Bitcoin and digital assets have experienced a series of ups, downs, and sideways markets in recent months as investors weigh risks and catalysts on the horizon.
A strong August in which bitcoin and ether gained 13.2% and 36.1% respectively led to a September pullback of 16% and 20% percent from monthly highs. As investors weigh risks and catalysts on the horizon, likely culprits of this month’s pullback include:
• buy the rumor, sell the news event related to El Salvador
• profit-taking and liquidations after a strong performance from the bottom in July (bitcoin rallied almost 74% from July 20th to September 6th, ether rallied 121%)
• and concerns of inflation, tapering, and global growth
Investors and traders look back to $50,000 as either significant support or resistance, with the 50 and 200D moving averages approaching a golden cross around $45,800.
This week, we cover El Salvador, September’s seasonality, the Fed, and recent economic data.
El Salvador
The highly anticipated launch of bitcoin as a legal tender in El Salvador was met with both celebration and speed bumps as the government-sponsored Chivo wallet required a back-end update to increase capacity. Despite these issues, El-Salvadorians signed up to receive $30 USD in bitcoin and immediately began using newfound money for purchases at Starbucks, McDonald's, and many other businesses offering bitcoin as payment. While investors across the globe “sold the news”, fundamentalists see this as a major milestone and use-case of bitcoin as both a medium of exchange and unit of account. It’s likely that other countries have a close eye on El Salvador’s progress.
Seasonality Strikes
Bitcoin has declined an average of 10.4% in September for the last four years, coinciding with the current month-to-date performance of -4.1% (as of Sunday’s close). While not unusual for risk assets to experience profit-taking and rotation in preparation for Q4, this year had catalysts such as El Salvador speedbumps, the failure to hold $50,000, and potential tapering as near-term firepower for bitcoin bears.
While September often struggles, the month also provides an opportunity for long-term investors to gain exposure. October, November, and December have averaged 23.7%, 6.0%, 25.2% in the last five years, and we illustrate monthly performances for bitcoin below:
Fed Up with the Fed
Last week news broke that regional Federal Reserve Presidents Kaplan and Rosengren day trade at the same time they influence asset prices, inflation, and standards of living for all Americans. Dallas Fed President Robert Kaplan has traded S&P 500 Futures with size greater than $1 million per trade and owns 27 other holdings worth more than $1 million, while Boston Fed President Eric Rosengren has traded stock in companies such as Apple, Alibaba, and Tesla for example, and actively trades real estate investment trusts. Ironically, the two announced they will no longer trade during their time as regional Fed Presidents, just as the Federal Reserve is likely to communicate the beginning of a reduction in bond-buying programs. Frustrated with this reality, both traditional and bitcoin investors take note: centralized decision-making is headed in the wrong direction.
Recent Economic Data & CPI
Non-farm payroll numbers for the month of August increased 235,000, missing estimates of 733,000. The potential for slower economic growth with higher inflation has created some whispers of stagflation, particularly as central banks look to reduce bond-buying programs. With the ECB announcing a slight reduction last week (PEPP to 60-70bn EUR per month from 80bn), the Fed is likely to announce their plans by year-end.
Tuesday morning, the BLS reported an expected 5.3% year-over-year increase in headline CPI for the month of August, with core CPI up 4.0% vs. 4.2% estimates. Month-over-month, headline grew 0.3% vs. 0.4% estimates while core rose 0.1% vs. 0.3% estimates. While this "slowing" of inflation is likely due to delta-variant, it could be a reason for a delay in tapering timelines. Current expectations are for tapering to begin by December, and the Fed's ability to navigate this environment will be a major focus for many market participants.
Going Forward
In the coming months, investors will learn whether inflation and tapering have any effects on risk assets and thus, the performance of bitcoin. For now, we’d say the momentum behind financial integration and institutional adoption remains forefront, with education, awareness, and accessibility a significant driver of demand. $50,000 as support would be a major milestone in bitcoin’s history and is likely to require fundamental and macro catalysts to the upside, which could come in the form of announcements from sovereign governments and/or institutions, unexpected inflationary changes in monetary and fiscal policies, or better regulatory clarity.
As always, please reach out with any questions or comments.
Stay Tuned,
Joseph Orsini, CFA
Director of Research
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.
