Blockforce Manager Commentary: June 2022

Fund Update

Before we get into the fund’s performance and market commentary for the month, there are two developments we would like to highlight.

First, our new dashboard is now live and we are making it available to every one of our investors.  As part of our newly redesigned website, we have built a dashboard that will provide a real time look into the performance of the fund.  It includes various metrics as well as all the cryptoassets we currently hold in the portfolio.  This way, all of our investors can have an up to date view on our portfolio anytime they like.

In order to access the dashboard, simply click on the “Login” link in the upper right hand corner of the Blockforce Capital website.  When you do, you will be prompted to enter a password.  For anyone interested in accessing the dashboard, please email Brett (brett@blockforcecapital) and he will provide you with a password.

We ask that you do not share the password with others as we would like to keep access limited to only those who are investors in the fund.  Also, we will be making further improvements to the dashboard over time and likely adding more metrics to make it more robust and valuable for all of you.  With that said, the dashboard is now live so we encourage you to check it out for yourselves.  

Secondly, last month, we began a blog series designed to provide a more in depth look into each of our three buckets of strategies that make up our multi-strategy fund.  Our first piece covered some of the characteristics we look for when we conduct fundamental analysis on various cryptoassets for our long beta portfolio. This month, we added two more pieces of content to this series.  In the middle of June, we published a piece describing our Yosemitte and Denali algorithms we developed for our systematic investment strategies.  Then last week, we published a post about our market neutral portion of the portfolio.  If you are interested in reading any of these or past research materials we have authored, they are available on our website by clicking on the “Insights” link at the top of the page.

Fund Performance

In one of the toughest months of crypto’s history, the Multi-Strategy Fund continued to execute on its strategy of minimizing downside risk.  With fears of contagion due to the insolvency of Three Arrows Capital and centralized lenders such as Celsius, Voyager and Blockfi, bitcoin was down 37.8% in June. This was bitcoin’s second largest drawdown in any single month in its history.  Other parts of the crypto market didn’t fare much better as DeFi as a whole was down roughly 30% and smart contract platforms were down about 41% in aggregate.  In comparison, the Blockforce Multi-Strategy was only down 13.7% over the same period.  While we see long only and levered funds really struggle during these times, our strategy continues to outperform and positions us well for when the market eventually turns.

	Blockforce Multi-Strategy	Bitcoin
June Performance	-13.7%	-37.8%
June Daily Volatility	1.7%	4.5%

On Chain Analysis

Last week, we were invited by one of our investors to give a presentation on what we see happening with the underlying fundamental metrics of the crypto market during this latest drawdown.  The quick recap is that the data we are looking at tells a very different story than the price action of the last couple of months so we thought we would share that presentation with you all as well.  Although we do not have a recording of the live presentation, we recorded a separate 20 minute video walking through the same material used in case you are interested in watching for yourselves.

Mid Year Crypto Market Review

Market Commentary

June was another rocky month for the crypto industry.  Not only were prices down across the asset class, but news began to surface about several prominent companies and funds in the space possibly becoming insolvent.  These stories highlight exactly why there is no substitute for experience and risk management when it comes to investing in this asset class.

Let’s start with Celsius. In our last newsletter we covered how tightening spreads, massive losses in LUNA and illiquidity from holding stETH had caused Celsius to become insolvent and halt withdrawals on their platform.  Celsius, a centralized entity who was opaque in their risk management practices, engaged in the riskiest parts of the crypto ecosystem in an effort to continue providing high yields for their customers.  When the market turned, those risky bets started catching up with them.  

Years ago, Blockforce evaluated Celsius as a potential platform to lend cryptoassets to in order to earn a yield.  During our due diligence, the company refused to answer basic questions or provide any meaningful information on their operations.  As a result, Blockforce refused to do business with Celsius and we never deposited any assets with the company despite the fact that they were offering higher yields than most of their competitors.  Now Celsius is facing bankruptcy.  As recent events have shown, the ability to conduct proper due diligence and research rather than chase the latest craze is vital for long term success.

The second major meltdown this month was the collapse of Three Arrows Capital. 3AC had grown into one of the most prominent crypto funds in the space over the last couple of years and at its peak, reportedly managed about $10 billion. Not only was Three Arrows heavily invested in LUNA and stETH, they were levered long across a wide swath of the crypto ecosystem. As the market turned, they began to get margin calls and started liquidating assets.  However, that soon wasn’t enough and the firm is now facing insolvency. 

This isn’t to pick on 3AC specifically, but having invested through multiple crypto market cycles, the unfortunate truth is that we have seen funds blow up during every major downturn (ie: 2014, 2018 and now 2022).  Newer entrants with long-only strategies have a tendency to get too aggressive and when the market turns, they inevitably go under.  As much as I hate to say it, Three Arrows isn’t likely the only fund we will see fold in the coming months.

Which brings us back to why we are so adamant about being long term oriented and have a risk mitigated approach.  We do not use leverage and we try to invest only in high quality projects that have the potential for long term value appreciation.  It’s not sexy, especially during bull markets when everyone is looking to chase the hot new thing.  But in an asset class as volatile as this one, it has proven to be effective time and again.  Our returns this month, YTD, and over the last three years are evidence of that.  Our strategy, which we believe provides the best risk adjusted returns, requires patience and discipline and that only comes with experience and perspective of living through previous cycles. 

Sincerely,

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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