January 2021 Market Commentary

Paul Cappelli, Portfolio Manager

February 10, 2021

When we entered the new year, the digital asset class appeared to take a victory lap on its many milestones of late-2020. Gone was any talk of another “Crypto Winter.” Indeed, the crypto natives who continued to build through that period three years ago began to see their hard work pay off; “the herd” arrived and, with it, a trajectory that has great upside.

As the asset class continues to grow in both size and scope, 2021 looks to be the year when its advancements will move beyond foundational and begin the transition to directional. This evolution will give us a better indication of where digital assets will go over the next five to ten years.

Two major narratives emerged in January. First: the continued adoption of bitcoin as an effective tool for portfolios following positive developments in regulation and on-ramps. Second: the relentless emergence of Ethereum as Decentralized Finance (DeFi) continues its rapid ascent amidst increased demand for platforms that are censorship-resistant.

Unsurprisingly, the orange wave of bitcoin continued to lead mainstream adoption as the digital gold rose 18.85% to close the month at $34,509.60. Its developments continue to be almost too numerous to count across its ecosystem, so let’s take a look at select highlights from the past month:

  • BlackRock, the world’s largest asset manager at almost $8 trillion in AUM, filed to invest in bitcoin futures in two of its funds
  • Corporate balance sheets continue to adopt bitcoin as MicroStrategy added $10mm and Marathon Patent Group added $150mm to their treasuries
  • Bakkt, the bitcoin futures exchange and custodian owned by ICE/NYSE, is being acquired by a $2.1 billion SPAC
  • The Office of Comptroller of the Currency (OCC) released guidance for US banks to use public blockchains as settlement systems
  • Digital asset custodian Anchorage became the first one to receive a federal bank charter
  • Ray Dalio, financial thought leader and founder of Bridgewater, the world’s largest hedge fund, penned his thoughts on bitcoin: “I believe bitcoin is one hell of an invention” (he did address some remaining concerns)

As mentioned above, Ethereum, the world’s second largest digital asset with market cap of almost $200bn, is continuing its rapid development in the Web 3.0 sector. ETH had a swift price increase in January for a final mark of $1352.18—up 82% to begin the year. And while price is certainly one indicator, it’s important to dig deeper to grasp what’s happening beneath the surface. Ethereum has become the choice operating system for DeFi, a sector of the asset class that enables peer-to-peer primitive financial functions. These include lending, debt issuance, yield collection, and decentralized exchange. Examples of assets associated with these functions (which require ETH tokens to be used as “gas” to occupy the network) are Aave, Compound, Uniswap, and Synthetix.

Additionally, Ethereum is seeing its network value recognized as it is completely censorship-resistant. Recent events on centralized networks like Twitter, Amazon, and Facebook have caused many investors to question censorship—what it means socially and economically—when it comes to controlling our data and/or communications. This was once again highlighted by Reddit and its WallStreetBets forum. One thing is clear: this issue isn’t going away, and the Ethereum network is well-positioned be a solution.

The broader digital asset market measured by the Bloomberg Galaxy Crypto Index (BGCI) finished up 42.44% for a final mark 1497.20.

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