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Bitcoin and ether test their 50D moving averages for the first time since April; Wednesday’s FOMC meeting and Thursday’s Q2 GDP print will take much of the focus this week.
- Bitcoin and ether have gained 28% and 78% since the lows on June 18th and are now testing their 50d moving averages for the first time since April
- While a 75 basis point rate hike is likely to occur in this week’s July FOMC meeting, the market’s expectations for a peak policy rate continues to decline, now 3.4% by February of 2023
- In an insider trading case, the SEC has labelled some assets as “securities” – we offer key takeaways
- Bitcoin and ether have outperformed since mid-June despite concerns of overleveraged institutions; bitcoin’s MVRV valuation metric enters a critical point as market price tests on-chain cost basis
THE BIRD'S EYE VIEW
Risk assets continued their rally last week with strong performance from bitcoin (+8.6%), ether (+19.7%), and traditional equities (S&P 500 +2.6%, Nasdaq Composite +3.3%).
Importantly, ether has remained incredibly strong since the whispers of a September 19th Merge date, with last week’s rally a follow-through of the prior week’s 14.2% gain. The asset is now up 78% from its low on June 18th, outperforming bitcoin’s not-to-shabby bounce of 28%.
For bitcoin, it’s certainly a positive to see that its price was relatively unfazed after Tesla reported the sale of 75% of its holdings. As we remember, Tesla purchased $1.5bn of bitcoin in February of 2021, only to pause the payment option three months later. While this accelerated bitcoin’s downside last year, the market shrugged off this most recent news, illustrating maturation and resiliency compared to just one year ago.
This strong performance across digital assets is alongside improvements in macro conditions, supported by decreasing inflation expectations and the likelihood of less-than-feared financial tightening as a result. As we’ve seen, the 10yr Treasury yield has moved from a high of 3.47% on June 14th to now 2.75% by Friday’s close, declining 16 basis points just last week.
This peak in rates has brought a subtle resurgence in risk appetite, illustrated by the outperformance of the Nasdaq Composite vs. the S&P 500 since that date. With renewed interest in growth, technology, and assets further out on the risk-curve, bitcoin and ether have certainly outperformed to the upside. We illustrate this relative performance on page 2.
Market participants now look to Wednesday’s FOMC meeting for clues as to how the group of policymakers will proceed with their process of normalization. While a 75 basis point hike has been priced in over recent weeks, the level of hawkishness or dovishness that Chair Powell portrays can certainly test the strength of the recent bounce we’ve seen across risk assets.
As we remember, the Fed hiked 25 basis points in March, 50 basis points in May, and then 75 basis points in June. Alongside the peak in interest rates, expectations for a peak policy rate have declined from 3.9% expected on June 14th to now 3.4% by the February 2023 meeting. Investors and traders also look to Thursday’s first-estimate of US Q2 GDP, with estimates of a 0.4% annualized pace of growth, up from -1.6% in Q1.
With improved market conditions, bitcoin and ether are now testing their 50d moving averages for the first time since early April, while the S&P 500 and the Nasdaq Composite have traded slightly above this indicator since early last week. This would be a sign of strength should these levels hold.
SEC AND SECURITIES
On Thursday of last week, the Securities Exchange Commission (SEC) charged a former Coinbase product manager and two other individuals for the insider trading of digital assets. While insider trading is nothing new for equities, the SEC alleges that nine of the 25 tokens as “securities”, applying the Howey Test to AMP, RLY, DDX, XYO, RARI, LCX, POWR, DFX, and KROM. Some takeaways include:
- The SEC applied the Howey Test and believes that nine of the 25 digital assets in this complaint are securities
- The trades were found through on-chain analysis and are another example of crime found through this transparency
- The largest of the assets listed (AMP $366m, RLY $120m, POWR $111m market caps) have marginally underperformed since, and thus, classification may not be as detrimental to price as imagined
- This does not impact bitcoin, which Chair Gensler reiterated is a commodity, or Ethereum, which is not included.
Given that this could have implications on exchanges that list these assets, Coinbase responded with a blog post titled, “Coinbase does not list securities. End of story.” We’ll continue to monitor any developments related to security classifications.
CRYPTO OUTPERFORMS ON THE BOUNCE
While digital assets often face the brunt of macro selling pressure, the segment often bounces stronger than traditional equities after the lows are reached.
As we’ve seen in the tantrum table on page three, most risk-assets bottomed on June 16th (for many US equity indices) or June 18th (for many digital assets).
This bottom in risk assets has been supported by several factors such as lower inflation expectations and better sentiment in relation to Fed rate hikes and the magnitude of financial tightening.
Even with the news of many overleveraged institutions, bitcoin and ether have still outperformed equities since their lows.
The two remain incredibly strong when risk-assets rally, which we view as an example of what’s to come when the trend ultimately changes to the positive.
MARKET PRICE TESTS REALIZED PRICE: MVRV
A popular valuation gauge for bitcoin is the Market Value to Realized Value multiple, which compares bitcoin’s market price to the average “on-chain cost basis” and can be interpreted as “the multiple one pays for the average store of value price.”
Historically, an 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. Prior to recently, a multiple below 1 has occurred very few times in bitcoin’s history (2011, 2012, 2015, 2018, and 2020). Each of these times in hindsight proved to be great buying opportunities.
After falling below this “fair value” on June 13th, bitcoin is now testing its realized price of $21,852.
While history doesn’t repeat itself, it often rhymes. Long-term investors should monitor this development as they look to rebalance or add to their position on price weakness.
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Joseph Orsini, CFA
Vice President of Research
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.