Market Commentary
Market Commentary: Lock Step
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Tuesday, April 19, 2022

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Bitcoin and digital assets decline despite another four-decade high in US inflation, as correlations with the Nasdaq continue to hold digital assets hostage to near-term price action.

Key Takeaways:

  • Last week, the Bureau of Labor Statistics reported March headline CPI at 8.5% YoY, another four-decade high
  • As the Fed attempts to combat inflation, subjective monetary policy and the perception of another “policy error” reminds those that bitcoin is an alternative to central bank decision making
  • We discuss correlations with the Nasdaq: as rates move rapidly higher, correlations explain why bitcoin and digital assets remain hostage to the “tech tantrum”
  • We offer many reasons as to why we believe current levels are attractive for long-term investo

THE BIRD'S EYE VIEW

Last week, the Bureau of Labor Statistics reported another four-decade high in US price inflation, with headline at 8.5% year over year and core at 6.5% year over year. This was on the back of news that the Fed will likely begin balance sheet run-off of $60 billion in Treasuries and $35 billion in Mortgage Backed Securities per month, and many investors now believe the Fed can no longer achieve a “soft landing.”

As a result, markets have remained volatile, and while the Fed combatting inflation is certainly a positive, nobody trusts the Fed and (almost) everyone is now calling for a recession.

But that’s what the Fed gets with subjective and discretionary monetary policy: the group of policymakers waited too long to act on inflation that exceeded their 2% target, and the group masked quantitative easing behind the words “transitory,” “supply chain,” and “average inflation targeting” until March of 2022. The Fed took a calculated bet, and as always, investors believe they made another policy mistake.

So, while bitcoin continues to be correlated with tech equities, to us, it’s not necessarily a bad thing in this uncertain environment. We point out on page two that this provides investors and traders with an understanding of price action.

What’s more important, is the long-term benefit for bitcoin as the Fed attempts to navigate what many are already calling a policy error. While central banks utilize subjective discretion for policy decisions, bitcoin is objectively a hard-coded and scarce asset.

The younger generation’s growing distrust in governments and central banks bodes well for bitcoin’s adoption, which continues despite swings in price action. In fact, small owners of bitcoin continue to accumulate, voting with their pockets as they feel the brunt of rising prices for food, gas, and rent:

Since the beginning of the year, accounts holding 0.01 to 1 bitcoin have added over 80,000 bitcoin to their stack, which is slightly over $3bn based on yesterday’s prices. While price action has been held hostage by the rapid rise in interest rates and high correlations with growth and technology, underlying adoption has continued. This to us is another signal that the pullback is macro specific.

So, where do we go from here? Well, if the Fed can manage a soft landing, today’s concerns are overdone and there is an attractive opportunity to buy the dip at today’s prices. On the other hand, the Fed can induce a hard landing in which equities remain in a drawn-out correction, and bitcoin remains correlated with the group until further awareness of its use-cases provide reason for decoupling.

As you may see, we don’t mind today’s higher correlation with the Nasdaq in these uncertain times. As we often say, “History doesn’t repeat itself, but it often rhymes” – this very environment has been experienced by markets many times, over many decades. Each time, long-term investors have been rewarded for maintaining conviction and holding in the face of uncertainty.

CORRELATIONS RISE AMIDST HIGHER RATES

As focus on the Fed’s process of normalization heats up, correlations continue to rise. The 10yr treasury has risen 58 basis points just in the month of April to now a three-year high of 2.83%, and investors in growth and technology have certainly taken note.

With greater inclusion in traditional, hedge fund, quant, and systematic strategies, the 90D correlation between bitcoin and the Nasdaq has reached all-time-highs of 0.65. Month to date, the tech and growth-heavy Nasdaq has declined 2.8%, while bitcoin has declined 3.5%.

We continue to publish our “tantrum table” on page three to illustrate the lock-step moves of bitcoin, ether, and risk assets in this rapidly changing rate environment.

While rising correlations are not ideal, bitcoin is still a diversifier at a 0.65 correlation, particularly when considering the S&P 500 & the Nasdaq’s 90D correlation of 0.96.

PRICE ACTION UPDATE

As we often point out in our commentary, we believe these levels are attractive for long-term investors, with the year’s lows likely put in place in late January around the FOMC meeting. Since then, there have been more than enough headlines to derail the bounce that’s occurred (BTC +14.3%, ETH +28.4%), yet bears have had little success in creating a new downtrend. Reasons we believe these levels are attractive opportunities for long-term investors:

  • The risk asset pullback is now almost five months old with much of the decline behind us (crypto weathered the third worst Nasdaq bear market in the last decade)
  • Reduction in uncertainty around regulation and policy given President Biden’s executive order as a greenlight
  • No new lows despite bearish headlines, the potential for 50bp increments, an aggressive balance sheet run-off, and concerns over a “hard landing” all serving as bull signal vs. bearish noise
  • Significant uncertainty setting up for a “not all that bad” rally with attractive bitcoin valuations at 1.6x MVRV
  • Rising adoption and a healthy network hash rate
  • Growing investor education and institutional interest
  • Extreme fear in the market as illustrated by the Crypto Fear & Greed Index of 24 on April 18

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

Stay tuned,

Joseph Orsini, CFA
Director of Research

Key Market Data

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.