2019 Year-End Market Commentary

Paul Cappelli, Portfolio Manager

January 1, 2020

The final month of 2019 brought the year to a fitting close, as price action and volatility mimicked much of the sentiment-driven price movement that we saw over the previous 11 months. In contrast to 2018 when a year-long retracement gave way to an aggressive late year sell-off that left the asset class battered and with many questions, at the end of 2019 we saw what a difference a year can make. A mid-month sell off served as a reminder that this asset class is still volatile and young, while a rally beginning in the final days of the year and continuing into the next decade demonstrated why both the near-term and long-term trajectories for digital assets continue to trend positively. It’s important to point out too that despite its volatility, data supports the benefits of owning bitcoin as it improves a model portfolio’s overall risk-return profile.

Ten years ago, born from the ashes of the financial crisis, bitcoin (BTC) emerged as peer-to-peer decentralized money. Fast forward to the present and bitcoin was the decade’s best performing asset and has evolved into digital gold, while simultaneously laying the foundation for open source blockchain technology, Web 3.0, decentralized finance and countless other projects that will fuel the next wave of technological and financial innovation. The asset class has also amassed a market cap of roughly $200B in the same short period of time.

After announcements in 2018, both Bakkt, the Intercontinental Exchange (ICE) and NYSE-backed digital assets and payments platform, and Fidelity launched their institutional custody solutions for bitcoin. Additionally, Bakkt launched the first federally regulated bitcoin exchange with physically- and cash-settled bitcoin futures, and bitcoin options. We started to see institutional investors warm to bitcoin’s place in their portfolio as a growth asset and macro hedge. On the regulatory front, we have some clarity on the roadmap to U.S. bitcoin ETFs and public funds with comments provided by the SEC following denial of all outstanding bitcoin ETF filings last year. Bitcoin has come a long way since Satoshi’s white paper ten years ago, from a little-known cryptocurrency used in pockets of the dark web to “digital gold” that institutions are building products and services around. As we continue to become an increasingly digital society, look for bitcoin to continue to make its impact both in investment portfolios and across society more broadly.

After a 2018 we may wish to forget, bitcoin rallied back in 2019 and returned just under 95%, finishing the year with a closing mark of $7,158.27. The flagship digital asset was not only one of the best performing assets globally in 2019, but, as stated above, it also led the way in other key areas that will help drive the asset class forward.

In addition to bitcoin’s strong performance in 2019, two of its hard forks seeking to fill the peer-to-peer payment role generated exceptional returns. Both Litecoin (LTC) and Bitcoin Cash (BCH) returned more than 30% from their 2018 close, increasing 39.85% and 33.73%, respectively. As we examine both assets, it’s clear that while bitcoin was initially designed to be a means of payment, we believe it has established itself as digital gold, and both LTC and BCH will continue to work towards scalability and adoption to ultimately become a decentralized means of payment in the future. Unlike the role of digital gold, which is likely a winner-take-all spot that bitcoin has claimed, the payments and means of exchange space will likely have multiple winners and may include central bank digital currencies (CBDCs), corporate-launched options like Libra, and crypto-native ones like stablecoins, BCH, and LTC.

It is still early days for Web 3.0 platforms, and, accordingly, related crypto assets did not see allocations from investors who are now more educated on the path forward and critical about these assets and their progress in their ability to scale. Since its inception in 2014, Ethereum (ETH), the world’s second largest digital asset by market capitalization, has aimed to become an open source blockchain-based distributed computing system, with the goal of fixing the things that are broken in today’s internet – like privacy, secure data storage, and data that is controlled and sold by tech behemoths, rather than in the hands of users and creators. Despite completing key updates throughout the year while recovering from its 2018 sell-off, Ethereum continued to experience scaling challenges and finished down 1.25%, for a final price of $128.41. Ethereum competitor EOS had a slightly better year, finishing up 0.78% for a final price of $2.57. EOS, a platform based on its ability to appeal to applications that need higher throughput like gaming, has also run into scalability issues. As we look ahead it will be interesting to see how the battle for Web 3.0 evolves over time and what new players will enter the arena.

Despite a partnership with Moneygram and a large push for adoption from tech company Ripple Labs, Ripple (XRP) lagged the market by a wide margin. XRP finished 2019 down -44.88% with a final price of $0.1906.

The Bloomberg Galaxy Crypto Index (BGCI) closed at a final price of 279.03 up 7.08% from a year prior.