Market Commentary
Market Commentary: Subjectivity
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Tuesday, June 7, 2022

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Whether now “good news is good news” or “good news is bad news,” this is just another example of the difference between central bank and bitcoin’s monetary policy.

Key Takeaways:

  • Bitcoin, ether, and digital assets broke their eight-week losing streak, with bitcoin rallying 2.6% and ether up a marginal 0.8% on the week
  • As economic data becomes increasingly important in relation to the Fed’s process of normalization, investors must now question whether “good news is good news” or “good news is bad news” – this, a result of the Fed’s discretionary and subjective policy making
  • We offer a different viewpoint on bitcoin’s price history, illustrating annual lows, as well as provide an update on valuation using the Market Value to Realized Value (MVRV) multiple

THE BIRD'S EYE VIEW

Last week, bitcoin and ether broke their eight-week losing streak with a marginal gain of 2.6% and 0.8%, respectively.
Amidst weeks of volatility, the relatively sideways action by the end of the week has begun to reassure investors that the rapid move lower may be for now coming to an end.

Economic data was the focus last week with mixed data and a flurry of viewpoints related to Thursday’s ADP report, which illustrated weakness for the month of May, while a day later, the more accurate and widely followed non-farm payrolls report beat estimates with 390,000 jobs added. This illustrated resilience of the US labor market and with average hourly earnings decelerating, a potential reason for less concern over a wage-price spiral.

But even with the strength in Friday’s non-farm payroll report, markets sold off on the day. With the Fed’s September’s meeting now likely the most important meeting of the year (50bp expected at the next two meetings), it’s clear that markets will continue to trade around how the upcoming Fed decisions may impact both the economy and markets.

It appears it is now time for investors to question whether “good news is good news,” or if “good news is bad news.”
This questions stems from the uncertainty around how the group of policymakers will judge the level of strength and weakness in the economy to then implement the right set of rate hikes and quantitative tightening to navigate a “soft landing.”

To add to the level of difficulty that market participants already face when allocating in this environment, recent Fedspeak has not helped either: two weeks ago, Atlanta Fed President Raphael Bostic offered the potential for a pause in September, while last week, Vice Chair Lael Brainard said it was “very hard to see the case” for a Fed pause. And while we respect our elected officials, when we review the events over the last twelve months, we can’t help but to believe subjective and discretionary policies are at the very least, “suboptimal.” Let’s consider:

  • “Transitory” claims from Fed Chair Powell through the beginning and middle of this inflationary run
  • The large and likely inflationary $3.5 trillion Build Back Better package that could have been passed amid four-decade high inflation
  • And most recently, the admission from US Treasury Secretary and former Fed Chair Janet Yellen that she “think[s] [she] was wrong then about the path that inflation would take.”

And as everyday Americans experience high prices for food, shelter, and gas, we wonder how the experts were unable see this situation play out the way it did.

But when policies are set with discretion, scrutiny will always emerge. Investors almost always question whether the Fed is “behind the curve” or if they’ve made another “policy error,” as portfolios are whipsawed on these debates.

But those invested in bitcoin are not fully subject to these uncertainties. Sure, bitcoin has been correlated given a rise in volatility, but investors are quickly becoming aware that bitcoin is not just a hedge against monetary inflation, but against uncertain central bank policy decisions as well.

This is because bitcoin’s monetary policy is certain. Approximately every ten minutes, a new block is created, and a block reward is issued to the miner. Every four years, this block reward reduces in half. Currently, 6.25 bitcoin is issued every block, and around May of 2024, this number will be 3.125.

With bitcoin’s monetary policy, there is no discretion, “Devspeak,” or implications on the global economy. When said this way, allocating some fiat towards a different, objective, and nationless hard-coded monetary policy certainly makes sense.

A DIFFERENT VIEW OF PRICE

While bitcoin’s drawdown has been much of the conversation this year, we illustrate a different perspective on bitcoin’s price: assessing annual lows.

Viewed in this manner, drawdowns and volatility appear much differently. The low price of the year continues to rise over time.

As we remind our investors, bitcoin and digital assets require long-term time horizons, as this allows for secular tailwinds such as digitalization, technology, demographics, and network effects to “win out” through various business and financial cycles.

The current low close of this year was placed on May 11th at $28,403. This is similar to last year’s low of $29,251 placed on January 1st, 2021. Recently, this area has remained support for much of this pullback, with $30,000 a key psychological level.

While a standard price chart illustrates up, down, and sideways action throughout the year, this chart of “just the lows” removes much of the noise that takes away from the bigger picture.

UPDATE ON VALUATION

A popular valuation gauge for bitcoin is the Market Value to Realized Value multiple, which compares bitcoin’s current market capitalization with today's price versus the capitalization using the price that each bitcoin last moved “on-chain.” This provides a multiple of price versus the average “on-chain cost basis.”

Historically, MVRV < 1 has been the most attractive scenario for buyers, as this represents a market price that is below the true cost-basis of on-chain holders. However, an MVRV < 1 has only occurred four times in bitcoin’s history (2012, 2015, 2018, and 2020). Each of these in hindsight proved to be great buying opportunities.

But with increasing education, awareness, and investment accessibility, valuations could have more support on the downside than prior years.

At Sunday’s price close of $29,902 (as per Glassnode) realized on-chain cost basis was $23,591, indicating an MVRV multiple of 1.27x and a valuation that has not been seen since the Covid-19 drawdown. As we’ve seen recently, market tops have had MVRV valuation multiples in the 3, 4, and even 5+ range. This was experienced in December 2017 (4.8), April 2021 (3.9), and November 2021 (2.9).

So while we often write about the improving fundamentals despite macro sentiment, the weakness seen in May now presents an increasingly attractive risk-reward for bitcoin on a valuation basis as well.

Click here for the full PDF. As always, please reach out with any questions or comments.

Stay tuned,

Joseph Orsini, CFA
Director 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. Past performance is no indication of future results. Please see our Form ADV Disclosures and Privacy Policy in our website.
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.

About Eaglebrook Advisors
Eaglebrook is a tech-driven investment manager specializing in bitcoin and digital assets. The firm offers various Bitcoin and Digital Asset SMAs serving financial advisors, registered investment advisors (RIAs), family offices, and institutions. Eaglebrook is backed by wealth management executives and institutions.
For more information, please contact us at +1 (202) 798-1880 or send an email to contact@eaglebrookadvisors.com.