Blockforce Manager Commentary: April 2023

Blockforce Update

As we have mentioned in previous updates, Blockforce has been steadily developing a machine learning trading model since midway through last year. After extensive backtesting and lots of refinement, April was the first month that model was put into live production in the Multi-Strategy fund. Though we started with a relatively small amount compared to the overall size of the fund, the initial results were very encouraging. The new model was up about 4% on the month, beating both bitcoin as well as some of our more established systematic trading strategies over that time period. As the new model continues to improve and demonstrate consistent performance, it is likely we will increase our allocation to this strategy over time.

Multi-Strategy Fund Performance

The crypto markets had a mild gain for the month of April, though it was a bit of a roller coaster ride to get there. Bitcoin spiked to $31,000 half way through the month, the highest level it had been since June of 2022. It then promptly fell to $27,000 a few days later, rose to $29,000 near the end of the month before finishing around $28,000. The Multi-Strategy Fund had a very similar return as bitcoin in April but its growth was much more smooth and less volatile. This was in large part due to our systematic and market neutral strategies performing as designed and smoothing out the volatility. 

Market Commentary

The largest market movement in April centered around the Ethereum upgrade known as Shapella. The upgrade went live on April 12th and enabled the ability for validators on the Ethereum network to de-stake their funds for the first time. The consensus heading into the Shapella upgrade was that once people had the ability to withdraw and cash out, that would lead to massive sell pressure and a drop in price in ETH. However, if you remember our predictions from the start of the year and our newsletter in February, we made the case for why the Shapella upgrade (called Shanghai back then) lowered the risk of staking which we believed would increase the amount ETH staked which in turn would result in a decrease the amount of ETH available to trade. This, we theorized, would put upward pressure on ETH’s price over the long run. Contrary to popular opinion, we predicted the Shapella upgrade would lead to an increase in price of ETH, not a sell off.

Following the upgrade, ETH climbed above $2,000 for the first time in eight months. But it wasn’t just ETH, the entire ecosystem seemed to rally. Liquid staking services Lido (LDO) and Rocket Pool (RPL) surged as much as 17% and 37% in the days following the upgrade. Ethereum Layer 2 tokens have also spiked immediately following the upgrade, with Arbitrum (ARB), and Optimism (OP) rallying as high as 52% and 26%. 

Short term price movements are one thing, but the more encouraging sign is the fact that on-chain indicators continue to improve. First, deposits are exceeding withdrawals. In the first few days following the Shapella upgrade, more ETH was un-staked than staked mostly due to the fact that Kraken was forced to withdraw all their ETH as a result of their SEC settlement. However, that trend reversed pretty quickly as deposits started outpacing withdrawals in less than a week. Now, we are seeing the amount of ETH staked grow faster than anytime in ETH’s history and in total, nearly 240,000 more ETH has been staked than withdrawn since April 17th. 

Furthermore, the vast majority of withdrawals tend to be only partial withdrawals. There are two types of withdrawals, full and partial. A full withdrawal means a user takes out all their ETH and is no longer a validator on the network. A partial withdrawal means a user takes out only a portion of the rewards earned, leaves at least the minimum 32 ETH staked on the network, and continues on as a validator. This is a long-term bullish signal for Ethereum as even among those who did withdrawal, the vast majority only withdrew a partial amount but still remain as validators on the network. Thus, the base number of validators are clearly committed to remaining validators which lends further evidence to our belief that stakers are long-term believers of the Ethereum network.

Shapella has proved to be a very positive development for the Ethereum ecosystem and the long term value of ETH. 

The Blockforce Team

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