Blockforce Capital’s Investment Strategy

At Blockforce Capital, we fundamentally believe that we are in the early innings of a technological and financial transformation which will result in the crypto industry outperforming every other asset class over the next couple decades. With that as our foundational assumption, the driving force behind Blockforce’s investment strategy is to position ourselves to capture the gains we believe the crypto asset class is likely to generate and compound that growth over the long term.

In order to achieve that goal, we must construct a portfolio that is positioned to produce outsized gains, but also withstand the volatility and inevitable market crashes that come along periodically with this asset class. Thus, Blockforce’s guiding principle is to capture the majority of the upside of the market while at the same time reducing the downside risk and volatility compared to a passive strategy. To be clear, this is the minimum standard we hold ourselves accountable to. The truth is we historically have oftentimes been able to outperform a passive strategy while still maintaining lower volatility and risk.

How have we been able to achieve such a high level of performance? It comes down to our core philosophy which you will find, is really just a unique spin on time tested strategies.

Our spin on conventional wisdom

Conventional wisdom has historically stated that a portfolio should consist of 60% stocks and 40% bonds. Given the low interest rate environment, there is a growing number of investors and advisors questioning the validity of that portfolio model. While we understand these criticisms, we prefer to take a slightly different view of what a 60/40 portfolio means and how that applies to crypto.

Rather than look at a portfolio as stocks vs bonds, we prefer to reframe that portfolio as “Return Enhancers” vs “Risk Reducers.” In our classic portfolio example, stocks would be the Return Enhancers and bonds would be the Risk Reducers. Stocks would generally provide the majority of the returns but when stocks were down, bonds would act as a buffer to the downside volatility. They would also provide a stable source of capital to draw from in order to rebalance into the underperforming asset class (stocks) while it is down.

When viewed through this lens, a portfolio can consist of any number of assets or asset classes. The Return Enhancers have traditionally consisted of stocks, private equity, venture capital, and certain hedge funds while the Risk Reducers would consist of bonds, real estate, collectibles, cash and other hedge funds. What critics of bonds today are really saying is that bonds are no longer providing the risk mitigation in the form of stability and downside protection from the coupon payments or yield that they once were able to produce.

For example, one component of risk is volatility. To qualify as a Risk Reducer, an asset should exhibit relatively low volatility. Historically, 30-year Treasuries have had low volatility in part due to higher interest rates. However, as interest rates have fallen in recent years, 30-year Treasuries not only have seen a decrease in their expected return, they have also seen an increase in volatility thus negating a lot of the benefits they provided a portfolio. As a result, the bond market has a lot more potential volatility, and thus a lot more potential risk, than at any time in recent history.

That being the case, let’s take this framework and apply it to the crypto market. Cryptoassets are not a monolithic industry. The mistake most people make is thinking of all cryptoassets as “alternatives” when in fact, they should be dividing various cryptoassets and strategies into our Return Enhancers vs Risk Reducers framework.

For example, taking a long position in bitcoin, ethereum, or any other cryptoasset definitely falls under the Return Enhancers. But what about staking those same assets and earning a yield? How about running a market making and other market neutral strategies that produce a lower but constant return regardless if the market is up or down? Those resemble the strategies in the traditional financial world that are classified as Risk Reducers. That is exactly the approach Blockforce has taken. By employing multiple trading strategies within our portfolio, we are able to increase the diversification, capture the majority of the upside and limit the downside volatility of the fund while investing only in cryptoassets.

Return Enhancers

The first strategy (which we call “Long Beta”) aims to capture the market’s growth by investing in various cryptoassets with an emphasis on larger cap coins such as Bitcoin, Ethereum, Binance Smart Chain, Solana, and others. This portion of our portfolio consists of ten to twenty cryptoassets based on research done by the internal team (more on that process below). These investments target longer hold periods and lower turnover. This strategy is designed to capture upside exposure in the crypto markets.

Risk Reducers

The problem we have observed in the market is that the vast majority of crypto funds today rely solely on long-only strategies that fail to protect downside risk. We believe the institutional investors need for exposure to digital assets is currently greater than the number of firms that can develop unique and productive solutions in an evolving product and regulatory environment. Blockforce lowers volatility and mitigates risk by employing two other strategies within our fund.

The first risk mitigator is what we call our “Systematic” strategy. This portion of our portfolio consists of fully automated trades based on proprietary trading algorithms that measure market direction, velocity, volatility, and price spreads to categorize and tailor trades to the current market environment. The algorithms are developed and monitored by the Blockforce team but execute on average 5–10 trades per month automatically. During more volatile market conditions the number of trades may increase. The algorithms seek to add exposure when the market confirms an upward trend. Similarly, when the trend plateaus or reverses, the model is designed to trim exposure. The models focus on entering positions when it calculates the probability of profit is above average and removing exposure when the algorithms deem the probability of profit to be waning or non-existent. The models seek to maximize the risk/reward ratio by measuring Sharpe, Sortino, and downside risk metrics — all in real time.

