May 2021 Market Commentary

Paul Cappelli, Portfolio Manager

June 14, 2021

Volatility returned to digital assets in May as the market finished generally lower across major assets. Bitcoin fell 36.61%, Ethereum fell 9.73%, and the Bloomberg Galaxy Crypto Index—a measure of the broader digital asset market—fell 24.17%. What stalled this year’s momentum? A perfect storm of sorts.

First, Elon Musk took to Twitter on May 12th and brought the bitcoin ESG debate front and center. His comments questioned bitcoin mining and its impact on the environment. Even though Musk’s involvement with bitcoin and its development over its lifetime has been minimal, his tweets have proved to be influential, and in this case, the market reacted negatively. If nothing else, this shows that investors would like a clear, thoughtful, and thorough approach to questions surrounding bitcoin mining and its impact on the environment. In response, select cryptocurrency organizations and investors formed the Bitcoin Mining Council, hosted by the CEO of MicroStrategy, Michael Saylor. The Council has outlined its initial goals, including standardizing the reporting of energy consumption for professional miners, transitioning to more renewable energy sources, and working toward industry-standard ESG goals.

On the back of Musk’s tweets, China joined in on the FUD (fear, uncertainty, doubt). In what feels like an annual announcement, the Chinese government announced a “crackdown” on bitcoin mining and trading as well as its ban of using bitcoin as a currency. The market took the news seriously, with reactions ranging from accelerated migration to capitulation. As the dust settles, other world regions stand to benefit as bitcoin mining migrates from east to west and continues to expand in North America. Mining moving away from China could benefit bitcoin as the network becomes more widely distributed and balanced across global jurisdictions.

Finally, US regulators joined the volatility party, signaling that regulatory action could be on the horizon. Federal Reserve Chair Jerome Powell commented that digital assets posed risks to financial stability and indicated greater regulation might be warranted, stating that cryptocurrencies “are really vehicles for speculation.” The US Treasury Department also signaled concerns that wealthy individuals could use the digital asset sector to avoid taxes. They will require any transfer worth $10,000 or more to be reported to the IRS. Furthermore, President Biden’s proposal includes additional resources for the IRS to address the growth of the digital asset class. With cryptocurrency expert Gary Gensler at the helm of the SEC, investors speculate that more regulatory clarity is forthcoming. Despite the short-term headline risk, we believe regulation is likely to lend increased legitimacy to the asset class, promote investor protection, and prevent potential market manipulation over the long term.

Despite the volatility and rash of selling, buyers began to surface as the digital asset market de-levered, and investors began to see opportunity as prices dipped. Both bitcoin and Ethereum saw support below the $35,000 and $2,500 levels, respectively. Analysts are optimistic that the bull market remains intact based on a deeper analysis of the drawdown. There was a clear rotation of supply from short-term holders to long-term holders, and coins sold are now in the process of accumulation. The driving force of the sudden price drop was liquidations, which wiped out all leverage.

Moreover, new entities are coming onto the network—possibly attracted by lower prices. Overall, it is likely that the markets will make a full recovery before long. Mike McGlone, the Senior Commodity Strategist at Bloomberg, projects that “it is more likely for Bitcoin to rise to a value of $100,000 than that it will dip to $20,000 in 2021.”

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