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Post-FTX, digital asset markets are at a standstill; while contagion uncertainty and the question of further downside remains, small owners of bitcoin have added to their positions at a record pace.

‍Key Takeaways

• For now, the calm after the storm: crypto markets traded in a tight range last week, as participants await clues of further contagion.
• This uncertainty related to whether there are “more dominos to fall” has led to a standstill as the market awaits any negative or positive catalysts to emerge.
• Small owners of bitcoin have added to their position at a record pace, even greater than what occurred during the parabolic advance to $20,000 in late 2017; the group has certainly found this as an opportunity.

For now, the calm after the storm.

After falling from a November high of $21,470 to a low of $15,574 following the FTX news, bitcoin spent most of the business week within a tight range of $16,400 and $17,000, before declining to a Sunday close of $16,253.

Ether, after falling from a November high of $1,676, traded between around $1,200 and $1,300 in the five business days of last week, and declined to $1,141 by Sunday evening.

So, while there hasn’t been much of a bounce following the FTX decline, there hasn’t been much follow-through to the downside, either.

This standstill in market action comes as the participants await any further contagion.

On the positive side, several exchanges have begun to provide proof-of-reserves. While not a perfect mechanism, “merkle trees” can give users confidence that their holdings are accounted for as part of the larger exchange wallets. It’s likely that most exchanges will provide this information in the future.

Further, many of the main market makers and trading firms have reported some, but mostly insignificant, losses. Some firms have just a portion of their assets locked on FTX, while others were able to avoid the situation by diversifying trading platforms or withdrawing prior to the suspension. This is certainly a positive.

But the question still remains around the larger lending firms – particularly those that have either dealt with Alameda or have taken in altcoins as collateral this year. Of course, altcoins have faced the brunt of the selling pressure within digital assets – particularly since the FTX fallout. The value of this collateral has declined in rapid fashion alongside market prices.

So, where do we go from here?

For now, negative sentiment and uncertainty remain key thematics post-FTX. As we discussed last week, this is likely the largest awareness event in digital asset history – as a result, it may take some time for the conversation to shift away from the negatives and back to the positives.

But only time will tell. As we say, price has a knack for changing sentiment.

Near-term, contagion is the focus, with risk that can come in various degrees: uncertainty, panic, or most significantly, the unwinding of positions by firms in need of liquidation.

While bitcoin and ether usually experience a strong bounce off the lows, a standstill between buyers and sellers will likely continue until any catalysts emerge.

Either way, we know that this year’s bear market is a combination of two significant headwinds: an unusual amount of monetary tightening, and the unexpected collapses of larger firms within the industry.

Bitcoin and ether’s closing 2017/2018 highs of ~$19,000 and ~$1,400 remain key levels in the “big picture.” While much has occurred since then, a historic bear market now brings us below the previous peaks seen five years ago.

But from this, attractive valuations are presented, which have historically been great opportunities for long-term investors. In fact, small holders of bitcoin have added to their positions at a record pace, highlighting that many believe the long-term theses remains intact. We discuss on page two.

We wish all our readers a Happy Thanksgiving.

Attractive Valuations Yet Again

As we often discuss, bitcoin’s Market-Value-to-Realized Value multiple provides an understanding of the market price relative to the average cost basis of on-chain holders, often called the “fair value.”

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

Bitcoin’s latest decline brings the MVRV multiple to 0.80  with a closing market price of $16,288 (Glassnode) versus an on-chain cost basis of $20,321.

Consider that market tops have had MVRV valuation multiples in the 3, 4, and even 5+ range, which was experienced in December ‘17 (4.8), April 2021 (3.9), and November 2021 (2.9).

While rough waters can remain, valuation remains attractive on an historical basis.

Small Owners Stack At Record Pace

Despite the uncertainty in the market, the amount of bitcoin held on-chain by small owners ( < 1 BTC) has hit record levels of 1,203,681 BTC. This includes only those that have moved their holdings from exchange to custody.

Not only is this a new high, but the increase is at a record pace: Over the last 30 days, this group added 82,055 bitcoin to their positions, 34,367 of which occurred just last week alone.

This 30-day uptick is 57% larger than the last greatest increase of 51,955 bitcoin added during the parabolic advance to $20,000 in 2017 (date 12/19/2017).

This growth in bitcoin held by small owners illustrates the high likelihood that adoption will continue despite recent events. Small owners of bitcoin have found this as an opportunity to ‘stack’ for the long term.

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

DISCLOSURES

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.

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