Blockforce Manager Commentary: November 2022

Fund Update

November was a turbulent month for the crypto industry. FTX was exposed to have been using customer funds to loan to its sister company, Alameda. As a result, FTX went from the the second largest crypto exchange in the world to filing for bankruptcy in a matter of days. Given FTX’s popularity and central role within the industry, many crypto companies and funds have been impacted by the recent events. After avoiding the collapse of Luna, Three Arrows, Celsius, and Voyager earlier this year, Blockforce Capital did have varying degrees of exposure to FTX. 

Our Multi-Strategy Fund had a relatively small amount of exposure to FTX while our newly launched Market Neutral strategy was much more significantly impacted. In light of recent events, we have decided to mark down the assets currently held on FTX by 95% until we have clarity of the results of the bankruptcy proceedings.  In the meantime, we will continue to work with legal counsel and explore every option we have available to us.

This is a difficult period for everyone involved in the industry including investors such as yourselves who have been impacted by FTX’s reckless behavior. However, recent events do not change our long term conviction about this asset class or our belief in the investing strategies we have developed. Blockforce remains committed to building a lasting organization, capable of weathering these periodic storms and delivering outsized returns to our investors over the long term.

Multi-Strategy Fund Performance

Prior to the FTX collapse, the Multi-Strategy Fund was continuing to beat the market just as it has most months throughout 2022. Unfortunately, approximately 10.5% of the Multi Strategy Fund’s assets are held in FTX as part of our various trading strategies. As a result of the inability to withdraw funds and FTX’s current bankruptcy proceedings, we have decided to mark down all assets held on FTX by 95% which caused the Fund to underperform bitcoin and the wider crypto market this month. While the impairment of those assets is frustrating, it’s worth mentioning the underperformance this month is due to a one time event. Our conviction about the Fund’s strategy, the future prospects of the crypto industry, and the Fund’s positioning moving forward remains unchanged.

	Multi-Strategy Fund	Bitcoin
November Gross Performance (Prior to FTX impairment)	-9.0%	-16.2%
November Gross Performance (Inclusive of impairment due to FTX)	-19.0%	-16.2%
November Daily Volatility	2.15%	4.24%

Market Commentary

Following the events over the summer (Luna, Three Arrows, Celsius and Voyager), the crypto industry had begun to stabilize in Q3 and the beginning of Q4. We had even started building a little momentum as BTC and ETH were trading at $21,000 and $1,600 respectively at the start of the month. Then on November 6th, the CEO of Binance put out a tweet that ultimately led to the collapse of FTX in a matter of days. We covered the event in detail in our November 15th edition of our newsletter as well as all the second and third order effects in our last newsletter. 

We have seen numerous companies impacted by the fraud committed by FTX and the market overall has dropped roughly 30% since the start of the month. The FTX fallout has triggered one of the largest capitulation events in bitcoin’s history, the significance of which is comparable with the COVID crash in March 2020 and the capitulation of the market in December 2018. However, the characteristics in the market following the collapse of FTX bear several similarities to the bottom of both those moments in history which turned out to be the moment of absolute seller exhaustion. Given the fact that the market has continued to consolidate after a chaotic few weeks, with prices even beginning to rebound slightly, there is reason to believe that the worst is now behind us provided another unforeseen collapse of a major entity doesn’t happen in the coming months.

FTX does not change the fundamental value that most crypto projects provide. Just like in 2008, the banks gambling with customers’ money on mortgage-backed securities did not change the fundamental value of a home. Bitcoin’s supply issuance and monetary policy can be verified by anyone and has not changed since it launched in 2009. Decentralized exchanges such as Uniswap and lending platforms such as Compound and Aave have continued to operate without interruption and with full transparency throughout the year. Their open design ensures that the platform’s collateralization is knowable and verifiable to all market participants at all times and thus, won’t collapse due to poor decisions of a single individual or small group operating behind closed doors. 

In fact, we have started to see an increase in user adoption and other metrics in many DeFi projects. We are also seeing more and more bitcoin being taken off of exchanges and held in cold storage, further decreasing the total available supply of BTC to be traded. Despite the events of the past few weeks, there are a number of positive developments happening that the market has not priced in yet. While it’s likely we may be in for a period of sideways price action, there is good reason to be optimistic about the long term value of many projects within the crypto market.

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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