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Bitcoin, ether, and digital assets face the brunt of macro selling pressure as inflation and sentiment data sparks further concerns over the Fed’s ability to achieve a “soft landing”.
- Bitcoin, ether, and digital assets face the brunt of macro selling pressure as inflation and sentiment data sparks further concerns over the Fed’s ability to achieve a “soft landing” – markets are now pricing in a 75bp hike in the June (tomorrow the 15th) and July Fed meetings
- Within digital assets, concerns over the solvency of a large “CeFi” lender Celsius Network have emerged as the corporation pauses withdrawals, transfers, and trading given ‘extreme market conditions’
- This week, we offer our answers to many of the questions we’ve received from clients, with topics including inflation, a potential recession, the bottom, correlations, and fundamentals
THE BIRD'S EYE VIEW
And there we have it. Risk assets experienced increased selling pressure last week and into Monday’s trade as recent economic data has caused further concerns over the Fed’s ability to achieve a “soft landing.”
On Friday, May’s headline CPI reaccelerated to a new four-decade high with an increase of 8.6% y/y. It was no help to risk assets that just an hour and half later, University of Michigan Consumer Sentiment Index came in at an historic low of 50.2, the lowest point on record since creation in January of 1978.
In response, interest rates moved rapidly higher (2yr +25bps on Friday), while risk assets moved lower, and the S&P 500 and the Nasdaq Composite lost -5.0% and -5.6% on the week. Bitcoin and ether continued their decline over the weekend, ending at -8.6% and -18.5% by Sunday’s close.
With no let up on Monday, the 2yr treasury yield moved another 29bps (from 2.81% to 3.35% in two trading days), and risk assets experienced another down day with the S&P 500, the Nasdaq, bitcoin, and ether losing -3.9%, -4.7%, -15.1%, and -16.0, respectively.
And as a result of reaccelerating inflation and market volatility, participants now expect Fed Chair Powell to raise rates by 75bp in both the June (tomorrow the 15th) and July meetings.
After claiming that inflation was transitory for much of 2021, Fed Chair Powell told the market he would not need to go 75bps in his May 2022 meeting, and now, he is likely to raise the policy rate by that very number just six weeks later.
With confidence in the Fed rapidly deteriorating from already questionable levels, a 75bp increase may prove to market participants that the group of policymakers is, in fact, attempting to curtail four-decade high inflation. Powell needs to prove he is not a “do nothing” Chairman as it now appears participants would rather see him hike in an attempt to avoid a recession, rather than sit back and let inflation create one.
It is no surprise that bitcoin, ether, and digital assets have again faced the brunt of macro selling pressure, as the riskier assets often go first when portfolio managers deleverage.
But similar to the Luna situation in early May, losses for bitcoin and ether were exacerbated by concerns over the solvency of Celsius Network, one of the largest “CeFi” lending institutions in digital assets ($11.8 billion in assets on May 17th). Celsius has paused all withdrawals, transfers, and trades in response to “extreme market conditions”, but the lender is known for utilizing various DeFi protocols to gain leverage, borrow, and offer high yields to those seeking high interest rates.
In an already weak market, these concerns led to bitcoin breaking key psychological support of both $30,000 and $25,000, reaching a low of $22,603 before ending at $23,209 on Monday. Ether reached a low of $1,165 and closed at $1,240. This is the lowest for both bitcoin and ether since Dec ‘20 and Jan ’21.
So, all eyes are on the Fed with the damage that has been done. The S&P 500, the Nasdaq, bitcoin, and ether are now down 21.8%, 32.7%, 65.7%, and 74.2% from their 52-week highs, placing new lows on Monday the 13th. Fixed income has provided no support with Barclays Agg down 13.2% as well.
So, what do we do from here? Well, we recommend letting the dust settle before making any portfolio decisions. While this scary environment may test the conviction of many investors, selloffs such as the one occurring have happened numerous times in bitcoin’s history. Most recently, December 2018 and March 2020, which then experienced strong bounces for bitcoin, ether, and the broader ecosystem.
While negative sentiment remains extreme, markets over time have a way of sorting themselves out. Knowing what you own, why you own it, and how it’s expected to perform helps investors maintain conviction in the most difficult of market environments.
This week, we offer our answers to many of the questions we’ve received from clients through this recent volatility.
Isn’t bitcoin supposed to be an inflation hedge?
It depends. Bitcoin’s perception as an inflation hedge comes from its hard-coded, fixed supply structure of 21 million coins. This digital scarcity serves as protection against monetary inflation, or the sustained increases in money supply.
