As we alluded to in previous manager commentaries, Blockforce has been working on updating our brand and messaging. The team is excited to announce that this is now complete. We have overhauled our website which you can visit using the link below.
We have also rebuilt our investment deck from scratch to better reflect our story and articulate our strategy more clearly. If you would like to take a look at our new deck or share with friends who may be interested in investing, you can use the link below.
But we aren’t stopping there. We are currently in production of building a brand new dashboard that will provide all of our investors with a real time view into a number of different metrics about the fund. Our goal is to bring an increased level of transparency and information to you about your investment. We hope to have this live in the next couple of months and will notify each of you once it’s ready.
Similar to the previous month, the Multi-Strategy fund was down in May (-13.4%) but once again beat bitcoin (-15.6%), Ethereum (-31.7%) and the wider crypto markets including DeFi which fell roughly 28.7%. Although these bear markets are never fun, it’s exactly this time in the market cycle that our strategy pays off and continues to position us well for when the market eventually swings back up.
|May Daily Volatility
For the first time in its history, bitcoin recorded 8 consecutive weeks of prices finishing lower than the previous week. This was driven, in part, by Luna’s crash on May 10th which caused the Luna Foundation to deploy $3 billion worth of bitcoin onto the market in a matter of hours in an attempt to defend the peg. Bitcoin’s price fell to as low as $26,850 but has since stabilized around the $28k – $32k range. The only two times in history when bitcoin has fallen to this range (January 2021 and July 2021) has coincided with a local bottom and the price shot up soon after, indicating there has historically been strong support at current prices.
Generally speaking, there have been two groups of crypto investors since the start of the year. The first group views crypto as simply another risk-on asset similar to tech stocks. As the Fed has tightened monetary policy to curb inflation and the stock market has fallen, this group has been selling crypto right along with every other tech stock. This explains crypto’s correlation with the stock market since the start of the year when historically, crypto has been extremely uncorrelated to stocks and bonds. From time to time we have seen bitcoin become highly correlated with stocks, as was the case in Spring of 2020, though these periods usually have not lasted too long.
And yet, there is another group. A group that continues to buy bitcoin, take it off exchanges, and refuses to sell. In our newsletters, we have routinely highlighted that the percent of bitcoin supply that hasn’t moved in over a year continues to set new all-time highs and now sits at 65.6%. Despite the market turbulence over the past year, nearly 2/3 of all bitcoin in existence hasn’t moved. While the first group has been responsible for the volatility this year, it’s this second group that has provided the stability and support at lower prices.
Based on a number of historical metrics (see On-Chain Analysis Video below), it’s more likely than not that bitcoin has reached the bottom of this cycle. By “bottom”, we simply mean the general range that represents a trough over a longer market cycle. We do not claim to be able to determine the very lowest price bitcoin will reach nor do we intend to predict the specific day at which bitcoin hits that price. It’s also impossible to predict how long a bottom may last and when price will ultimately rebound. In fact there is historical precedent that this kind of sideways price movement can last a long time such as 2015 when the “market bottom“ lasted for nearly the entire year. However, the metrics that we are tracking show that there is evidence that the price is unlikely to drop significantly more from here but is likely to rebound to new all time highs eventually. Which is why for anyone with a long term outlook, we believe this moment in time represents an incredibly attractive opportunity from a risk/reward perspective.
On Chain Analysis
Reflections on UST and LUNA
As we covered in our May 17th edition of The Node Ahead, Terra’s collapse was one of the largest and most dramatic in crypto’s history. More than $40 billion of market value was destroyed in a couple of days which had a material negative impact on a number of prominent crypto funds. Fortunately, Blockforce had very minimal exposure to the Terra ecosystem. We did not hold any UST but had made a small investment into LUNA. Hence, the collapse had an insignificant impact on our overall performance for May. We do not bring this up to gloat or beat our chest but rather, to provide a great case study for why we remain disciplined in our risk-adjusted approach.
