Blockforce Manager Commentary: January 2023

Blockforce Update

January proved to be a great start to 2023. At the beginning of the month, we published a research report covering the on-chain metrics which, at the time, suggested that there was a good possibility that the market had bottomed out in late November. The price of bitcoin at the time of writing that piece was roughly $16,500. By the end of the month, the market had rallied to over $23,000 which was good validation of the data we were tracking but more importantly, got the fund off to a good start for the year. 

In addition, the developer team continued to improve and refine our machine learning market neutral strategy. We are encouraged by the progress and results that model is displaying and expect it to have a meaningful impact on the performance of the Fund in 2023. 

Finally, Eric, Brett and Grant recorded our annual Year in Review video. In it, we discussed what we saw in 2022, how the fund performed in a difficult year, and the six trends we are watching for in 2023. You can find the link to both the full video and the slide presentation here.

Multi-Strategy Fund Performance

Though we had seen signals that the market may have hit bottom in late November, we were waiting for confirmation from a few key on-chain and technical levels before getting more aggressive. Hence, the Fund started the year still positioned quite defensively. Once bitcoin crossed the Realized Price and Short Term Holder Realized Price (see analysis below), we began re-balancing the Beta portfolio to bring it more in line with our historical target weightings. Because of this, the Fund saw muted gains on the initial move up from $15,600 to $20,000 as compared to bitcoin due to the purposeful conservative positioning of the portfolio. We knew that would always be the case but, assuming we hold above the $20k level, we believe this is just the start to a much longer trend that will play out over the course of this year as we begin to rotate the portfolio back to a more standard allocation.

	Multi-Strategy Fund	Bitcoin
January Gross Performance	12.2%	39.8%
January Daily Volatility	1.8%	2.3%

Market Commentary

After a 64% drawdown in price over the course of 2022, bitcoin has since rallied from a low of $15,700 on November 21 to over $23,000 in January putting it on track for its best opening to a year since 2013. It seems hard to believe, but bitcoin and other large cap tokens have recouped the entire dip caused by the FTX collapse and are breaking through several widely observed technical and on-chain pricing models. One key threshold that we highlighted in our research post at the start of the year was Realized Price. On January 13^th, bitcoin’s price crossed back above the realized price for the first time since June of last year meaning the average BTC holder and mining operation are back in the black. This is a key psychological threshold as market participants are less inclined to sell and more likely to buy when their investments are in the money. The current Realized Price is $19,800 and if bitcoin’s price can hold above this threshold, that would be a very good sign for the rest of the year.

Another positive indicator is that the amount of leverage in the system has declined dramatically since November 2021. At the height of bitcoin’s price, the futures open interest (often used as a way to gain leverage in trading) was above $25 billion. We now know that many trading firms, including 3AC and FTX had taken on massive debt which in part fueled the run to $67k. Much of that risky behavior has been flushed out of the system given that the futures open interest now sits at $9.5 billion which is about on par with the levels from the start of 2021 prior to the market’s big move upward. In other words, there are fewer accounts at risk of liquidation and fewer tokens susceptible to being dumped in forced selloffs. This most recent upswing in price was not fueled by massive speculation or propped up by over-levered firms. Instead, this price movement seems to be a genuine market signal.

Third, on-chain activity has begun to pick up. The number of new addresses and the number of transactions on the network has spiked in recent weeks. Increasing on-chain transactions is a sign of increasing demand and a healthy indicator that we may be nearing the end of the bear market.

Lastly, as Bankless noted in their recent newsletter, stablecoin data shows a spike in the amount of dry powder (money waiting to be invested) held by big players sitting on the sidelines. Nansen Smart Money stablecoin positions, which measures the percentage of large whales’ portfolios that are held in cash, is currently at a historically elevated level. “This data suggests that investors are nowhere near fully allocated, and there is plenty of ammo remaining on the sidelines to drive prices higher.”

The recent move upwards has crossed key price thresholds that have historically been reliable indicators of future bull markets. The amount of leverage in the system is relatively low, activity on-chain is picking up, long term holders continue to accumulate and yet there is still plenty of dry powder sitting on the sidelines to fuel a future run. While it’s impossible to know for certain what will happen to prices in 2023, all the right pieces are in place from an on-chain perspective.

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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