Market Commentary
Market Commentary: Clues
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Tuesday, July 12, 2022

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Bitcoin and ether rallied 8.0% and 8.7% respectively on the week despite a small weekend pullback; the market looks to inflation and sentiment data this week for clues into the tough economic environment.

Key Takeaways:

  • Bitcoin and ether rallied 8.0% and 8.7% in the week ending Sunday, July 10th. Whether “good news is good news” or “good news is bad news,” we receive key inflation and consumer data this week
  • The DXY Index continues to move higher, a headwind for digital asset investors based in the U.S.
  • While we may not yet be out of the water, we assess the trajectory of bitcoin’s bounces from major lows. As some have commented on the weak action since June 18th, we point to similar 2015 and 2018 bottoms
  • Despite price weakness, bitcoin is on pace for 36% growth in transfer volume for the 2022 year

THE BIRD'S EYE VIEW

Bitcoin and ether rallied 8.0% and 8.7% respectively in the week ending Sunday, with a small weekend pullback in preparation for key inflation and sentiment data to be reported this week.

This now improves performance for the month of July to 12.0% and 16.5% for bitcoin and ether, respectively, as the S&P 500 has gained 3.1% and the Nasdaq Composite up 5.5% month-to-date as well.

With last week’s holiday-abridged week and summer trading in full effect, investors have certainly looked ahead to this week’s flurry of economic data, including:

  • Consumer Price Inflation (CPI) on Wednesday
  • Producer Price Inflation (PPI) on Thursday
  • Retail Sales, Industrial Production, and University of Michigan’s Consumer Sentiment on Friday

Of course, the uncertainties related to whether “good news is good news” or if “good news is bad news” certainly impacts investors’ ability to handicap this economic data. As we remember, May CPI (reported on 6/10/2022) surprised to the upside, sending risk-assets in a spiral lower on expectations that the Federal Reserve will act more aggressively than originally planned. This turned out to be true as the Federal Reserve then hiked 75 basis points days later in the June FOMC announcement on June 15th.

Since then, rate hike expectations have come down significantly. Even with an 8.8% year-over-year estimate for headline CPI in the month of June, the market’s expectations for a peak policy rate have declined from the 3.9% expected on June 14th to now 3.5% expected for the February ‘23 meeting.

These expectations of less aggressive hikes have provided support for risk assets as of recent. Contrary to some “inflation hedge” narratives, we’ve recently discussed why we believe lower inflation will ultimately benefit digital assets in this current environment as this could bring a resurgence in risk-appetite.

And so, all eyes are on this week’s economic data. Will investors continue to price in less rate hikes than originally feared, and if so, how does this impact sentiment and pricing? Currently, futures imply a 75bp rate hike at the July 27th meeting as well as a 50bp hike on September 21st.

BITCOIN AND THE DOLLAR

The dollar has continued to strengthen with the DXY Index now up 11.9% year-to-date, reflecting both the dollar’s safe-haven status as well as the Federal Reserve’s more hawkish tilt when compared to central banks in other developed and emerging markets across the world.

While a strengthening dollar impacts performance for U.S. based investors, bitcoin is a global asset. When considering bitcoin’s returns against other currencies around the world, performance isn’t “as bad.” We illustrate bitcoin’s returns versus other major currencies of Sunday’s close, with non-US investors having fared better than those stateside:

While the dollar strength for now has been a headwind to U.S. investors, dollar weakness in the past has helped bitcoin rally. We point to two periods of significant dollar weakness (-14.2% from 12/28/2016 to 2/15/2018 and -13.0% from 3/20/2020 to 1/5/2021), in which bitcoin rallied 920.7% and 465.9% in the same period.

COMPARING BOTTOMS

As we often note, bitcoin has experienced several drawdowns in its 13-year history.

Those that were 70% or more from closing highs include 11/18/2011, 1/14/2015, 12/14/2018, and most recently, the 6/18/2022 low.

When assessing the trajectory of the subsequent bounces after the lows are in place, we see bitcoin has had both v-shaped recoveries (2011, 2020) as well as bottoming processes (2015 and 2018).

While some may be discouraged by the smaller magnitude of bitcoin’s bounce from closing lows of $17,786 on June 18th (Bloomberg data), the 2022 low is similar to that seen in 2015 and 2018, with bitcoin up around 20% in the 20 days following the low.

Whichever the trajectory, bitcoin’s 360D returns from these major bottoms include 437% after 2011, 147% after 2015, 133% after 2018, and 1,074% after 2020.

While we may not yet be out of the water, the lows for now were put in place on June 18th. We continue to follow the trajectory of the bounce for signs of a sustainable path towards recovery.

BITCOIN TRANSFER VOLUME

We often comment on improving holding trends, address growth, and hash rate as key fundamentals to consider when assessing bitcoin’s performance through this tough macro environment.

Here, we illustrate strengthening fundamentals through greater use of the Bitcoin network, with total volume transfers (in USD) on pace for 36% year-over-year growth in 2022 (as per Glassnode data).

In a year in which price has declined ~55%, this increase in total USD volume highlights significant growth in the amount of bitcoin transferred. Glassnode data illustrates 289.4 million bitcoin have already been sent and received this year, outpacing the amount of bitcoin transferred for all of 2021 (275.4 million).

With bitcoin on pace to transfer $17.8 billion in 2022, it’s hard to believe that crypto is, in fact, “dead.”

The fundamentals continue strengthen despite weakness in price action.

Click here for the full PDF. As always, please reach out with any questions or comments.

Stay tuned,

Joseph Orsini, CFA
Vice President 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.

About Eaglebrook Advisors
Eaglebrook is a tech-driven investment manager specializing in bitcoin and digital assets. The firm offers various Bitcoin and Digital Asset SMAs serving financial advisors, registered investment advisors (RIAs), family offices, and institutions. Eaglebrook is backed by wealth management executives and institutions.
For more information, please contact us at +1 (202) 798-1880 or send an email to contact@eaglebrookadvisors.com.