Monthly Manager Commentary: June 2024

Multi-Strategy Fund Performance

In June, the crypto market faced several perceived selling pressures, including the impending Mt. Gox distribution, the sale of $3 billion worth of BTC by the German government, and increasing miner capitulation. Despite these challenges and the prevailing market fear, bitcoin maintained its support level at $58k, suggesting a likely continuation of consolidation within this range before any upward movement. After a difficult start to the month, Solana emerged as a notable outperformer in the final week, driven by the release of potentially transformative technology for Solana applications called “blinks,” ZK Compression to reduce the costs of certain on-chain actions, and VanEck’s S-1 filing for a spot Solana ETF.

	Multi-Strategy Fund	Bitcoin
June Gross Performance	-10.9%	-7.1%

Market Commentary

The cryptocurrency market experienced a pullback in June as bitcoin was down 7% and the rest of the market down more than that. This decline was driven primarily by two factors: concerns surrounding the impending Mt. Gox asset distribution and increased sell pressure from unprofitable miners.

Mt. Gox Distribution: Misconceptions and Realities

In the latter half of June, the defunct bitcoin exchange Mt. Gox announced that it would start distributing up to 142k BTC back to creditors beginning the first week in July 2024. The market reacted negatively to this news, anticipating that the repayments would lead to a surge in sell pressure. Many believed that early investors, who will receive assets valued significantly higher than their initial investments before 2013, would be inclined to sell part or all of their holdings.

However, as we explained in a recent Forbes article, this narrative is based on a misconception that these bitcoins are being distributed back to the original retail customers. In reality, there has been a vibrant secondary market for Mt. Gox claims over the past several years and institutional investors have acquired a substantial portion of these claims. Consequently, fewer bitcoins will be returned to retail investors than commonly assumed. Instead, more will go to sophisticated, long-term investors who are less likely to liquidate immediately upon receipt.

Additionally, retail investors who still hold claims have had ample opportunities to sell over the past decade, often rejecting attractive offers. The ones still holding their Mt Gox claims are more likely to be long term oriented believers in bitcoin then your average retail investor. They also face significant capital gains tax liabilities, given that bitcoin’s value has increased 140-fold since the bankruptcy. 

Hence, we believe the fears surrounding the Mt Gox announcement are widely overstated and the impact from the Mt. Gox distribution will be far less than the prevailing narrative. 

Miner Capitulation: The True Pressure Point

A more significant factor affecting bitcoin’s price action in June has been miner capitulation. Following the April halving, where the block subsidy was cut by 50%, bitcoin’s price has remained largely range-bound. This has drastically reduced miners’ revenue while their costs have remained the same. While miners with access to cheap electricity might manage, those with higher costs or less operational efficiency are now operating at a loss. These miners have resorted to selling bitcoin to fund their operations, hoping to survive until bitcoin’s price increases sufficiently. We can see there has been a sharp decline in total miner revenue (block subsidy + fees) since the halving in April. 

In June, miners offloaded $2 billion worth of BTC in an effort to stay afloat, marking the fastest sell-off in over a year. This selling pressure has offset demand from the ETFs and kept bitcoin’s price in a tight range. Furthermore, the network’s Hash Rate, which measures the total computational power on the bitcoin network, has declined significantly for the first time in over two years. The 14-day moving average for Hash Rate is down about 10% since its peak on April 25th, indicating that miners are shutting down operations—a sign of capitulation.

Miner capitulation can be tracked using a metric known as Hash Ribbons, which compares the 30-day and 60-day averages of Hash Rate. This metric helps identify when miners are unplugging their machines due to unprofitability or energy curtailments. Historically, the forced selling of bitcoin to cover operating expenses has created local bottoms in bitcoin’s price. As weaker miners exit the market and Hash Rate begins to recover, bitcoin’s price typically follows suit.

We are likely witnessing the weakest miners being flushed out of the market, a common occurrence post-halving. However, this cycle’s capitulation is taking longer, possibly due to ordinal inscriptions temporarily raising fees, allowing less efficient miners to hang on longer. Once this sell-off phase concludes, we expect bitcoin’s price to start recovering.

Investors should focus on the underlying dynamics of miner behavior and the real impact of the Mt. Gox distribution. The prevailing fears surrounding the Mt. Gox announcement are likely overstated. The more significant influence on bitcoin’s price action is the ongoing miner capitulation, which historically precedes market recoveries.

The Blockforce Team

Disclaimer:  This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. 

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