Market Commentary
Market Commentary: Reassurance
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October 25, 2022

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UK’s government shake-up and a hint of dovishness from the Fed offer reassurance to investors; bitcoin has officially surpassed its 2021 transfer volume, while ether post-Merge issuance highlights increased scarcity.

Key Takeaways

  • Stocks posted the best week of performance since late June, but digital assets haven’t participated: we dissect
  • Markets find some reassurance from the resignation of UK Prime Minister Liz Truss alongside a glimpse of Fed dovishness through a WSJ article
  • Bitcoin has transferred over $14 trillion in value this year, on pace for 32% year-over-year growth; ether’s annual supply inflation since the Merge is, in fact, 0.0%

The Bird’s Eye View

Last week offered investors a glimpse of optimism in a world of continued negative sentiment, with the S&P 500 and the Nasdaq Composite having posted the best weekly performance since late June.

Supported by a better-than-expected start to earnings season, the S&P 500 has now rallied 7.5% off the intraday lows that occurred after the hotter than expected CPI report on October 13th, as of Friday’s close.

Further contribution to last week’s rally was the shakeup in the United Kingdom, with Prime Minister Liz Truss resigning just six weeks after she took office.

This resignation was certainly the “markets wish”. Since the mini budget was announced on September 23rd, UK yields moved rapidly higher and the pound quickly lower, enough to cause room for significant concern. The Bank of England had to reinstate a period of asset purchases, despite their desire to both raise rates and undergo quantitative tightening.

But the resignation from Liz Truss reassured investors that fiscal policymakers in the United Kingdom, at least, are not blind to the fight against inflation. Truss’s tax cuts during a period of high inflation seemed to be “fuel to the fire” – and the markets did not appreciate this initiative.

In a similarly positive fashion, markets are also having their say in the upcoming United States midterm elections. Democrats – viewed as the “spenders” in Congress - are now seen to likely lose the Senate: in recent weeks, bettors have placed a 59% chance for Republicans to take over, up from the ~40% chance in September, as per PredictIt.

So, while in recent weeks it felt as if the Fed was alone in their fight against inflation, the clean-up in the United Kingdom and now voting probabilities in the United States may change that perspective.

To finish off the week, markets experienced a touch of dovishness through a WSJ article titled, “Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes,” written by renowned Fed-journalist Nick Timiraos, now dubbed “NikiLeaks”.

This article included quotes such as “The time is now to start planning for stepping down,” from San Francisco Fed President Mary Daly, and “We will have a very thoughtful discussion about the pace of tightening at our next meeting,” from Fed governor Christopher Waller.

Consider this: just one article from the WSJ was enough to reassure investors that the Fed could consider different paths of normalization than the “autopilot” mode currently priced in.

And this small taste of dovishness led to a significant rally on Friday, with the S&P 500 gaining 2.4% on the day and 4.7% on the week. This compares to bitcoin and ether’s gain of 0.8% and 1.6% on the day and 0.9% and 1.5% on the week.

So, what’s this mean for digital assets?

Sure, bitcoin and ether underperformed equities last week - but they’ve outperformed significantly in the second half of the year. Since June 30th, bitcoin and ether have gained 4.1% and 31.6% while the S&P 500 lost -0.4% and the 10yr treasury rose from 3.0% to 4.2%. All things considered, not too shabby.

In the big picture, bitcoin and ether continue to weather one of the toughest market environments in quite some time, showing resiliency and staying power despite price weakness. In fact, bitcoin has been less volatile than the S&P 500 in recent weeks – trading rangebound between $18.8k and $20.3k since late September - with a 10D annualized volatility of 16.1% versus the S&P 500’s 29.0% as of Friday’s close.

On page two, we discuss bitcoin’s record amount of transfer volume and ether’s increased scarcity post-Merge. Progress, not perfection.

Bitcoin Transfer Volume

On-chain bitcoin transfers have officially surpassed 2021’s total of $13.1 trillion, with now $14.0 trillion sent or received throughout the 2022 year. This excludes exchange trading volume.

This puts bitcoin on pace for ~32% year-over-year transfer growth in 2022, with an annualized estimate of $17.3 trillion by year-end.

The growing use of the Bitcoin network despite the bear market in price highlights the significant amount of adoption that has taken place throughout this year.

While it took four years for a new high in annual transfer volume post-2017, it took just one year this time around.

This illustrates bitcoin’s growing success as a payments system.

Ether Post Merge Scarcity

A big theme of post-Merge Ethereum is the smart-contract platform’s increasingly scarce supply in which new issuance has dropped dramatically after switching to proof-of-stake.

Now, Ethereum’s issuance reflects the amount of staked ether, rather than the traditional PoW “block reward”.

The results have been nothing short of significant: with a combination of proof-of-stake and the buyback mechanism, Ethereum has had a 0.0% inflation rate since the Merge took place on September 15th. Fifteen of these days since the Merge have been deflationary, reducing total supply by an average of 751 ether per day.

This significant improvement in Tokenomics should not be ignored, particularly as this is occurring through a bear market.
Should transactional activity rise like it did in the previous bull-market, there is now a high likelihood that Ethereum’s supply will be deflationary.

Click here to download full report. As always, please reach out with any questions or comments.

Stay tuned,

Joseph Orsini, CFA, CMT
Vice President of Research

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