Market Commentary
Market Commentary: Reminders
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January 18, 2023

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Bitcoin and ether’s weekly gains of 23.3% and 22.3% should serve as reminders to investors that the two assets are “down, but not out”; rallies often happen quite quickly, highlighting the importance of maintaining conviction.

Key Takeaways

  • Bitcoin and ether gained 23.3% and 22.8% last week as bitcoin moved above $20,000. While many remain hesitant after 2022, this rally should serve as a reminder of bitcoin and ether’s ability to bounce when conditions warrant
  • Bitcoin and ether are again above the “key levels” of the 2017/2018 peaks illustrating “progress, not perfection”
  • Bitcoin and ether have regained their 200d moving averages – a well-known trend indicator. We illustrate this importance on page two

Well, that was quick. In short fashion, bitcoin rallied to $20,906 with a 23.3% weekly gain, while ether rallied 22.3% to Sunday’s close of $1,552.

With this move, digital assets have outpaced equities year-to-date. Since the close of a tough 2022, bitcoin and ether have gained 26.4% and 29.4%, while the S&P 500 and the Nasdaq Composite have gained 4.2% and 5.9%, respectively.

So, with so many investors afraid of further contagion, what was the catalyst for the upside move?

Well for one, it appears to be a catch-up to the recent equity rally. As we discussed throughout much of 2022, inflation and its impact on yields, alongside the Fed and its impact on the dollar, were key overhangs to risk assets and particularly, the more speculative digital asset class.

And just as we believed, digital assets were likely to rally when these “macro-overhangs” move into the rearview mirror.

Equities first bottomed in anticipation of these improving conditions in mid-October, and while digital assets participated in the beginning of that rally, the FTX news “stole the show.”

Months later, there has yet to be another “shoe to fall” and the fear, uncertainty, and doubt (“FUD”) that remains is slowly being “priced in” as known risks to the industry today.

So, with little contagion news and November’s historic capitulation, the digital asset class has not experienced the leg lower that many believed could occur. This served as an underlying signal of market resiliency.

This, alongside last week’s CPI print, was reason for the market to rally: disinflationary trends have continued, and the Fed’s rate hikes are likely nearing an end. While markets remain concerned with a soft or hard landing, the US economy is yet to crack after 425 basis points of rate hikes.

And in true crypto fashion, bitcoin and ether rallied relentlessly last week. Not only have the two retraced their losses experienced from the FTX ordeal, but are now 33.7% and 71.9% above their 2022 lows.

This rally, while small when compared to all-time highs, is large as it relates to the bottom-fishing opportunity. Rallies such as the one experienced should remind investors of the importance of maintaining conviction through tumultuous times, as price gains often happen quicker than expected. We offer some considerations of this rally’s strength:

  • Bitcoin gained 24.1% in 10 days, the best 10-day gain since October 2021
  • Bitcoin and ether reclaimed their 200D moving averages for the first time since December 2021 and April 2022 respectively, a popular long-term trend indicator (as shown below)
  • After months below its realized price, bitcoin has rallied above its on-chain fair value, a sign of strength
  • Ether, which never put in new yearly lows after June 18th, continues to outpace bitcoin, a sign of “risk-on” sentiment
  • Many large-cap altcoins bounced 50%+ from their lows, highlighting breadth of the crypto rally

And so, while there are “always reasons not to invest”, last week should remind investors that digital assets offer more “opportunity” than the “danger” perceived in recent months.

Progress in the Big Picture

Bitcoin and ether have again moved above the 2017 and 2018 closing peaks, key levels we define as progress in the “big picture.”

Given the growth in the digital asset ecosystem alongside the rise in awareness, education, and both institutional and regulatory interest, we’d imagine that prices should be higher than previous cycle peaks. While this remained true for quite some time, a historic drawdown driven by a “double whammy” of both macro and idiosyncratic risk brought prices momentarily below those seen around five years ago.  

But last week’s rally has for now closed the window of opportunity to purchase this “dislocation”, which lasted about 73 days for bitcoin and 137 days for ether. As part of their bottoming process, reclaiming the previous peaks serves as a sign that “all is not lost” and the two are “down, but not out.”

