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The November Fed meeting is now behind us, with a touch of dovish and hawkish tilts; the market looks to this week’s midterm elections and October’s CPI report to weigh where the balance lies going forward.
Key Takeaways
- A fourth 75 basis point rate hike brings the Fed Funds Upper Bound target to 4%, with the Fed now increasing the US policy rate by 375 basis points in just eight months
- Chair Powell offered bears, bulls, and everyone in between a bit of confidence; we highlight one comment that particularly benefits digital asset investors
- One-year after the closing high on November 9, 2022, on-chain holders remain steadfast, with the percentage of bitcoin supply held longer than one, three, and five years recently reaching record highs
- Bitcoin remains historically attractive on a valuation basis, marking a continued opportunity for long-term investors
THE BIRD'S EYE VIEW
The November Fed meeting is finally behind us, resulting in the fourth 75 basis point hike to reach a 4.0% upper-bound Fed Funds target. In doing so, the Fed has now hiked their policy rate by 375 basis points in just eight months, maintaining its fastest pace of tightening since 1980.
This widely-anticipated event offered bears, bulls, and everyone in between a bit of confidence as Fed Chair Jerome Powell flip flopped between dovish and hawkish tilts throughout much of the press-conference.
First, the written 2pm statement recognized policy lag: “the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity...”
This consideration was a small but nice change to the Fed’s autopilot and “higher for longer” attitude portrayed in recent weeks – and as such, led to an initial positive reaction by market participants.
But similar to the pain felt all year – any hope turned to dismay - Powell’s tone became increasingly hawkish in the Q&A session after a journalist mentioned a positive market reaction. “It is very premature to be thinking about pausing,” he said.
This pushback against the main narrative used to explain recent market rallies naturally led to a downward reversal in risk assets: bitcoin, ether, and the S&P 500 fell -1.5%, -4.1%, and -2.5% by the end of the day on Wednesday.
Of course, this was the only real response Powell could have offered. As he has reiterated many times over, the Fed needs to anchor down inflation expectations that often drive inflation itself. Any hint of a pivot by Powell would be taken as a full pivot, so a denial is a subtle form of tightening. This doesn’t mean a pivot or pause is far away, it just means he won’t show his hand.
As markets digested Powell’s comments, policy expectations remained unchanged, meaning the Fed is for now 80% complete towards a current peak estimate of 5.0% in May of 2023.
Positively, this means uncertain monetary policy may become incrementally more certain – that is of course, if October’s CPI report on Thursday complies.
We further point out a subtle comment made by Chair Powell that admitted the very truth that drives at least one part of the bitcoin and digital asset thesis:
“If we were to over-tighten, we could then use our tools strongly to support the economy.”
– Fed Chair Powell, 11/2/2022
As he implies, don’t forget that the Fed is always ready and able to provide stimulus when needed. This necessary evil of growing the monetary base to support economic growth at the expense of fiat purchasing power not only supports risk appetite, but strengthens the argument for bitcoin’s hard-coded scarcity as an alternative store of value.
Bitcoin and ether ultimately rallied on Friday with a gain on the week, outperforming equities and closing above the levels seen prior to the FOMC meeting.
This week should provide investors with a further understanding of where both monetary and fiscal policy may head with October’s CPI report and the US midterm elections.
One-Year Later
We remember bitcoin and ether’s closing highs of $67,734 and $4,799 one-year ago on November 9th, 2022. Through this tough environment, we hope we’ve provided you with the education and knowledge to understand digital asset markets, the strength of the underlying fundamentals, and why digital assets are here to stay.
Be on the lookout for our upcoming research report titled, “10 Bear Market Considerations” and our newest ongoing research titled, the “Adoption Monthly.” Please be sure to sign-up for our monthly webinars.
On page two, we highlight record holding trends for bitcoin and its attractive valuation compared to on-chain cost basis.