The last couple of years have proven the usefulness and demand for stablecoins evidenced by the fact they have grown to $180 billion in market cap in less than 5 years. However, much of that growth has been from collateralized stablecoins such as USDT and USDC which are backed by the United States dollar. Dollars or US Treasuries are deposited into a bank, after which a stablecoin is issued with a 1:1 ratio against those dollars. When a person wants to convert their stablecoin back to USD, that stablecoin is destroyed and USD is issued to that user.
This model provides stability but also has a number of downsides. The biggest drawback of the asset backed model is the resulting centralization of these stablecoins. An asset backed stablecoin requires a central entity to custody the underlying asset and facilitate the issuance of the stablecoin. Thus, these stablecoins require its users to trust that the central authority actually has the proper amount of underlying collateral it claims it does. These concentrated risks have already manifested into legal trouble for USDT and USDC which have both had a history of regulatory run ins. Furthermore, as long as a central entity controls a stablecoin, it is subject to political whims, government seizure, and assets being frozen. Hence, centralized stablecoins negate much of the benefits of self-sovereignty and censorship resistance that decentralization is supposed to provide.
Which brings us to the second method for maintaining price stability. Algorithmic stablecoins maintain their price peg through a set of self-executing rules rather than relying on collateralization. Thus, algorithmic based stablecoins do not require a centralized authority to operate, they are completely decentralized. Algorithmic based stablecoins align much better with the mission and ethos of bitcoin, DeFi and crypto at large.
It was our thesis (and frankly still is) that a decentralized stablecoin that is able to retain its peg (granted that is a big if) would become the most widely used stablecoin in the market. The fact that UST was the fastest growing stablecoin in 2021 and in less than 18 months because the fourth largest stablecoin in the market is validation of that thesis.
However, although UST became the largest algorithmic stablecoin to ever be developed, it wasn’t the first attempt at creating a decentralized stablecoin. All previous attempts failed due to the dreaded “Death Spiral” (essentially a run on the bank). We were well aware of the risks which is why when we did decide to make an investment in LUNA, we sized it appropriately within the fund.
In December 2021, Blockforce allocated 0.5% of our fund to LUNA. Like any initial investment into an early protocol, we start small due to the unpredictability of new protocols and the asymmetric opportunity they present. If it had been able to maintain its peg, there was potential for an enormous return. However, we knew the risks associated with LUNA and if it should go to zero, we did not want to put the portfolio at risk.
Blockforce avoided significant loss not because we are smarter than other investors, but rather we stayed disciplined to our strategy. In all honesty, we too were excited about the possibility of a truly decentralized stablecoin as evidenced by our investment in the first place. However, we did the research, understood the risks and sized the investment appropriately to those risks. Discipline rarely ever makes the headlines but it’s something we pride ourselves on at Blockforce.
The fundamentals of the network have never been stronger, and the adoption of bitcoin has never been greater. Bitcoin’s supply issuance remains constant and ultimately capped at 21 million. HODLers continue to take more supply off exchanges and hold for the long-term creating one of the largest supply squeezes in bitcoin’s history. Countries are continuing to embrace bitcoin to varying degrees. Even within the US, there is enough political support for bitcoin so it is unlikely to be regulated away and any anti-crypto regulation seems to be focused on stablecoins, not bitcoin. Bitcoin has been significantly de-risked over the past year (that’s not to say there is no risk) and yet we are sitting at roughly the same price per bitcoin as a year ago. All the while, the long-term upside is orders of magnitude from where we currently stand today.
And yet, macro forces and confusion from market participants that don’t yet fully understand bitcoin and crypto have kept prices suppressed. This isn’t to say bitcoin’s price can’t go lower in the short term, it definitely could. It’s impossible to know for sure if we have hit the bottom or how long that bottom may last. But even if we haven’t hit the very bottom, we are likely pretty close. Hence, from a pure value perspective, this moment in time might be one of, if not the greatest entry points in bitcoin’s history.
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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