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Blockforce Manager Commentary: October 2022

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Fund Update

Unlike previous months, there were no major announcements or new developments in October for Blockforce Capital. Rather, the team continued to work diligently on both funds as evidenced by our performance this past month.

With regards to our flagship fund, the team continues to closely monitor our portfolio allocation, analyze the on-chain data and refine our systematic trading strategies. We have been pleased that the strategy has performed as intended during these challenging months and believe the Multi-Strategy fund is well positioned heading into the end of the year.

As for our newest fund, the team continues to develop and improve the algorithmic trading strategies. The Market Neutral fund is growing as interest continues to increase with each month that passes. We are now up to nearly $3.5m after only two months. There is still room left for any investor interested in participating in the first $5m tranche of capital which comes with preferred terms. Those terms include no lock up period and a revenue share for the life of the fund. Please contact us ASAP if interested in investing as the preferred terms will no longer be offered once we raise the first $5m.

Multi-Strategy Fund Performance

Our stated goal for the Multi-Strategy Fund is to minimize the drawdowns in the crypto markets when they happen and catch the upswings when they turn in our favor. If we do this through multiple market cycles, over a long period of time we will outperform a passive investment crypto strategy in a risk managed manner. The last few months have been a microcosm of that strategy playing out.

The crypto markets have finished down 5 of the last 6 months and in each of those months (as well as every month that bitcoin has been down in 2022), our portfolio allocation and investment approach has allowed us to minimize the downside volatility. This past month saw bitcoin rebound and the Multi-Strategy Fund was able to take advantage of that move upward. The result is the Fund outperforming BTC by more than 17% year to date.

Though a small win in what has been a challenging year, October is further evidence that our strategy is working as intended. With any luck, the crypto markets will begin to build momentum through the rest of the year and if so, the Fund is well positioned to take advantage of that momentum.  

Multi-Strategy FundBitcoin
October Gross Performance7.0%5.5%
October Daily Volatility1.1%1.7%

Market Neutral Fund Performance

In the second month of live trading, the Market Neutral Fund outperformed its first month by over 100 bps. The new fund is performing right in line with our 24 month backtest we ran prior to launching the fund which gives us confidence that we may be able to continue producing similar results for a sustained period of time. That’s not to say everything operated perfectly with the new strategy. FTX, one of the exchanges the Fund trades on, had API failures on their end which prevented us from closing out a trade at the moment we originally intended to. That resulted in the trade lasting much longer than usual and falling outside our typical risk management thresholds. The good news is that trade ultimately proved to be profitable but it is a good reminder that this strategy is still a work in progress and not without risk.

OctoberYear to Date*
Market Neutral Gross Performance8.6%16.8%
Percent of trades profitable92.9%92.6%
Daily Volatility2.0%1.5%

*Note: Market Neutral Fund launched September 1st, 2022

Market Commentary

The last couple of months have seen the crypto markets beginning to dislocate from traditional assets. Most major currencies, including the British Pound (-5.6%), the Euro (-5.6%), Chinese Yuan (-8.3%) and the Japanese Yen (-8.7%) have fallen significantly relative to the dollar over the past 4 months. Yet during that same time period, bitcoin has increased 5.6% relative to the dollar.

In October, both Facebook (META) and Amazon (AMZN) fell -24.6% and -18.1% respectively over a 24 hour period. In comparison, BTC was up 5.6% on the month.  Furthermore, bitcoin’s worst single day drawdown so far this year (-17.1%) was less than both of those blue chip stocks. 

Bitcoin has proven to be one of the most stable investments over the past few months. Part of the reason is that, as we have covered in past monthly updates and bi-weekly newsletters, most of the sellers (either out of fear or forced liquidations) have been exhausted at this point. Meanwhile, the majority of buyers throughout the year have been wallets that have a historical propensity to take their coins off exchanges and hold for long periods of time. Thus we have had a substantial transfer of coins from short term oriented market participants to those who are very likely not to sell in the foreseeable future, if ever. That base has provided strong support at the $19,000 – $21,000 range that bitcoin has been hovering at for the last several months.  

This base of long term holders should provide a base from which bitcoin can climb upwards over the coming months. However, there is one source of potential forced sellers that may interrupt this momentum and that would be bitcoin miners. More and more computing power has come onto the network in recent months as evidenced by the fact that the hash rate on bitcoin’s network is now at all time highs. This is likely due to several reasons. First, former Ethereum miners have likely switched to mining bitcoin now that Ethereum has moved to proof-of-stake. Second, new mining locations can take upwards of a year to build out so much of the new computing power that has recently come online was likely originally invested in last year when the price of bitcoin was much higher and mining was more profitable. Third, there have been reports of more Chinese and Russian miners beginning to come back online following those governments becoming more relaxed in their restrictions. As computing power on the network has risen and price has remained relatively constant, miner’s profitability has declined rapidly. Should some mining operations become too stressed, they may be forced to liquidate their bitcoin holdings onto the market.

Even if miners become forced sellers, it would very likely signal the last leg down for bitcoin and the crypto markets. Should they not, bitcoin has a strong base from which it can move upwards from here. The rest of the year should be interesting to watch.

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. 

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. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.


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