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A tough first half for markets has participants looking forward to the turn of the year; “halftime” could offer a new perspective on the same macro thematics
- A tough first half across the board as bitcoin and ether declined -59.6% and -72.6%, while the S&P 500 and the Nasdaq Composite fell -20.0% and -29.2%. Fixed income provided little protection to investors, with Barclays Agg down -10.3% while the dollar has remained a headwind, gaining 9.4% from the start of the year
- We highlight six weekly commentaries that discuss our views on key thematics from the second quarter
- We assess bitcoin’s improving fundamentals despite a rough start to the year, and discuss entity, miner, and exchange balances on page two
THE BIRD'S EYE VIEW
The first half of the 2022 year has officially come to an end, with both risk assets and fixed income down in an incredibly tough time for global markets. While the first quarter of the 2022 year wasn’t “all that bad” with bitcoin -1.2%, ether -10.5%, S&P 500 -5.0%, and Nasdaq Composite -9.1%, the second quarter was much different: bitcoin lost -59.1% and ether declined -69.4%, while the S&P 500 and the Nasdaq Composite lost -16.5% and -22.4% respectively.
It goes without saying that the market has had tough time navigating the Fed’s process of normalization. A series of mishaps have reduced confidence in the group of policymaker’s ability to curtail four-decade high price inflation, and markets have certainly acted with a “tantrum” type attitude for much of this year. Starting from “transitory” in 2021, the Federal Reserve quickly acted more aggressively than expected, raising 25bps in March and 50bp in May while taking the possibility of 75bps off the table. Then, just six weeks later, the Fed hiked 75 basis in the June meeting.
This set the stage for one of the worst first halves in quite some time: the S&P 500’s worst start since 1970, bitcoin and ether’s worst start since inception, and treasury bonds worst performance since 1788. A look at year-to-date total returns illustrates the global rout that’s occurred across markets:
As this macro volatility has resulted in higher correlations, bitcoin and ether have performed nearly lockstep with traditional equities. However, two specific events such as the collapse of Luna / UST in early May and the solvency concerns of lenders and hedge funds in June, are key culprits for the significant digital asset underperformance versus expectations.
While global monetary policy and the potential for a soft or hard landing remains forefront of investor focus, several metrics that track inflation and inflation expectations have moved lower by the end of the quarter. These include some commodity futures (such as crude -13.4%, wheat -20.5%, copper -18.4% from June highs) and US breakevens (1yr -122bps, 2yr -112bps, 5yr -55bps, 10yr -44bps from June highs).
As a result, market participants have quickly priced in less financial tightening than originally feared. Traders now expect a peak policy rate of 3.3% in February of 2023, down from the 3.9% expected on June 14th,, as well as two rate cuts in 2023 with an expected policy rate of 2.6% by the end of next year. As we wrote last week, we believe lower inflation expectations are good for bitcoin and digital assets in this particular environment.
As investors must now determine whether “good news is good news, or good news is bad news” when it comes to Fed policymaking, the negative impact of their subjectivity this year continues to highlight the importance of bitcoin’s objective monetary policy. We also point to our weekly titled “questions” where we answer many questions we’ve received from clients.
We note that the SEC has rejected GBTC’s spot ETF application for the same reasons spot ETFs have been denied for many years now: the lack of a surveillance-sharing agreements with a regulated market of significant size. The SEC’s response to GBTC is very similar to their response to VanEck back in November, which we analyzed here. As a result, GBTC continues to trade at a near-record discount of 31%.
We discuss improving fundamentals despite price weakness and dissect changes in entity balances on page two.
BITCOIN’S PERFORMANCE COMPARED
Bitcoin has experienced the worst start of the year in its history (full-year pricing data began 2011), with the asset down 59.6% year-to-date in the first six months.
While we continue to comment on the broader macro-specificity of this decline, it’s ironic to us that in a year with strengthening fundamentals, performance is the worst it’s ever been. Despite the tough macro picture, some positive developments that have occurred this year:
- Improving regulatory structure with President Biden’s Executive Order and a new foundational framework from the Lummis/Gillibrand bill
- Continued financial integration with digital assets part of the conversation for long-term strategic asset allocations
- Lightning network growth, with new highs in capacity and nodes and news of retail integration with major companies
- Record highs in bitcoin’s hash rate, or the computing power used to mine and secure bitcoin
- Record highs in average transaction size ($190k) and average daily transfer volume ($48bn), with annual transfer volume on pace for $17.9T (or 39% growth from 2021)
- Record highs in holding trends, with 37.9% of bitcoin supply held longer than three years and 23.6% held longer than five years
ON-CHAIN BUYER AND SELLER ACTIVITY
As we assess on-chain buyer and seller activity throughout the first half of 2022, we see that small entities have accumulated, while large entities have distributed, which is expected in a volatile macro period.
According to Glassnode data, those owning less than 10 bitcoin have increased their stack by 314,460 bitcoin this year, for a total of 2,886,816 by the end of Q2. This group experienced a record uptick in holdings for the month of June (+119,320), reflecting continued adoption of smaller investors across the world, particularly as prices moved lower. On the contrary, large investors with more than 1,000 bitcoin have sold a total of 217,094 bitcoin this year, likely reflecting changes in positioning amid concerns over the macro-environment. The group owns 9,332,731 total bitcoin.
Despite news headlines mentioning the sales of bitcoin by public miners such as Core Scientific (sold 7,200 bitcoin) and Bitfarms (sold 3,000 bitcoin), Glassnode’s miner balance data shows outflows in May (~3,714 bitcoin) but inflows in June (+2,735 bitcoin). Miner balances have remained largely the same this year, up just 0.02% from six months ago.
With an increase in education around the importance of self-storage, June experienced record outflows from exchanges (124,651), decreasing available exchange supply to 2.42 million.
Click here for the full PDF. As always, please reach out with any questions or comments.
Joseph Orsini, CFA
Vice President of Research
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.