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It’s truly dead calm on the cryptocurrency market; a calm that the emerging asset class certainly hasn’t gotten us used to! The price of bitcoin is consolidating in an increasingly narrow channel, respecting its support downwards as stock markets hit yearly lows, but still failing to show a real bullish push. Bitcoin’s 20-day volatility has matched that of the NASDAQ for the first time in two years. However, while bitcoin’s price has remained roughly the same since the beginning of September, both the NASDAQ and S&P have fallen 13% and 10% respectively since that time.
Like its volatility, bitcoin’s real price fell to its late-2020 low last week after the U.S. CPI hit even higher-than-expected inflation data. In fact, cryptocurrencies are swimming in calm tides when compared to the traditional equity, but also bond markets. As shared by analyst Will Clemente, the volatility of the Treasury bond markets has skyrocketed compared to the volatility of bitcoin in recent months. The argument that bitcoin is too volatile is suddenly starting to fade.
Are we gradually witnessing the hoped-for turnaround where bitcoin essentially acts as a risk asset to one of inflation protection? Underneath the displayed calm, there are several pieces of data that make this a plausible hypothesis.
As mentioned first, the correlation between bitcoin and the NASDAQ, the technology index encompassing many stocks considered risky, is at its lowest level since January. According to IntoTheBlock, a cryptocurrency data and analytics firm, the 30-day correlation between bitcoin and the S&P 500 has fallen to 0.04 – which is virtually zero, as a correlation close to 0 suggests no link between the prices. In short, the decoupling is clear. It remains to be seen whether it is temporary or not.
For BTC and ETH, the Volume Profile Visible Range (VPVR) tool implies that both assets are trading near significant levels of activity. As long as this is the case, the price is likely to remain fairly stable, barring an unexpected catalyst. At the same time, however, more than 37,800 BTC left the cryptocurrency exchanges yesterday alone, according to data tracked by CryptoQuant. This is the largest daily outflow of bitcoin since June 17, when traders removed nearly 68,000 BTC from exchanges. In addition, more than 121,000 BTC, or nearly $2.4 billion at current prices, have exited the exchanges in the past 30 days. Such an exit is often interpreted as a willingness to hold for the long term, while the opposite movement illustrates a willingness to sell crypto assets on exchanges. For example, bitcoin bottomed out locally at around $18,000 when its exits from exchanges reached nearly 68,000 BTC on June 17. The cryptocurrency’s price recovered to around $24,500 in the following weeks.
“Bitcoin prices have shown remarkable relative strength of late, amidst a highly volatile traditional market environment,” Glassnode noted in its weekly review published Oct. 10, adding, “Several macro metrics indicate that bitcoin investors are establishing what may be a bear market floor, with many similarities to the lows of previous cycles.” In short, despite the weaknesses in the stock markets, the bitcoin market just seems to be short of sellers at the current price level.
When all assets are down as they have been this year, focusing on price is often not the best metric for analysis. On a fundamental level, over the past few months, indicators that major financial institutions and technology companies believe cryptocurrencies are here to stay have been growing. In August, BlackRock, the world’s largest asset manager, launched a private bitcoin trust to expose its clients to the current bitcoin price. This month, Google announced that it would begin accepting cryptocurrencies as payment for its cloud services early next year by connecting to Coinbase. On the same day, the 239-year-old Bank of New York Mellon launched its own bitcoin and Ethereum custody service. In short, despite the gloomy prices, the asset class is far from backing down in its adoption and development. As the adage goes, “Bear markets are for building”.
A recent paper from Fidelity Digital Assets named “The Rising Dollar and Bitcoin” adds a layer on the fundamental proposition of the mother of cryptocurrencies. In this report, analysts indicate how far bitcoin as an asset has deviated from what is currently considered the norm. In the new high-inflation environment, bitcoin’s fixed issuance and supply is of particular importance. “As a result, bitcoin may soon contrast sharply with the path that the rest of the world and fiat currencies may take – namely the path of increased supply, additional money creation and central bank balance sheet expansion,” the report explains. The firm predicts that “more monetary depreciation may be needed to alleviate the high debt burden among developed economies, while recent events in the UK have shown the counterparty and liability risks in the system, making monetary intervention and doses of liquidity features that are not likely to go away any time soon. […] Comparatively, bitcoin remains one of the few assets that does not correspond to someone else’s liability, has no counterparty risk, and whose supply schedule cannot be changed.” The report humbly concludes that “it is ultimately up to investors and the market to decide whether these properties begin to look more attractive.”
The Ethereum network’s migration from Proof-of-Work to Proof-of-Stake consensus mode is barely complete that developers have just launched the testnet for the next major update: Shanghai. The Ethereum Foundation announced on Friday the launch of a pre-Shanghai test network it calls “Shandong.” Shandong will serve as a testing ground for numerous Ethereum enhancement proposals that Ethereum’s core developers will build, refine, and ultimately narrow down to the small number of updates that will be included in Shanghai when it finally goes live. It is expected that this upgrade will be introduced by September 2023 at the latest. The upgrade most likely to be included in Shanghai is certainly EIP-4895, which would allow individuals and entities holding ETH staked on Ethereum to withdraw them. Last month, the merger moved the Ethereum network to a proof-of-stake mechanism, whereby users can now deposit pre-existing ETH tokens to generate new ETH. However, deposited – or staked – ETH is currently immovable. EIP-4895 would allow users to withdraw their ETH and earnings.
An early version of the IRS’s 2022 tax form sees cryptocurrencies, stablecoins and non-fungible tokens lumped into a new category called “digital assets.” The holding of such assets is clearly addressed in the draft: “You have a financial interest in a digital asset if you are the owner of record of a digital asset, or if you have an ownership interest in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest, or if you own a portfolio that holds digital assets.” In short, the category is better defined at the taxable asset level, while still encompassing as many digital assets as possible.
Finally, Tether has announced that it is eliminating commercial paper from its reserves in the interest of transparency. This type of asset will be replaced by U.S. Treasury bills, which are much more secure in terms of stability and liquidity. “This announcement is part of Tether’s ongoing efforts to increase transparency, with investor protection at the core of Tethers’ reserves management,” the company’s blog post said. “Reducing commercial paper to zero demonstrates Tether’s commitment to backing its tokens with the safest reserves in the market.”
The Rivemont Crypto Fund is about two-thirds exposed currently, almost exclusively in bitcoin, with a small secondary position in MATIC.
Rivemont Investments, manager of the Rivemont Crypto Fund.
The presented information is as of October 19th, 2022, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.