Should this hold, these peaks as long-term support should provide confidence for those with hesitation.

A Long-Term Trend Indicator

Historically, the 200-day moving average is a well-known trend indicator for both traders and long-term investors. In theory, prices are trending upwards when the current price is above the 200-day average and trending downwards when the price is below.

With the most recent rally, bitcoin and ether are again above their 200-day moving averages.

When color-coding the price chart for when bitcoin is above and below this indicator, we see the potential for a “trend change” and what this may mean going forward.

Perhaps this is the beginning of a new bull market.

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

Investment advisory and management services are provided by Eaglebrook Advisors, Inc., a registered investment advisor. Information presented is for educational purposes only and should not be construed as providing investment advice. Past performance is no indication of future results. Investing in digital currency comes with significant risk of loss that a client should be prepared to bear, including, but not limited to, volatile market price swings or flash crashes, market manipulation, economic, regulatory, technical, and cybersecurity risks. In addition, digital currency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. Eaglebrook does not offer tax advice. Neither consultations nor information published by Eaglebrook should be construed as offering or providing tax advice.
Volatility Risk: Digital currency is a speculative and volatile investment asset. Investors should be prepared for volatile market swings and prolonged bear markets. Digital currency can have higher volatility than other traditional investments such as stocks and bonds and market movements can be difficult to predict.
Economic Risk: The economic risk associated with digital currency is in the lack of widespread or continuing digital currency adoption. The market and investors could decide that digital currency should not be valued at the current market capitalization due to a variety of factors.
Regulatory Risk: Digital currency could be banned or highly regulated by governments that would deter investors from buying or holding digital currency.
Technical Risk: Digital currency is a dynamic network with a codebase that is updated to add new security and functionality features. The updated code that is merged by the core developers could potentially have an error that threatens the security or functionality of the digital currency network.
Cybersecurity Risk: Digital currency exchanges and wallets have been hacked and digital currency has been stolen in the past. This is a potential risk that clients must be comfortable with when investing and holding digital currency. Theft is less likely when holding digital currency at a qualified custodian in offline systems (cold storage) with institutional security and controls.
The indexes presented are unmanaged portfolios of specified securities and the performance shown is gross of fees which do not reflect any initial or ongoing expenses. Indexes cannot be invested in directly. Returns for digital assets may differ significantly from the returns of indexes which hold securities. Returns are for the time periods shown.
There are significant limitations in the comparison of cryptocurrencies, notably Bitcoin, to fiat currencies and therefore the comparison of Bitcoin to fiat currencies in the presentation above is for presentation and discussion purposes and does not imply that  Bitcoin is comparable to fiat currencies.  The information presented should not be relied upon as a recommendation to invest in Bitcoin or any cryptocurrency and should not serve as an indication of the future value of Bitcoin.
Fiat currency is issued and backed by a government and is largely stable and controlled.  Through legitimate monetary policy, central banks determine the amount of money in circulation and when to increase or decrease the supply, which in part affects the value and price of fiat currency.
Cryptocurrency, on the other hand, is decentralized by nature and does not have a central authority governing it. The price of cryptocurrencies is determined by several external factors may including, but not limited to: supply and demand, investors’ expectations with respect to the rate of inflation, interest rates, currency exchange rates or future regulatory measures (if any) that restrict the trading of a cryptocurrency or the use of a cryptocurrency as a form of payment. Values of cryptocurrencies have historically been highly volatile, experiencing periods of rapid price increase as well as decline.
There is no assurance that a crypto currency will maintain its long-term value in terms of purchasing power in the future, or that acceptance of Bitcoin payments by mainstream retail merchants and commercial businesses will continue to grow.  Bitcoin and other cryptocurrencies are not endorsed or guaranteed by any government, are not FDIC or SIPC insured, are very volatile, and involve a high degree of risk. Consumer protection and securities laws do not regulate cryptocurrencies to the same degree as traditional brokerage and investment products.
BGN, Bloomberg Generic Price: A real-time composite based on quotes from multiple contributors that provides a market indication of where assets are priced. BGN uses both executable and indicative pricing, depending on the type of quotes available in the marketplace at the time of pricing. This methodology is used for bitcoin and ether.
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