Cryptocurrency Monthly Report | February

Cryptocurrency Monthly Report: Key Takeaways

• Russia ‘ban’ news roils markets but regulation beckons 

• South America doubles down as inflation hits double digits 

• Institutions shift to buy the market dip 

Macro Outlook

Russia ‘ban’ news roils markets but regulation beckons

By the third week of January the total cryptoasset market cap had fallen 31%, from $2.21trn to $1.52trn, before reversing course by the end of the month to climb 11% to $1.69trn. Two major incidents precipitated the slide: the US Federal Reserve’s moves on interest rates, and comments on a potential ban on cryptocurrency by the Russian central bank. 

While markets continue to digest the Fed’s plan to hike rates as many as five times in 2022, more consideration needs to be given to the Russian situation. Crypto markets are extremely sensitive to regulatory news from global superpowers: predictable given the wide differences in regulation between nations. 

On 20 January the central bank, Russia’s de facto financial regulator, called for a full ban on mining, trading and cryptocurrency usage. [1]

But according to national news agency Tass, on 26 January President Putin pushed back on the bank’s comments, saying that Russia has “competitive advantages” in cryptocurrency mining, ordering the bank and the government to “come to some kind of consensus” on the matter before reporting on the results. [2] According to the Cambridge Centre for Alternative Finance, Russia controls around 11% of the world’s Bitcoin mining, third in the world behind the United States and Kazakhstan. [3]

Putin concluded that the regulator is “not trying to block technical progress” and “takes required measures to implement state-of-the-art technologies in this area”. 

In response the Russian Finance Ministry has put forward a legal cryptocurrency framework, noting that it supports regulation, citing potential tax revenues from the several million crypto wallets containing ~2 trillion rubles ($25.6bn) opened by Russian citizens, the potential for increased fraud and inability of law enforcement to track crimes posed by a total ban. [4]

With the Biden administration preparing an Executive Order compelling US federal agencies to report on the “risks and opportunities” of cryptoassets as early as February 2022, all eyes are on what could be the most important year in history for Bitcoin regulation. [5]

South America doubles down as inflation hits double digits

With a GDP of $169.1bn, Rio de Janeiro is the fourth-richest city in Latin America. [6] It was no surprise, then, to see global headlines when mayor Eduardo Paes announced on 14 January 2022 that the city’s municipal treasury would move 1% of its assets into Bitcoin. This confirms ETC Group analyst predictions that more central banks and governments will buy and hold digital assets in 2022. [7] 

As per Bloomberg, Paes’ move is part of a wider scheme to locate Rio de Janeiro as Brazil’s ‘crypto capital’, attracting wealthy businesses to its shores. [8] Paes also promised to include tax breaks for bitcoin-based businesses in the city, stating that any regulation would not impede the growth of the industry. As recently as October 2021, the Brazilian Congress was considering legislation to regulate cryptoexchanges, enacting industry-standard KYC procedures and strengthening local powers to prosecute crypto-related crimes. [9] Recent reports also suggest the Brazilian national stock exchange B3 plans to enter crypto markets in 2022, listing its first Bitcoin ETF. [10]

At the same time, Brazil — like most economic powerhouses worldwide — is struggling to keep inflation in check. Recent data via the government statistics authority IBGE pegs FY2021 inflation at 10.06%, more than double its 2020 figure and the country’s highest in six years. [11]

Billionaire crypto early adopter and hedge fund magnate Ray Dalio told CNBC this month that a 1% to 2% allocation to the asset class is “reasonable”, and the message appears to be spreading. [12] The Bridgewater Associates founder is famous for his global macro style and his $150bn AUM firm manages assets for the most conservative of conservative investors: central banks, foreign governments and pension funds alike.

Bitcoin’s status as a potential inflation hedge has come under question as, in the past two months, it appeared to move more in tune with equity markets and behave like a risk-on asset. But there is no doubt that inflation-hit countries see the thesis playing out long-term.

Institutions shift focus to buy market dip

It’s been something of a white-knuckle ride for cryptoasset holders recently. In January 2022 the crypto market dipped to its lowest level since August 2021 with assets seeing swift falls across the board. Markets have recovered, but remain choppy and without clear direction. Institutional investors, however, have now showed their hand.  

Between mid-December 2021 and mid-January 2022 markets witnessed five solid weeks of net outflows totalling $532m.

But data via asset manager CoinShares suggests sentiment is shifting, with the first week of net inflows reappearing. [13] Between 17-24 January 2022 institutions moved net $14m into blue-chip cryptoasset products including Bitcoin, Ethereum, Solana, Cardano and Polkadot ETPs.

Lest we forget: 2021 was a record year for institutional cryptoassets. $9bn flooded into structured ETPs and ETFs trading on regulated exchanges.  

It is also worth noting the almost carbon-copy repeat of market moves in response to Russian regulation. 

In March 2020 it was widely reported that the country‘s central bank would ban crypto trading as part of the Digital Financial Assets bill. Bitcoin dropped 40% in 48 hours, falling from $8,000 to $4,700. [14] It took just six weeks for Bitcoin to recoup its losses, and in the year that followed the world’s first cryptocurrency ran up gains of over 1,000%. As ever, those that can withstand short-term volatility came out on top.

Crypto Performance (As of 31.12.2021)

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/01/2022
Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product.

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