The second risk-mitigating strategy is our “Market Neutral” strategy. This portion of the portfolio includes a combination of lending or staking of cryptoassets, market-making on perpetual future markets, and arbitrage. This strategy is designed to generate yield regardless of market conditions and limit the downside volatility of the Fund.

These two strategies, Systematic and Market Neutral, provide diversified investment strategies that produce attractive returns on their own but more importantly, counteract the large price swings inherent in the Long Beta strategy.

Our Investment Process aka our “Alpha Predator System”

Implementing a strategy is just as important, if not more important than simply conceiving of one. At Blockforce, we strive to be disciplined, collaborative, and data-driven. The only way to do that is to follow a process for every investment decision we make.

The process by which new assets, strategies and algorithms are added or removed from the Blockforce portfolio is known as our Alpha Predator System (APS). The process is designed to be inclusive of the entire team as we believe the best ideas can come from anywhere. Another key component of APS is that it takes a holistic approach to investing. Not only must an investment stand on its own, but it must also fit within the broader context of our portfolio. The basic steps of our Alpha Predator System are as follows:

1. Strategic Analysis — any member of the Blockforce team is encouraged to introduce a hypothesis around a specific asset, investment strategy, or algorithm to add to the portfolio or remove from the portfolio. That individual must then make an investment case as to why they have conviction around the proposed strategy.
2. Testing — the hypothesis is back tested to understand in detail the performance of the asset, algorithm and strategy on its own merits.
3. Presentation to the Investment Committee (IC) — The results are presented to the IC at which point its merits are debated. The IC will either reject the proposal, suggest adjustments to re-test or agree to the merits of the proposal.
4. Portfolio Fit and Allocation — once the merits of the hypothesis are accepted, the IC will then test and discuss how the asset, algorithm or strategy fits into the wider portfolio, and what benefits it provides. Not only must the asset, algorithm or strategy be viable on its own, it must also be synergistic with the existing portfolio. If determined to be additive to the portfolio, an allocation will be discussed and agreed upon for the asset, algorithm or strategy.
5. Incorporation — once agreed on by the IC, the new asset, algorithm or strategy is then added to the Portfolio.

What We Don’t Invest In

Knowing what we don’t invest in is just as important as knowing what we do invest in. This allows us to focus, stay disciplined and not succumb to FOMO (fear of missing out).

Blockforce’s team is made up of individuals who have invested in the crypto industry for nearly eight years (keep in mind the industry is only 12 years old) meaning we are some of the most experienced cryptoasset investors in the world. The Blockforce team members have invested through multiple crypto market cycles whereas most managers today have yet to invest through even one downcycle. This gives Blockforce experience, insight, and perspective that few crypto fund managers can match. As a result, we believe we have a unique level of experience and expertise within this industry that gives us an edge.

The corollary to that is anything outside of crypto, we likely do not have an edge investing in. Hence, Blockforce Capital is solely focused on investing in cryptoassets. We spend 100% of our time researching and investing in the crypto industry.

However, even within the crypto industry, we can further refine our scope of investment activity. For one, Blockforce Capital is not a venture fund. We do not invest in ICOs, SAFTs, pre-launched tokens, or equity in crypto companies. We invest in liquid assets that have demonstrated market traction, early signs of network effects, and have compelling token economics. Furthermore, we are not interested in this month’s fad or meme coin. Even if it is profitable for some traders to speculate on assets such as Dodge or Shiba Inu, we do not believe in the long-term value of these types of assets and thus will not invest in them.

Finally, Blockforce Capital will never be 100% long only in our portfolio. While allocations across strategies may shift over time based on market conditions, we will always be prudent and maintain diversification of our strategies to mitigate risk.

Skin in the Game

There is one last principle Blockforce Capital holds dear, and that is ensuring we have alignment of interest with our Limited Partners. We will never invest other people’s money in a strategy we aren’t willing to invest in ourselves. Because of that, everyone on the Blockforce Capital team is an investor in the fund and as a collective unit, make up a substantial percentage of the capital the fund has raised to date.

However, this value goes beyond a simple minimum GP commitment. As we stated at the beginning, we are long-term oriented and believe in the effects of compounding. This is not just lip service. Historically, we have always reinvested a substantial portion of our annual performance fee back into the fund. Rather than take a short term payout like most hedge funds, we dedicate a portion of our performance fee to be reinvested back into the fund every year.

We hope this shines light on our investment philosophy and how we operate at Blockforce Capital. If you would like to learn more about us and our fund, you can find us at info@blockforcecapital.com.

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