As we’ve seen recently, monetary inflation led to price inflation, and bitcoin rallied alongside inflation-sensitive assets in late Q4 2020 and throughout much of 2021. However, rampant price inflation seen in today’s environment often reduces risk appetite, and very few assets aside from maybe commodities and real estate can hedge against this type of inflation.
Are bitcoin and digital assets only a product of Fed liquidity?
Unlikely. Bitcoin and digital assets are supported by long-term secular trends such as digitalization, technology, demographics, and populism. These trends have supported adoption over the last decade and will likely continue to do so going forward. All that bitcoin requires is an internet connection, and technology and ease of access are significant tailwinds to bitcoin and digital asset adoption.
Cyclically, macro events such as monetary and fiscal easing accelerate adoption. These events include the multi-decade run of lower interest rates (which has increased risk appetite) as well as the increasing willingness of policymakers to provide fiscal and monetary stimulus (which has brought global money supply above $100 trillion).
`Bitcoin and digital assets are a product of adoption, which recent studies illustrate is growing faster than the internet did in its earliest stages. This opportunity for long-term investors is much larger than the cyclicality of Fed liquidity.
How low can bitcoin go?
While we have no crystal ball and there is never an all-clear signal, we’d expect the bottom in bitcoin to occur alongside the bottom in equities. If equities continue a downturn, it’s likely this selling pressure across digital assets can continue.
That being said, we’ve seen many times the ability for bitcoin to bounce off the lows. Most recently, in the six months following the December 2018 drawdown, bitcoin rallied 182.1% vs. the S&P at 25.3%. In the March 2020 drawdown to the end of that year, bitcoin rallied 352.0% vs. the S&P’s 67.9%.
One valuation metric that could signal a buying opportunity is the MVRV multiple, which compares bitcoin’s current market capitalization with the capitalization using the average on-chain cost basis. According to data from Glassnode, an MVRV multiple of less than one has occurred very few times in bitcoin’s history, each of which has proven to be a great buying opportunity:
- 2011, low MVRV of 0.39 on 10/19/2011
- 2012, low MVRV of 0.84 on 2/15/2012
- 2015, low MVRV of 0.55 on 1/14/2015
- 2018, low MVRV of 0.70 on 12/16/2018
- 2020, low MVRV of 0.85 on 3/12/2020
With on-chain cost basis of $23,214 by Monday’s close, bitcoin’s MVRV multiple was less than one at 0.97.
What happens to bitcoin in a recession?
While markets are not always in line with the economy and a recession is not always a crisis, broader risk appetite for now is important function of digital asset price advances. As volatility rises, correlations go to one, and we’d expect digital assets to mirror other risk assets through tumultuous times.
But in itself, bitcoin has no credit or counterparty risk, which is attractive in recessionary environments. The asset provides economic incentive to support the network through block rewards. Bitcoin is a very simple asset - a digital store of value and an emerging global payments system tied to the evolution of money.
We know that recessions often call for monetary and fiscal easing, which often drives risk assets higher - we’d expect this to benefit bitcoin and digital assets at that time as well.
Have long-term investors lost confidence?
We don’t believe so. Bitcoin and digital assets are long-term investments and should be treated as so. In our annual outlook, we mentioned the possibility of a long-drawn out equity bear market testing the conviction of crypto investors. This conviction is likely being tested at this very moment, with price levels not seen since December 2020.
While the growing narrative of a pending recession certainly impacts risk-appetite, on chain-data suggests holding trends have remained strong: according to Glassnode, a record 65% of supply has been held for longer than one year, and a record 38% of supply has been held for longer than three years. We know that most bitcoin investors have incredibly “strong hands” with the ability to hold through many cycles given long-term investment horizons.
Are high correlations here to stay? Are digital assets just tech+?
Unlikely. Digital assets have experienced rising correlations to growth and technology equities in these uncertain times. But while bitcoin is an emerging technology, the asset really is a digital store of value and global payments network. We’d expect it to ultimately trade more in line with those objectives in the future. As Ethereum is a platform for the new internet labelled Web 3.0, it relies on demand for underlying applications of stablecoins, NFTs, DeFi, gaming, and services, and thus, is more cyclical in nature. While ether should trade more in-line with technology, its different drivers of returns provide diversification benefits.
Have the fundamentals changed?
No. Bitcoin, ether, and digital assets are long-term investments that are supported by secular trends and accelerated by macro events. The evolution of money and the evolution of the internet will not go away in a bear market. Calls for the end of the internet in the dotcom bubble were proved to be ill-advised, and we believe a similar opportunity is now present with bitcoin and digital assets, particularly for long-term investors.
Those that can practice patience, maintain discipline, and remain convicted will likely be rewarded just as they have in the past.
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.