Click here to download this article.
Risk assets rallied last week with a slight change in negative perspectives; whether there is more to uncover with overleveraged crypto market participants, we’re encouraged by news of support for Voyager and BlockFi.
- A positive week for risk assets, with bitcoin +3.8% and ether +9.4%, alongside the S&P 500 and the Nasdaq Composite’s gain of 6.4% and 7.5%, respectively
- Whether or not the dust has settled with overleveraged crypto market participants, we’re encouraged by FTX’s support for Voyager and BlockFi
- We point out that a decline in inflation expectations in this environment is likely positive for bitcoin and provide forward returns for various levels of Crypto Fear and Greed Index levels on page 2
THE BIRD'S EYE VIEW
Last week, market participants experienced a change from the norm as risk assets rallied on a feeling of relief as inflation expectations eased throughout the week.
With concerns over the Fed’s ability to curtail four-decade high inflation taking much of investors’ focus, Fed Chair Powell’s commitment in the Senate Banking Committee alongside some weakness in commodities and a revision “to the good side” on University of Michigan’s inflation expectations survey all provided reason for positivity.
Further support came on Friday, as St. Louis Fed President James Bullard (one of the more hawkish Fed officials) said worries over a recession are “overblown.”
Naturally, this combination of a recommitment by Chair Powell, some signs that inflation is easing, and the possibility of soft-landing resulted in a strong week for risk assets, with Friday as the best one-day performance (+3.1%) for the S&P 500 since May of 2020. On the week, bitcoin rallied 3.8% and ether rallied 9.4% versus the S&P 500’s gain of 6.4% and the Nasdaq Composite’s of 7.5%.
While digital assets have bounced quite well from their closing lows on June 18th (bitcoin +20.3% and ether +38.1% as of Sunday’s close) concerns related to Celsius, Three Arrows Capital (3AC), and centralized lending in general have likely caused some investor hesitation to “jump back in” given the chance there is “more to uncover.”
But whether or not the “dust has settled”, some encouraging news crossed the tape last week. FTX, a well-known digital asset exchange led by Sam Bankman-Fried, has offered Voyager Digital a $500 million line of credit as the firm awaits the unlikely repayment of a ~$670 million loan from 3AC. FTX has also offered BlockFi a $250 million line of credit to help stabilize the balance sheets of these large crypto lenders.
We’ve also heard on Monday of this week that Goldman Sachs is interested in brokering a $2 billion fundraise to purchase Celsius assets if the firm were to go bankrupt.
So, one of the most prominent crypto exchanges and one of the most prominent traditional financial institutions have found opportunity amidst the declines of these overleveraged institutions. To us, it’s unlikely this would occur if crypto were, in fact, “dead.”
And with inflation expectations easing a bit last week (we do note that May’s PCE deflator report comes Thursday the 30th), some risk-appetite has returned. The growth and tech-heavy Nasdaq Composite, ARK Innovation, and large-cap high-beta factor have rallied 9.0%, 25.3%, and 9.5% from their respective lows, which we track on pg. 3.
Time will tell whether this is a bear market bounce or the beginning of a “not all that bad rally.” But as we’ve mentioned in the past, we expect the bottom in digital assets to occur at a similar time to the bottom in equities.
For now, investors can utilize bitcoin’s $20,000 as psychological support, with a closing low reference of $17,785, as well as ether’s psychological support of $1,000 versus its closing low of $881.
INFLATION & HIKE EXPECTATIONS
Several metrics that track inflation and inflation expectations have moved lower in recent weeks, such as weakness in commodity futures (crude -11.9%, wheat -15.5%, copper -17.9% from June highs, for instance) and US breakevens (2yr -66bps, 5yr -32bps, 10yr -21bps from June highs). Last week, we also saw final revisions for Umich’s inflation expectations survey miss initial estimates (5-10yr Ahead 3.1% vs. 3.3%, and 1yr Ahead 5.3% vs. 5.4%). This has been cited by some as a reason for the broader risk-asset rally last week.
But are declining inflation expectations ultimately good or bad for bitcoin?
First, we’ve recently explained why we believe bitcoin is a better protector against monetary inflation than price inflation, given its hard-coded fixed supply structure of 21 million coins.
But another question is if price inflation expectations retreat meaningfully, how do we expect bitcoin to perform? To us, rampant price inflation seen in the United States and developed markets today (which has driven interest rates recently higher) and the view that the Fed and global central banks are unable to tighten correctly (which has led to calls for a hard-landing) are leading culprits for the reduction in risk-appetite across the board (which has included bitcoin and digital assets.)
If both inflation expectations and inflation were to ease, the Fed can step back from one of the most aggressive tightening policies in quite some time. This can bring a resurgence in risk-appetite, which is likely to include investment in the emerging digital asset class.
We believe bitcoin’s returns are driven by longer-term secular trends towards digitalization, technology, changing investor preferences, populism, and demographics, as illustrated through the many years of adoption and positive price returns through low inflationary periods.
As we know, ultra-low interest rates over the last decade have supported appetite into growthier risk-assets. The implied rate for February 2023 has declined from 3.9% to 3.5% in recent weeks, and interest rate probabilities illustrate expected cuts from the Fed in 2023.
CRYPTO FEAR & GREED INDEX
Last week we discussed bitcoin’s large deviation from its longer-term trend through 1) its distance from its 200D moving average, and 2) the market value to realized value multiple, both of which are at levels that have occurred very few times in bitcoin’s history.
This week, we revisit the Crypto Fear & Greed Index, which provides investors with an understanding of current market sentiment and is often used as a contrarian indicator for long-term investors.
Currently, the crypto-index is in “Extreme Fear.” To the right, we see that these periods have historically been attractive for long-term position building.
We can also see the difference between short and long-term performance. Average forward 3-month returns are the largest for periods that read “extreme greed,” while 12- and 18- month returns are better in “extreme fear” (we also note that neutral does well in most periods).
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.