Blockforce Manager Commentary: August 2023

Blockforce Update

Earlier this year, we integrated a new market neutral trading strategy in the fund. Since then, we have continued to build our machine learning capabilities and have applied those learnings to developing new Systematic trading strategies. After extensive back testing and rigorous examination, we began paper trading those new trading strategies in August. Much to our excitement, the new systematic trading strategy performed well and mirrored our back test over the past several weeks. Starting in September, we will begin live trading these new systems with small amounts of capital within the Multi-Strategy Fund. Should these new systematic strategies perform as expected in a live environment, our intention is to transition more of the fund towards these machine learning based strategies as we believe they offer the potential for better performance, heightened risk management and more adaptive to market conditions.

Multi-Strategy Fund Performance

After months of muted price action, August was a volatile month. Bitcoin saw the largest single day price drop this year (more on this below) which the fund was able to minimize the impact. We then saw price rebound following Grayscale’s victory over the SEC only to have price retrace back down. Through it all, the diversified strategies within the fund performed as intended, dampened volatility, and minimized the losses for the month.

	Multi-Strategy Fund	Bitcoin
August Gross Performance	-7.2%	-11.3%
August Daily Volatility	1.2%	2.1%

Market Commentary

Since March of this year, bitcoin has been pretty much flat, trading between $25,000 and $31,000 with historically low volatility. In August, we saw volatility return in a big way. 

On August 17, bitcoin unexpectedly fell roughly 12% back down to $25,000 representing the largest single day sell-off thus far in 2023. The drastic dip was caused by a leverage flush out in the derivatives market. Derivative markets are used to make bets about the future price of bitcoin and are especially popular with traders and hedge funds because it’s easy to add leverage. The dollar amount of futures open interest had been steadily rising since March most likely because many were expecting the volatility to eventually pick back up. The longer bitcoin traded in a tight range, the more likely it is we would see a breakout in the future (at least that’s the theory). The data suggests most of the positions were longs, meaning most traders were anticipating bitcoin’s price to rise in the near future (perhaps in anticipation of a ruling in the Grayscale vs SEC case, more on this in a moment).

However, bitcoin’s price started to drop. It’s unclear exactly why but once it did, it triggered margin calls on some of those long derivative positions. This forced some market participants to sell which further lowered the price and thus triggered even more margin calls. In fact, as prices kept falling, it triggered over $1 billion worth of liquidations in the open interest market in just a couple hours. For context, that was more liquidations in a single day period than when FTX collapsed.

In our newsletter we argued that this dip in price had nothing to do with fundamental growth metrics or adoption rates. In fact, bitcoin recently hit new all-time highs in daily transactions proving the adoption and usage continues to grow. What we saw happen was an unwind of all the leverage that was built up through the last few months, and although painful in the short term, actually puts the market in a healthier position moving forward. Taking all that into account, it’s likely that this is a short-term pull-back in price within a much larger uptrend for the crypto markets.

Shortly after, that analysis proved to be correct. On August 29th, a U.S. court of appeals unanimously found that the SEC’s refusal to grant Grayscale Investments permission to launch a spot-bitcoin ETF was unreasonable. The DC Circuit court of appeals has concluded that “The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products. We therefore grant Grayscale’s petition and vacate the order.”

Although this ruling does not guarantee a successful conversion of GBTC to an ETF, it does eliminate another excuse for the SEC to deny a spot ETF and pushes the industry closer to getting one approved. Grayscale’s win could clear the way for the flood of applications for a spot bitcoin ETF from the likes of BlackRock and Ark Invest that have been filed with the SEC. As a result, the price of bitcoin shot up nearly 10% immediately following the news on anticipation that spot ETFs will open new demand from untapped investors. 

We have long believed that the fundamental dynamics underlying the crypto markets have continued to strengthen throughout 2023 despite relatively minimal price action. It’s possible that given the recent return of volatility to the markets in August, we could start to see some of those dynamics play out in the coming months. 

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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