Blockforce Manager Commentary: February 2023

Blockforce Update

This past month, Blockforce was awarded Best Sustained Risk Adjusted Performance over the past 36 months for digital assets by Hedgeweek. We have won numerous awards over the years but most of those are for monthly or annual performance. What makes this award so meaningful to the team is the sustained performance over a longer period of time. We fundamentally believe crypto is a multi-decade long trend that is just starting to play out and we have built the firm with that long-term mindset and focus. We are not here to capitalize on the flavor of the month token or over-leverage into a position simply out of FOMO. We simply want to build a lasting business that takes advantage of the value appreciation we believe crypto will experience over the next couple of decades and deliver superior risk adjusted returns during that span. This award is nice validation of our long term focus.

Multi-Strategy Fund Performance

Similar to the general overall crypto market, the Fund was basically flat on the month. Historically speaking, this is common during the rare months in which the crypto markets are flat. Our portfolio is designed to perform best when there is clear movement regardless if that move is up or down. However, during flat months, our beta portion is likely to track the market and our systematic algorithms tend to hover around even as they are optimized to take advantage of volatility in either direction. Hence, during periods of sideways action like we saw in February, it’s pretty common for the Fund to track the market. We do not expect this low volatility to remain for very long and when it does pick back up, we should see better performance from the Fund.

Market Commentary

After a rapid start to the year in January, the crypto market traded in a pretty tight range for most of February with a few notable exceptions. Optimism (+29%), Filecoin (+39%), Lido (+45%) and The Graph (+85%) all had strong months.

The more interesting development however, is that we are beginning to see the correlation of cryptoassets with U.S. equities and macro events weaken. At the start of the month, the Fed raised interest rates once again and many US equities fell over the course of February. The Dow dropped 4.2% in February and is down 1.5% in 2023. The S&P 500 and Nasdaq declined 2.6% and 1.1%, respectively, for the month.  In contrast, much of the crypto market was flat to up on the month. Hence, we may be witnessing the crypto market’s sensitivity to traditional markets declining, as bitcoin’s correlation with equities has fallen steadily throughout the year. The correlation between the leading cryptocurrency by market cap and the Nasdaq Composite has fallen from 0.94 to 0.58 according to data from The Block.

Though recent regulatory actions present headwinds for the crypto market, weakening correlation U.S. equities poses a bull case for crypto. Until the last couple of years, crypto has been largely uncorrelated to any other asset class making it a valuable tool in a capital allocator’s portfolio. Should crypto return to more historical correlation levels, we could see more capital flock into the asset class over the course of the year as investors look for greater diversification in a tough investment environment.  

The Blockforce Team

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