Research Round-Up: April

Market Commentary

Bitcoin rallied approximately 9% during the month of March, putting in a nearly 25% rally from the low made in the middle of month to close near $47,000. While the one-year chart still looks like a broad consolidation, the recent rally is notable, not only because of the push past $45,000, but also because it is pushing against the 200-day moving average.

As you can see in the chart above, bitcoin has historically moved in strong upward trends or waves, meaning once it crosses above the 200-day moving average it can register large percentage gains, while time below the 200-day moving average has been much shorter. We took this analysis a step farther and compared what bitcoin's 12-month forward returns looked like if an investor purchased above the 200-day moving average versus below, as well as the average for the entire period studied:

This, of course, gives some confirming data to the chart pictured above, but what is perhaps more interesting is the average large percentage gain over the 12-month period when an investor purchased bitcoin and it was below its 200-day moving average. In other words, bitcoin has historically done very well once it crosses above its 200-day moving average, but even if purchased when it is below this, the next 12-months have historically been positive. While this is no guarantee of future performance, the data does illustrate bitcoin's price performance so far has been marked with very large bull runs, but consistent adoption and price increases over longer time frames.

News and Editorial

A curated list of the most relevant news and developments along with our two Sats.

President Biden signs an executive order concerning digital assets

President Biden signed an executive order on March 9th, to "ensure responsible development of digital assets."¹ The executive order prioritizes responsible financial innovation, the research and development of a Central Bank Digital Currency (CBDC), growth of the crypto economy, and the need for U.S. technological leadership and competitiveness. A result of this executive order will be a legislative proposal by the Attorney General to implement a CBDC, and a report on how cryptocurrency technology will impede or advance climate change.

Our Two Sats:

The executive order validates the idea that digital assets are more than a passing fad and the government is willing to get involved. Overall, the research and regulation resulting from this could remove the "unregulated" narrative behind a lot of digital assets, providing more comfort and certainty for potential investors and paving the way for institutional onboarding. Additional education is much needed and usually a net positive for an industry. However, at this point the executive order is largely focused on directing other agencies to produce reports over the next 180 days or more, so time will tell what the details bring. We note the executive order has a fairly heavy emphasis on CBDCs, and surprisingly does not mention the decentralized nature of these assets anywhere.

El Salvador delays launch of their "Volcano Bonds"

The Central American government had scheduled the launch of their $1 billion bond around the end of March, but given market volatility it has decided to delay the offering until May or June, or "at the latest in September."² Half of the expected proceeds from the bonds were expected to go towards the construction of a "Bitcoin City," the other half expected to go towards the government purchase of bitcoin.

Our Two Sats:

We noted in previous months' newsletters that progress was being made for the bond offering, including the introduction of multiple laws that would pave the way for the bond, as well as verbal commitments of $500 million. While it is not uncommon for financial institutions or countries to delay bond offerings due to market volatility, it nevertheless does introduce some uncertainty risk that it may not happen or the previous demand has now shrunk. El Salvador continues to be criticized for its adoption of bitcoin as legal tender by organizations like the IMF and World Bank, and most recently U.S. Senators introduced a bill that would require the U.S. State Department to produce a report on El Salvador's Bitcoin Law and propose a "plan to mitigate risks to the United States financial system posed by the adoption of cryptocurrency as legal tender in certain countries." We, of course, will continue to watch this unprecedented plan unfold.

Goldman Sachs survey shows 60% of surveyed clients expect to increase crypto holdings

A survey of 172 Goldman Sachs clients revealed that 60% of those surveyed expect to increase their digital asset holdings in the next one to two years.³ Of the 60% expecting to increase exposure, 32% said that they expect to "significantly increase" their digital asset exposure. Approximately 51% of all respondents reported having digital asset holdings in their investment portfolio compared to 40% in their prior year of the survey, and 55% noted that they would be willing to allocate up to 5% of total assets to digital assets. This follows news of Goldman Sachs making its first-ever over-the-counter (OTC) digital asset transaction with a bitcoin option on March 21.⁴

Our Two Sats:

One-off surveys can appear potentially tainted or biased when the data for digital asset adoption is so compelling. In recent years,  however, survey after survey of investors, from individuals to institutions, show dramatically increased levels of interest in digital assets over time. These positive trends seen in surveys as well as in real allocations from traditional financial institutions have continued to reinforce the thesis that the digital asset revolution is just beginning and will continue to drive traditional financial firms towards the embrace of change that is already beginning to take place. We also note that the news of Goldman Sachs making an OTC bitcoin option trade is another mile marker on the road to mainstream financial institutional adoption.

ExxonMobil, one of the largest oil and gas companies, is using excess natural gas to mine bitcoin

The oil and gas giant launched their pilot program in early 2021 and is now looking to expand to Nigeria, Argentina, Guyana, and Germany.⁵ Due to a lack of pipelines to move the natural gasses offsite, bitcoin mining rigs are brought in to utilize the roughly 18 million cubic feet of gas per month that would have otherwise been burned off into the atmosphere. Exxon, looking to meet the World Bank's call to end routine flaring by 2030, states that they "continuously evaluate emerging technologies aimed at reducing flaring volumes across our operations." Natural gas is comprised mostly of methane which is 80 times more powerful than carbon dioxide during the first twenty years in the atmosphere.

Our Two Sats:

One man's trash is another man's treasure. The pairing of these two industries could be a match made in heaven. Bitcoin mining rigs are mobile and energy hungry. Bitcoin miners look to consume the cheapest energy available and what's cheaper than energy that was nothing more than costly waste. It's promising to see the oil and gas industry testing whether mining rigs could be a long-term consumer of excess natural gas. Bitcoin mining also poses an additional source of revenue for hard-to-reach sources of energy.

Data to Watch

Data we are currently keeping an eye on and our commentary.

Bitcoin Perpetual Futures Funding Rates

We often look to funding rates to see if bitcoin price rallies are being driven by the futures market and may be due to speculation or euphoria. We noted last month funding rates were negative across many of the popular exchanges as price continued to be choppy and moving in a sideways pattern. What is interesting is that this past month saw bitcoin's price rally nearly 25% in the latter half of the month of March, but futures funding rates have not moved much higher. This could indicate the rally is being driven by the spot market and not the levered and usually more speculative futures market as we have seen in the past. Part of this spot market strength could be attributed to Terra’s bitcoin buying (more on that below).

Bitcoin Active Supply

We also note active supply remains subdued, indicating there is not a lot of trading or profit taking along with the recent rally. Interestingly, longer-term active supply, such as 1-year and even 180-day, remain low.