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Uncertainty is definitely the theme of the week, with Wednesday being the high and possibly pivotal point. The themes behind this instability? Always the same, really. Inflation, U.S. monetary policies and a crucial technical area for the price of bitcoin. Let’s approach this week’s letter by first focusing on the very short term, gradually stepping back to observe the bigger picture of the cryptocurrency market.
Bitcoin traded in a progressively thinner channel throughout the week, spending the majority of its time between $46,000 and $50,000. All indications are that speculators prefer to stay on the sidelines until after the U.S. Federal Reserve’s two-day monetary policy meeting on Wednesday, which could be a source of volatility for the broader markets. “The failure of inflation to recede as anticipated will put central banks in a more aggressive tightening stance, causing a sharply negative reaction in financial markets and most likely a significant economic recession,” Deutsche Bank warned in a Tuesday report. The central bank is expected to announce a $30 billion reduction in its asset purchases starting in January 2022, doubling the pace two months earlier, with the goal of phasing out the $120 billion-a-month program by March. In addition, it is expected to signal two rate hikes in 2022.
The question is therefore whether markets have already absorbed this expectation into current prices, or whether confirmation of such a scenario will bring downward pressure on risk assets. The former scenario, however, may prove to be the more plausible, as a significant reduction in risk has already taken place in recent weeks, leaving the door open for a classic “buy the fact” trade after the Fed’s decision. This chart shared by Coindesk points to that scenario:
As mentioned with the chart, “bitcoin appears to have digested the impending hawkish or anti-inflation policy adjustment by the U.S. Federal Reserve, with a significant decline in recent weeks. Analysts said the cryptocurrency could see a relief rebound after the Fed’s decision due later Wednesday.”
In the meantime, however, the market is clearly in wait-and-see mode. Technically, what comes next will prove to be just as interesting. Indeed, the 200-day moving average has served as perfect support for the past few days. We have been above it since October 1st. Normally, some easing of the downtrend follows a bounce off such a support. Here again however, the price seems to be waiting for the trend to change. The answers may not be long in coming.
While inflation is rampant, speculators to this day continue to treat bitcoin as a risky asset rather than digital gold, or a hedge against centralized monetary policies. Yet the very nature of bitcoin and the data demonstrating it has taken a significant step forward this week. Indeed, as of Sunday, 90% of Bitcoins ever in existence had been mined. At the current rate of asset creation, the network’s inflation rate is …. 1.88%. Most importantly, however, we know that this rate will never rise. On the contrary, its decrease is fully programmed, until it makes bitcoin a deflationary asset in the long run.
Since May 2020, miners have earned 6.25 bitcoins for every new block verified. This rate will drop to 3.125 BTC per block in the next halving in 2024. By 2040, the reward per block will be reduced to less than 0.2 BTC and only 80,000 bitcoins will remain to be earned out of 21 million. It will take nearly 40 years to mine the last bitcoin.
Investor confidence levels definitely seem to be on the decline in the short term. It must be said that markets always have a short memory! Such price declines have already occurred twice in 2021, in May and September. While many were predicting the end of the bull market, it was in this area of distrust that the reversals took shape. All one has to do is take a step back to ease one’s worries and truly observe the health and progress of the asset. Indeed, while no one likes to experience this:
Yet this decline appears innocuous in the grand scheme of things (top period framed in the bottom graph):
On the fundamental side, the network is doing just fine. The global hash rate of the Bitcoin network dropped to 84 exahashes per second (EH/s) in early June, following the Chinese government’s crackdown on the cryptocurrency mining industry. Six months later, this major crisis has been erased, as the hash rate has returned to its historical highs.
Institutional players, on the other hand, seem to have a high level of confidence for 2022. “Incentivized by China’s ban and the proliferation of revolutionary technologies such as crypto dollars and non-fungible tokens (NFTs), we expect the U.S. to embrace cryptocurrencies in 2022, with appropriate regulation and associated bullish pricing implications,” said Mike McGlone, senior commodity strategist at Bloomberg Intelligence, in the 2022 crypto outlook. “The renewed push by the Federal Reserve to remove the punch bowl and lower bond yields may indicate a macro environment in 2022 that favors Bitcoin and Ethereum. The fact that cryptoassets showed divergent strength relative to equities in late 2021 may point to continued outperformance of digital assets in 2022,” he adds.
Asked whether bitcoin’s price has peaked in 2021 or is just consolidating, McGlone said another rally is coming. “We see the reference crypto well on its way to becoming a global digital collateral in a world that is moving in that direction. It’s likely to be a key support around $40,000 and resistance at $100,000 in 2022,” he said.
The analysis firm Messari is also moving in this direction, having just published a very relevant 165-page paper. While it would be pretentious to pretend to summarize it in a few paragraphs through this letter, we warmly suggest you read it. Let us simply share this screenshot. As the introduction to the report itself states, “It was written in five minutes and it’s better than this report, which is why I self-RT’d”
On the fund side, we are – as many market participants seem to be – in maximum capital protection mode.
Rivemont Investments, manager of the Rivemont Crypto Fund.
The presented information is as of December 15th, 2021, 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.
