Click here to download this article.
- The pullback gets interesting; bitcoin and ether down 23.7% and 34.3% year-to-date as of Sunday’s close
- Uncertainty likely to remain until Wednesday’s FOMC Meeting, which could provide some clarity on renewed concerns over the Fed’s hawkishness
- Crypto’s pullback is part of a larger “tantrum” we’ve seen since November, we update this table on page two
- While bitcoin and ether are off 48% and 56% from 52wk highs, the amount of time spent in deep drawdowns has diminished as public awareness and portfolio adoption takes hold
Now it gets interesting. With another week of the “tech tantrum” seen over the year-to-date period (and really, since November), bitcoin and eth are now down 23.7% and 34.3% YTD as of Sunday’s close.
While crypto’s pullback is in “good company” with similar macro counterparts (we update the Tantrum Table on page two), this does not reduce the pain seen by digital asset investors. Nearly $600bn in market capitalization has been wiped out since the beginning of the year, and both bitcoin and ether were off 48% and 56% from their 52wk intraday highs at Monday’s lows of $32,970 and $2,160.
This “Tech Tantrum” of 2022 will likely be remembered similar to the “Taper Tantrum” under Ben Bernanke in May of 2013.
Both episodes reflect the same market perception: the view that the Fed is behind the curve and tightening is coming sooner than expected. As Mark Twain said, “History doesn’t repeat itself, but it often rhymes.”
But as we remind our readers: time progresses, markets move on, and long-term investors are often rewarded for maintaining conviction in uncertain times. For this too, history doesn’t repeat itself, but it often rhymes.
Now, the market looks for Wednesday’s FOMC meeting to either confirm or reject new worries of the Fed’s plans: will the Fed hike 50bps in March, and/or hike seven times (one at each meeting) this year? Based on recent market action, investors apparently want neither.
But as correlations between bitcoin and equities remain high, we expect digital assets to bounce in tandem with equities and risk-assets when participants gain further clarity on the Fed’s process.
Traders and investors hope for the base case to occur: The Fed remains both transparent and “data dependent”, ultimately hiking just 3-4 times this year. This would avoid the current perception of the “worst case” scenario: 50bps in March and/or seven hikes total.
For crypto, this price action provides opportunities for digital asset investors to gain exposure off recent highs. As we often say, bitcoin’s volatility is a “feature” not a “bug”, particularly in this emerging price discovery phase. Such volatility allows tactical allocators to take advantage of market swings, particularly through the lens of disciplined rebalancing. The Fear & Greed Index has now reached a new low in “Extreme Fear” with a reading of 12.
Adoption trends have not faltered.
Daily Returns Illustrate Magnitude of Correlation
Last week, we highlighted bitcoin’s increasing 30D rolling correlation with the Nasdaq, particularly as markets remain so focused on the Fed. As “all correlations go to one” when volatility arises, we see this particularly play out within crypto. Both the S&P 500 and the Nasdaq had four consecutive days of 1% losses or more; a rarity within equities. With the S&P 500 and the Nasdaq at or near correction territory, it’s no wonder for the pullback in digital assets.
The Tantrum Continues
We update our Tantrum Table as of Sunday’s close, illustrating it was a tough week for assets impacted by concerns over rates, the dollar, and growth. While bitcoin and ether declined 18% and 27%, other assets faced significant volatility as well. Bitcoin and ether’s drawdown remains in “good company.”
Despite the Drawdown, Trends Continue to Improve
We often bring up improving drawdown trends as a sign of greater public awareness, liquidity, and institutional adoption. To illustrate, we can compare the percentage of time bitcoin spends in drawdowns prior to 2017 versus more recently.
As we can see, bitcoin spends less time in deep drawdowns than it did prior to mass public awareness. As bitcoin becomes more traditional, it spends more time closer to all-time highs.
This most recent drawdown of 49% will serve as another test: does bitcoin enter in a deeper correction, or do long-term investors start taking advantage of attractive levels? To us, we expect the latter.
Click here for the full PDF. As always, please reach out with any questions or comments.
Joseph Orsini, CFA
Director of Research
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.