Market Commentary
Market Commentary: Awaiting
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December 13, 2022

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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.

Key Takeaways

  • 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.

Stay tuned,

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.
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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.
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