RECORD BITCOIN HOLDING TRENDS
Despite the bear market in price, the percentage of supply held for longer than one, three, and five-years has recently reached record levels:
- A record 66.5% of supply held longer than one-year
- A near-record 38.8% of supply held longer than three-years, (record 39.1% on 10/16/22)
- A record 25.7% of supply held for longer than five-years
These holding patterns by on-chain investors illustrates bitcoin’s emerging and continued success as alternative store-of-value, as a greater amount of bitcoin is being held for longer periods of time.
This highlights the resilience of bitcoin’s holder base even amidst this historically tough macro environment.
BITCOIN VALUATION STILL ATTRACTIVE
As bitcoin builds upon its bottoming process that began following its low in mid-June, valuation remains attractive for long-term investors.
The Market-Value-to-Realized-Value (MVRV) multiple, or the market price versus the average on-chain cost basis of bitcoin holders, remains near 1.
This value has historically been a strong entry point for long-term investors as it represents a price that is below or near the on-chain “fair value.”
Consider that MVRV multiples have reached 3,4, and 5 at market tops, with December 2017 (4.9x), April 2021 (4.0x), and November 2021 (2.8x) as recent examples.
The current MVRV multiple stands at 0.99 for bitcoin with a closing price of $21,110 versus an on-chain cost basis of $21,129.
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.
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.
The S&P 500 Index is an unmanaged value-weighted index of 500 common stocks that is generally considered representative of the U.S. stock market. The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency). The ICE U.S. Dollar Index is a geometrically-averaged calculation of six currencies weighted against the U.S. dollar. The Gold Spot price is quoted as US Dollars per Troy Ounce. Bloomberg's spot crude oil price indications use benchmark WTI crude at Cushing, OK ; and other U.S. crude oil grades trade on a price spread differential to WTI, Cushing. The Volatility Index (VIX) shows the market's expectations of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. The VIX is a widely used measure of market risk. ARK Innovation ETF is an actively managed exchange-traded fund incorporated in the USA. The Fund will invest in equity securities of companies relevant to the theme of disruptive innovation. Relevant themes are those that rely on or benefit from the development of new products or services in scientific research relating to Genomics Revolution, Web x.0, and Industrial Innovation. iShares MSCI USA Momentum Factor ETF is an exchange traded fund incorporated in the USA. The Fund seeks to track the performance of an index that measures the performance of U.S. large and mid capitalization stocks exhibiting relatively higher momentum characteristics, before fees and expenses. Invesco S&P 500 High Beta ETF is an exchange-traded fund incorporated in the USA. The Fund tracks the S&P500 High Beta Index which consists of the 100 stocks from the S&P500 with the highest sensitivity to market movements, or beta, over the past year. The index is designed for investors initiating a bullish strategy or making a directional bet. The Fund is rebalanced quarterly. iShares Russell 2000 Value ETF is an exchange-traded fund incorporated in the USA. The ETF tracks the performance of the Russell 2000 Value index and holds small cap US equities focused on low price to book ratios and lower forecasted growth. Its investments are primarily focused in the consumer discretionary, financial and industrial sectors. The ETF uses a representative sampling approach. iShares Russell 2000 Growth ETF is an exchange-traded fund incorporated in the USA. The ETF tracks the performance of the Russel 2000 Growth Index and invests in over 1000 small cap US equities across all sectors. The ETF weights its holdings using a representative sampling indexing strategy, generally investing at least 90% of its assets in the underlying index. US Breakeven Rates: The rates are United States breakeven inflation rates. They are calculated by subtracting the real yield of the inflation linked maturity curve from the yield of the closest nominal Treasury maturity. The result is the implied inflation rate for the term of the stated maturity. The MSCI Em (Emerging Markets) Index is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI EAFE Index is a free-float weighted equity index. The index was developed with a base value of 100 as of December 31, 1969. The MSCI EAFE region covers DM countries in Europe, Australasia, Israel, and the Far East. The MSCI US REIT Index is a price-only index, which MSCI began calculating on June 20, 2005. Previously, this index (then known as the Morgan Stanley REIT Index) was calculated and maintained by the AMEX. The AMEX began calculating the index with a base level of 200, as of December 30, 1994. Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. Roll period typically occurs from 6th-10th business day based on the roll schedule. Standard and Poor's 500 Information Technology Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.
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