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- The second week of Russia’s invasion changes sentiment for some as inflation in key commodities leads to concerns for economic growth
- The Federal Reserve chose to maintain QE and ZIRP through nine months of 5%+ inflation, and is now expected to hike amidst a war in Europe
- Bitcoin and ether remain higher than lows placed in late January, while equities closed at a new year-to-date lows on Monday
- Comparing bitcoin’s drawdown to equities illustrates the magnitude of the “macro specific” pullback
With another week of Russia’s invasion of Ukraine, markets begin to worry of the potential knock-on effects that could impact economic growth in the coming quarters.
While bitcoin and ether decoupled against equities last week, (bitcoin +4.3%, ether +1.0%, SPX Index -1.3%, Nasdaq Composite -2.8%), heightened concerns of a drawn-out war and potential impact on inflation and growth has again led to broad sell-off across risk assets. Commodity prices have risen dramatically, and with the potential for bans on Russian oil imports, the likelihood of persistent commodity inflation remains high.
The Federal Reserve chose to continue quantitative easing and zero interest rate policy for nine months while inflation gained 5%+ year-over-year, and now the group of policymakers is planning a hike amidst a war in Europe in the upcoming FOMC meeting on March 16th.
With increasing economic concerns, volatility has remained high, and growth, momentum, and technology equities rolled over into new year-to-date closing lows on Monday. The Nasdaq Composite officially entered into “bear market” territory with a drawdown of 20% from its 52wk highs.
Despite this weakness, bitcoin and ether continue to trade higher than the lows in late January.
Bitcoin and digital assets are supported by secular trends such as digitalization, innovation, and demographics to name a few, and macro events accelerate adoption in various periods of time.
This most recent geopolitical turmoil is likely one of these macro events. Awareness of bitcoin as a decentralized and non-sovereign alternative to fiat has grown rapidly in just a few weeks.
And while some members of Congress believe crypto can be used to bypass financial sanctions, they must remember that transactions are fully traceable. Crypto enables for the tracing and blocking of specific addresses, while allowing ordinary citizens to utilize these assets as lifelines and alternatives to FX volatility.
So, while for now bitcoin is susceptible to economic and market risk, performance illustrates the asset is “down, but not out.” As we believe, this time will likely be viewed in hindsight as an accelerator to education and demand for bitcoin as a “macro asset.”
Investors now have an easy reference point for price action: will equities continue to make new lows, dragging down bitcoin and ether with it? Or are the lows of the year near with a “not so bad” rally to ensue as volatility eventually normalizes?
While the current landscape continues to test the conviction of investors, the eventual moving past of these “overhangs” should bode well for risk assets, bitcoin and ether included. President Biden’s upcoming executive order on digital assets is expected to be signed this week, which we will continue to monitor developments around.
For now, investors have the opportunity to practice patience, maintain conviction, and if warranted, add to long-term positions on weakness rather than at all-time-highs.
Equities Have Entered New Lows, Bitcoin and Ether Remain Higher than January FOMC
We update our “Tantrum Table” that monitors a variety of risk assets impacted by recent uncertainties around the Federal Reserve’s process of normalization and now, geopolitical risk. While many of these lows prior to Russia and Ukraine tensions were around January’s FOMC meeting, new closing lows have been placed in many equity indices and sectors. We note that intraday lows for equities was on February 24th. As of Monday, March 7th:
Relative Drawdowns Illustrate Macro Specificity
We often mention that this pullback from all time highs in digital assets has been in “good company” with equities, as the two have drawn down in synchrony on concerns of monetary policy and geopolitical risk.
Instances such as early 2019 (drawn out bear + hash wars) and mid-2021 (China bans mining) can be considered bitcoin specific, as equities remained near or at all time highs while bitcoin receded.
Now, as of Monday’s close, the Nasdaq was 20.2% from it’s 52week highs, while bitcoin was 44.1%. Here, we can see that the pullback is “macro-specific.”
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Joseph Orsini, CFA
Director of Research