Insight
February 3, 2023
The bitcoin price was up 39.5% in January, making it the third-best January on record for the asset (there were no markets in January 2009 or 2010). Only 2011 (+73.3%) and 2013 (+54.5%) had better Januarys. The rally comes as the macro backdrop for many asset classes has become more favorable with declining inflation and declining forward interest rate expectations, while at the same time, many of the distinctive events that plagued crypto markets in 4Q abate and recede in the rearview mirror.
If the returns of past Januarys portend anything about the rest of the year for bitcoin, then we might be in store for a good year. 2011 and 2013, the years that had better Januarys than this past one, were quite positive for bitcoin, both being the peak years in the repeating halving price cycle for bitcoin. We would be surprised if that were the case as this year is shaping up to be more like 2015 or 2019, the rebuilding years following a precipitous drawdown. Those were not bad years for returns, just far from the manias of 2011 and 2013.
The “January effect” used to be an anomaly in the stock market, where small caps outperformed in the first month of the year, but since its uncovering, the effect has gone away. However, there seems to be some statistical evidence for bitcoin linking January returns with full-year returns. The correlation of January and full-year returns is +0.62 and an R-Squared of +0.38 with a t-Stat of +2.47. With the appropriate caveat that past performance is not indicative of future performance, we think there is a lot to like about the start of the year. This asset, which was once again left for dead by many in the wake of the events of 2022, is once again, predictably, showing signs of life.
For the past week, the Bitcoin community has been fixated on ordinals, a project led by developer Casey Rodarmor that enables native NFTs, called inscriptions, on Bitcoin’s blockchain without a separate token, side chain, or change to Bitcoin’s underlying code. It does this with a special program, ord, that ascribes arbitrary data to a satoshi, the smallest divisible unit of a bitcoin, in the witness data of a transaction, that is permanent, unique, and viewable with the ordinals explorer. The data can be an image, gif, text, HTML, or even a video game. We have seen pictures of Jessica Lansbury, digital rocks, video games Doom and Zork, and hundreds of other digital artifacts inscribed into satoshis. The data are entirely on-chain, meaning there is no pointer to an off-chain data source, a structure popular with many other NFTs on Ethereum, and the only limit of what can be inscribed in the 4 MB/block limit. We won’t go into all the details of how ordinals work, but there are some good explainers here, here, and here.
The launch of the project has incited some important philosophical, technical, legal, and economic questions about Bitcoin, ones that challenge some of the core principles of Bitcoin – permissionless, decentralization, and censorship resistance. The media has played up the tension caused by the ordinals project, which relies heavily on the Taproot upgrade from November 2021 in a way many developers had never expected. Our view is that these tensions, while very real for some members of the Bitcoin community, come from a very small number of people, amplified by the media. The technical debate boils down to an “inventive” use of the blockchain versus a “corruption” of the blockchain, twisting what Bitcoin was intended to be used for. Ultimately, the technological debate is one that is philosophical in nature to us – this is something that Bitcoin CAN do, but SHOULD it be able to do this?
The legal debate provokes important questions. Does this content violate intellectual property rights? Does it contain societally objectionable or illegal content? It prods us to think more deeply about Bitcoin’s permissionless and censorship-resistant nature. Bitcoin can be downloaded by anyone with internet access and used in a manner that others cannot control. The same questions can be applied to financial transactions as they are to NFTs. The ordinals project has already banned some objectionable content but there is no practical way to prevent it from happening again in the future—plus this content is forever inscribed on Bitcoin’s blockchain.
Finally, on the economic front, ordinals raise questions about transaction fees and crowding out. As these NFT transactions can be quite large, filling up an entire block, if need be, there are questions about crowding out typical financial transactions. As bitcoin transactions are priced based on the space they take up in a block (satoshis/virtual byte), there are concerns about how NFTs may drive up fees for ordinary financial transactions. On the flip side, this is a boon to miners and perhaps the long-term security of Bitcoin, which will increasingly rely on transaction fees rather than the block subsidy.
The dust is far from settled on this, but we are watching it closely for its many implications. The advent of ordinals certainly has many in the community rethinking and re-testing their beliefs and assumptions about Bitcoin. Usually, these moments have galvanized the technology and community, making Bitcoin as a social construct and software ecosystem even stronger in the future.
On Wednesday afternoon the Federal Open Market Committee (FOMC), the monetary policy-setting body in the US, raised the target on the Fed Funds rate by 0.25%. The rate increase was largely expected by the market, which reacted little to the news release. However, Fed Chairman Jay Powell’s press conference following the rate increase was interpreted as dovish for future rate increases by the market, and as a result, investors sent the price of assets sharply higher. Bitcoin rallied over 5% at one point and through the $24,000 price level, before settling back down around the $23,800 level.
We have previously written about bitcoin becoming increasingly driven by macroeconomic events, as seen by the increasing returns on days of monetary policy announcements in the post-2020 era. This Wednesday is just another example of that. We wondered if some of this price action around the FOMC announcement was mean reverting, meaning prices subsequently fall after rising on FOMC days (and vice versa). An analysis of the data shows some mean reversion (negative slope of the linear regression), but the relationship does not appear to be substantial or statistically significant (low R-Squared and t-Stat). Regardless, macroeconomic events continue to impact bitcoin prices in the short term, indicating the Fed has made watchers of us all.
It was a good week for most asset classes, largely propelled by dovish actions from the Fed. Bitcoin was up again, rising 3.3%, and briefly breaking through the $24K price level. Equities had a strong week as well, with the S&P 500 rising 3.0% and the Nasdaq Composite rising 6.0%. Commodities struggled with gold down 0.7% and oil falling 6.3%. Bonds were up across the board, with investment grade corporate bonds up 1.2%, high yield corporate bonds up 1.5%, and long-term US Treasuries up 1.5%. Real yields were mixed and inflation expectations fell slightly.
Investing:
ARK Invest Big Ideas 2023 (Page 55 for Bitcoin) - ARK Invest
The Unusual Crew Behind Tether, Crypto’s Pre-Eminent Stablecoin - WSJ
Regulation and Taxation:
Binance Offshore Exchange Tapped Same Lobbyists as US Affiliate - FT
As Crypto Cratered, Gemini Talked to Customers About FDIC Insurance - Axios
A CFTC Commissioner’s Enthusiasm for Crypto Draws Attention - The Block
Companies:
Elon Musk Pushes Forward with Twitter Payments Vision - FT
Celsius Problems 'Dated Back to at Least 2020': Examiner’s Report - Decrypt
FTX-Linked Alameda Research sues Voyager Digital for over $445M - The Block
Strike Launches Remittances to Philippines - Bitcoin Magazine
WazirX Says Binance Lied About Ownership as Dispute About India’s Largest Exchange Escalates - CoinDesk
Zanmai-Run WazirX Can No Longer Use Binance Wallet Services - Binance
Feb 14 - January CPI reading
Feb 24 - CME Futures and Options Expiry
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