Click here to download full report.
Digital asset participants await positive catalysts to arrive as the year comes to an end; markets remain at a standstill with bitcoin around $17,000 and ether around $1,250.
- Another quiet week with little contagion or catalyst news flow; bitcoin was flat while ether declined 0.9% by Sunday’s close
- The broader market now awaits the November CPI report and the Federal Reserve’s December announcement, with the expected 50 basis points to come on Wednesday, a decline from the recent historically large 75 basis point hikes
- While this year has been a tough year of monetary tightening, we illustrate bitcoin’s performance versus the ebbs and flows of monetary policy and money supply
Another quiet week for digital assets and a tight range of performance, with bitcoin returning a flat 0.0% while ether declined a marginal -0.9%.
These tight ranges for bitcoin and ether come even as the S&P 500 posted its “worst” week since late September with a loss of -3.4% by week-end. The flagship equity index rallied from a closing October low of 3,577 to a November high of 4,080 but has since pulled back from its 200D moving average and ahead of key economic data this week.
Within digital assets, the focus remains on contagion risk – and any forced selling this may bring. But one month after the FTX bankruptcy filing, not much unexpected news has hit the tape, and as a result, markets have yet to see another leg lower.
Bitcoin, by the end of the week, traded just 3.7% below it’s June low, while ether remains 40.1% above the capitulatory lows that occurred six months ago.
So even as equities pulled back, digital assets were unaffected by such performance. Given the events that have unfolded this year, it’s possible that those that plan to sell, already have. If it’s not because the fastest pace of tightening since 1981 or the collapses of major crypto institutions, what else would they be waiting for?
And this is likely why there hasn’t been much follow-through to the downside since the initial FTX news. Last week we discussed the historic on-chain losses for bitcoin investors as a percentage of market capitalization – approximately 5.3%. This, alongside the realized losses of 5.7% of bitcoin’s market cap that occurred in June highlight the selling that has already taken place this year. It’s likely something big would have to occur for another capitulatory move lower.
But, if no news is good news as we said last week– what can bring digital assets back?
To us, no more bad news is likely enough good news for now. Sentiment is sour, broader confidence has weaned, and many are expecting more negative news. But fear of negative news doesn’t necessarily mean this type of news arrives.
And if equities continue their rally higher, eventually, a relative trade into bitcoin and digital assets should occur, particularly as the group remains significantly off their highs. Of course, improving sentiment around risk assts would benefit digital assets as well.
This week’s November CPI report, while unlikely to change the Fed’s expected 50 basis point rate hike, may impact the tone of Chair Powell through his Q&A session. Should inflation continue to illustrate its slow-but-steady decline lower, markets may certainly rally on a better-than-expected macro environment.
We’ve already seen a significant and beneficial pullback in the two largest overhangs to risk assets – the stampede higher in both the dollar and yields. These moves, alongside the rally in gold (8.3% in November), suggest that the Fed is closer to the end of its tightening cycle than the beginning.
And of course, this is likely the case. With the current Federal Funds Upper Bound Target at 4% and a peak 5% expectation, Wednesday’s likely 50 basis point rate hike brings the market ever-so-closer to the end of this historically large tightening schedule.
Given the significant headwinds this path of normalization has created for risk assets, market participants certainly await the eventual peak in Fed policy and hawkishness. We look forward to what this likely means for digital assets in the months ahead.
Monetary Policy Becoming More Certain
As we often discuss, the rapidly changing expectations of the Federal Reserve’s process of normalization has been a large headwind to risk assets for nearly all of the 2022 year.
Nearly every month of this year has had tightening expectations jolt higher, causing significant uncertainty around where Fed policy may land. As we believe, this uncertainty is more meaningful to market pricing than the level thereof, as it hinders corporate and investor ability to plan for the future.
But recently, and particularly since October, market expectations have remained largely the same for 2023, supporting the equity rally we’ve seen in recent weeks. Expectations for cuts in 2024 have also ticked up.
