existing supply that is held but unlikely to be sold.

Currently, “illiquid” entities, or those with little tendency to sell, hold 14,532,663 of the 19,001,921 circulating supply (76.5%). Illiquid supply is currently 3.3x larger than liquid and highly liquid supply combined.

As we’ve seen in commodity markets as of recent: a sharp reduction in supply can significantly impact prices to the upside.

As more entities that are unlikely to sell accumulate bitcoin, a similar “supply shock” is likely to occur - it’s only a matter of time.


Part of the rise in bitcoin’s “illiquid supply” is due its growing institutional holder base. As the asset becomes more mainstream and accepted, companies, governments, and investment vehicles are beginning to gobble up existing supply.

While previously a retail driven market, this institutionalization brings bitcoin into “strong hands,” or those with long-term investment horizons and the ability or mandate to hold through periods of volatility.

By of the end of the first quarter, these entities held over 1.5 million bitcoin, or nearly $70bn in USD value. This is over 7% of fully diluted (21mln) supply.

As time progresses, we expect these existing holders, along with new corporate, government, and institutional entrants, to own larger allocations of bitcoin’s total supply.

This will drive further scarcity and again, the eventual “supply shock.”

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

Stay tuned,

Joseph Orsini, CFA
Director of Research

Key Market Data

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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