Market Commentary
Market Commentary: Settling
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December 6, 2022

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Bitcoin and ether gained 3.3% and 5.1% last week as the FTX dust begins to settle; here, “no news is good news”  when it relates to the unexpected.

Key Takeaways

  • Bitcoin and ether rallied to their post-FTX range highs last week with little follow-through of selling pressure: here, “no news is good news” when it relates to the unexpected
  • Much of bitcoin and ether’s annual fall can be attributed to a few, event-driven declines. In the long run, these days mean very little to the bitcoin, ether, and digital asset investment theses
  • Capitulation in the month of November was on par with the lows in June 2022, December 2018, and January 2015, with on-chain realized losses totaling 5.3% of bitcoin’s market capitalization

With little follow-through on both selling pressure and news related to contagion risk, bitcoin and ether gained 3.3% and 5.1% last week. The two closed towards the highs of their post-FTX ranges with a price of $17,115 and $1,277 by Sunday evening.

With the largest near-term risk the selling pressure any further contagion may bring, not much news has hit the tape in this regard. The BlockFi bankruptcy was relatively priced in given their need for the FTX bailout. Otherwise, “no news is good news” when it relates to the unexpected – as a result, buyers have found interest at these levels as the dust begins to settle.

So aside from the knee-jerk reactions lower, both bitcoin and ether have remained resilient since the news broke. Ether has not only held the lows from mid-June but remains 41.4% above those very levels.

One would think that ether would have put in new lows alongside bitcoin when the second-largest digital asset exchange filed for bankruptcy. But post-Merge Tokenomics and ether’s wide net into the digital asset ecosystem has likely supported price throughout these tumultuous times. Since the Merge, ether’s issuance has averaged just 0.0% inflation, a significant reduction in selling pressure compared to the ~2.4% inflation rate that occurred prior to September 15th.

And even bitcoin, which did put in new lows in the month of November, hasn’t performed all that badly. Bitcoin is just 3.8% below its previous low-watermark of $17,785, and a reclaim of these levels is certainly not out of reach if a catalyst were to appear.

With the Q4 rally that occurred prior to the FTX news, bitcoin and ether are down just 11.9% and 4.1% on a quarter-to-date basis, hardly reflecting the events that unfolded in the month of November.

And while performance from all-time highs is the talk of the town, the underlying price action is relatively strong when considering both the macro and crypto uncertainty that has occurred throughout nearly all of this year. Much of these moves lower can be attributed to just a few, significantly event-driven days in which bitcoin fell:

  • 11/8: -9.6% and 11/9: -15.9%
  • 6/13: -15.1%
  • 6/18: -13.8%

And as we believe, these single days (while impacting near-term perception) ultimately mean very little to the long-term digital asset theses.

Even with the double whammy of headwinds (both macro & idiosyncratic), bitcoin and ether remain significantly higher than the lows seen in previous years. We recall most recently, the Covid-19 close of $4,904 and $110 on 3/16/2020.

So where do we go from here?  Aside from contagion (or lack thereof), it’s likely bitcoin and digital assets revert to their  correlations with equities.

Equities have rallied since the mid-October lows, and the S&P 500 is now down just 13.3% on a total return basis this year. These gains are likely supported by monetary policy that has recently become less uncertain. The market has priced in a 5% peak Federal Funds rate since mid-October, and as a result, the stampede higher in both the dollar and yields paused and pulled back quite quickly. These weeks would have garnered a digital asset rally, but the FTX news rightfully took center stage.

But as contagion risk slowly moves to the rear-view mirror, improvements in macro sentiment should support digital assets through these tough times. On page 2, we illustrate the events that have increased the underperformance versus equities and highlight significant capitulation in the month of November.

Event-Driven Declines

As we’ve often discuss, correlations with equities have remained high for much of this year given macro volatility.

While bitcoin and digital assets performed quite well in the face of macro uncertainty (bitcoin outperformed equities in Q1, while both bitcoin and ether outperformed equities in Q3), the idiosyncratic risk – i.e. the collapses of major institutions – has been the culprit for this year’s significant underperformance.

To us, the resilience through both the macro environment and the crypto-specific risks demonstrate the investment case is still intact. While growing pains, these events should ultimately lead to improvements in both regulation and the quality of the underlying infrastructure. While some companies have failed, many have not: the remaining group is battle-tested and has likely learned valuable lessons for the future.

We annotate the chart to the right to illustrate how bitcoin, which outperformed to start the year, has fallen to today’s levels. The event-driven risk has hit the tape the hardest.

Capitulation on Par With Previous Lows

One measure of market extremes is bitcoin’s on-chain realized profits or losses as a percentage of its total market capitalization.

Bitcoin’s realized profit and loss sums the gains or losses of on-chain transactions by comparing the price at which each bitcoin was sent out of a wallet versus the price at which it entered.

Thus, meaningfully large amounts of bitcoin transferred at values lower than its original cost basis suggests participant capitulation. When taking the aggregate of all on-chain transfers and comparing it to market cap, we can normalize the magnitude of profits or losses experienced on that day, week, or month, compared to history.

Here, we find that realized losses in November as a percentage of market capitalization is on par with major lows. $17.8 billion of losses in November was 5.3% of market capitalization, which is the largest percentage since June 2022 (-5.7%), December 2018 (-5.1%), and January 2015 (-5.5%). Bitcoin has withstood

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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