If Wednesday’s FOMC meeting leaves market expectations for Fed policy relatively unchanged (or even with a bias lower), the slow-but-steady resurgence of risk appetite may continue – again, likely supporting digital assets.
Bitcoin and Global Money Supply
For those looking for a positive catalyst, we point out bitcoin’s response to the ebbs and flows of global money supply. As we see, bitcoin often declines through monetary tightening but benefits from monetary easing.
We can see this interaction between the growth of global money supply and the performance of bitcoin in the chart to the right.
When viewed in this manner, we understand that this year’s bitcoin performance fits within the realm of monetary tightening. But as we know, such cycles occur, and ultimately, tightening lends itself to easing.
Similar to the easing cycles in the past - this should benefit digital assets.
With the Fed nearing its peak terminal rate and other central banks beginning to show signs of dovishness, this easing cycle (or even, less tightening) may be closer than many imagine. Global money supply has already begun to tick higher, even without yet the Federal Reserve’s “pivot.
Click here to download full report. As always, please reach out with any questions or comments.
Joseph Orsini, CFA, CMT
Vice President of Research
Investment advisory and management services are provided by Eaglebrook Advisors, Inc., a registered investment advisor. Information presented is for educational purposes only and should not be construed as providing investment advice. Past performance is no indication of future results. Investing in digital currency comes with significant risk of loss that a client should be prepared to bear, including, but not limited to, volatile market price swings or flash crashes, market manipulation, economic, regulatory, technical, and cybersecurity risks. In addition, digital currency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. Eaglebrook does not offer tax advice. Neither consultations nor information published by Eaglebrook should be construed as offering or providing tax advice.
Volatility Risk: Digital currency is a speculative and volatile investment asset. Investors should be prepared for volatile market swings and prolonged bear markets. Digital currency can have higher volatility than other traditional investments such as stocks and bonds and market movements can be difficult to predict.
Economic Risk: The economic risk associated with digital currency is in the lack of widespread or continuing digital currency adoption. The market and investors could decide that digital currency should not be valued at the current market capitalization due to a variety of factors.
Regulatory Risk: Digital currency could be banned or highly regulated by governments that would deter investors from buying or holding digital currency.
Technical Risk: Digital currency is a dynamic network with a codebase that is updated to add new security and functionality features. The updated code that is merged by the core developers could potentially have an error that threatens the security or functionality of the digital currency network.
Cybersecurity Risk: Digital currency exchanges and wallets have been hacked and digital currency has been stolen in the past. This is a potential risk that clients must be comfortable with when investing and holding digital currency. Theft is less likely when holding digital currency at a qualified custodian in offline systems (cold storage) with institutional security and controls.
The indexes presented are unmanaged portfolios of specified securities and the performance shown is gross of fees which do not reflect any initial or ongoing expenses. Indexes cannot be invested in directly. Returns for digital assets may differ significantly from the returns of indexes which hold securities. Returns are for the time periods shown.
There are significant limitations in the comparison of cryptocurrencies, notably Bitcoin, to fiat currencies and therefore the comparison of Bitcoin to fiat currencies in the presentation above is for presentation and discussion purposes and does not imply that Bitcoin is comparable to fiat currencies. The information presented should not be relied upon as a recommendation to invest in Bitcoin or any cryptocurrency and should not serve as an indication of the future value of Bitcoin.
Fiat currency is issued and backed by a government and is largely stable and controlled. Through legitimate monetary policy, central banks determine the amount of money in circulation and when to increase or decrease the supply, which in part affects the value and price of fiat currency.
Cryptocurrency, on the other hand, is decentralized by nature and does not have a central authority governing it. The price of cryptocurrencies is determined by several external factors may including, but not limited to: supply and demand, investors’ expectations with respect to the rate of inflation, interest rates, currency exchange rates or future regulatory measures (if any) that restrict the trading of a cryptocurrency or the use of a cryptocurrency as a form of payment. Values of cryptocurrencies have historically been highly volatile, experiencing periods of rapid price increase as well as decline.
There is no assurance that a crypto currency will maintain its long-term value in terms of purchasing power in the future, or that acceptance of Bitcoin payments by mainstream retail merchants and commercial businesses will continue to grow. Bitcoin and other cryptocurrencies are not endorsed or guaranteed by any government, are not FDIC or SIPC insured, are very volatile, and involve a high degree of risk. Consumer protection and securities laws do not regulate cryptocurrencies to the same degree as traditional brokerage and investment products.
BGN, Bloomberg Generic Price: A real-time composite based on quotes from multiple contributors that provides a market indication of where assets are priced. BGN uses both executable and indicative pricing, depending on the type of quotes available in the marketplace at the time of pricing. This methodology is used for bitcoin and ether.
The S&P 500 Index is an unmanaged value-weighted index of 500 common stocks that is generally considered representative of the U.S. stock market. The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency). The ICE U.S. Dollar Index is a geometrically-averaged calculation of six currencies weighted against the U.S. dollar. The Gold Spot price is quoted as US Dollars per Troy Ounce. Bloomberg's spot crude oil price indications use benchmark WTI crude at Cushing, OK ; and other U.S. crude oil grades trade on a price spread differential to WTI, Cushing. The Volatility Index (VIX) shows the market's expectations of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. The VIX is a widely used measure of market risk. ARK Innovation ETF is an actively managed exchange-traded fund incorporated in the USA. The Fund will invest in equity securities of companies relevant to the theme of disruptive innovation. Relevant themes are those that rely on or benefit from the development of new products or services in scientific research relating to Genomics Revolution, Web x.0, and Industrial Innovation. iShares MSCI USA Momentum Factor ETF is an exchange traded fund incorporated in the USA. The Fund seeks to track the performance of an index that measures the performance of U.S. large and mid capitalization stocks exhibiting relatively higher momentum characteristics, before fees and expenses. Invesco S&P 500 High Beta ETF is an exchange-traded fund incorporated in the USA. The Fund tracks the S&P500 High Beta Index which consists of the 100 stocks from the S&P500 with the highest sensitivity to market movements, or beta, over the past year. The index is designed for investors initiating a bullish strategy or making a directional bet. The Fund is rebalanced quarterly. iShares Russell 2000 Value ETF is an exchange-traded fund incorporated in the USA. The ETF tracks the performance of the Russell 2000 Value index and holds small cap US equities focused on low price to book ratios and lower forecasted growth. Its investments are primarily focused in the consumer discretionary, financial and industrial sectors. The ETF uses a representative sampling approach. iShares Russell 2000 Growth ETF is an exchange-traded fund incorporated in the USA. The ETF tracks the performance of the Russel 2000 Growth Index and invests in over 1000 small cap US equities across all sectors. The ETF weights its holdings using a representative sampling indexing strategy, generally investing at least 90% of its assets in the underlying index. US Breakeven Rates: The rates are United States breakeven inflation rates. They are calculated by subtracting the real yield of the inflation linked maturity curve from the yield of the closest nominal Treasury maturity. The result is the implied inflation rate for the term of the stated maturity. The MSCI Em (Emerging Markets) Index is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI EAFE Index is a free-float weighted equity index. The index was developed with a base value of 100 as of December 31, 1969. The MSCI EAFE region covers DM countries in Europe, Australasia, Israel, and the Far East. The MSCI US REIT Index is a price-only index, which MSCI began calculating on June 20, 2005. Previously, this index (then known as the Morgan Stanley REIT Index) was calculated and maintained by the AMEX. The AMEX began calculating the index with a base level of 200, as of December 30, 1994. Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. Roll period typically occurs from 6th-10th business day based on the roll schedule. Standard and Poor's 500 Information Technology Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.