December 2018 - Market Update

Monthly Update || December 2018

 It’s essential for investment success that we recognize the condition of the market and decide on our actions accordingly.
— Howard Marks, speaking about market conditions much more stable than crypto

Opening Remarks

 Greetings from inside Ikigai Asset Management1 headquarters in Marina Del Rey, CA. We welcome the opportunity to bring to you our third Monthly Update and hope these are helpful in better understanding some of what we’re doing and what we’re seeing. We have the privilege of deploying capital on behalf of our investors into a new technology and asset class that we believe will fundamentally change the world and create trillions of dollars of value in the process. We believe we are obligated to be shepherds of this technology – to help the world better understand the powerful potential of DLT and crypto assets, and to fund and be an ambassador for DLT projects that will change our lives forever.    

To that end, we continue expanding on multiple spectrums of frameworks -> processes -> tools across our business. We believe in constant improvement – that will never be a finished job. Not seven months in, not seven years in. As investors in this dynamic technology and asset class seeking to generate attractive risk-adjusted returns on a repeatable basis, the ground we’re standing on may be moving below our feet in real time. Market prices, market structure, fundamentals, and the definition of value are moving around in real-time. We believe this environment provides significant, compelling opportunity, and capitalizing on it requires 1) patience, 2) objectiveness, 3) vigilance, and 4) flexibility.

We believe capitalizing on opportunity in this space requires having the right team members in the right roles and doing the right work towards the right objective. We have an outstanding team here at Ikigai and we are proud of that.

In the following letter, we discuss the current state of the crypto market, some of our expectations for the coming months, and the opportunities we see. We do not think the asset class will cease to be volatile. However, with 1) proper risk management; 2) careful observation; 3) relentless focus on value; and 4) flexible capital deployment strategies, we believe attractive risk-adjusted returns can be identified and generated. Building an organization that effectively converts opportunity into achievement requires daily focus on many tasks. Those tasks roll up into short-term goals. Short-term goals roll up into long-term goals. Long-term goals roll up into a vision. In that way, the things we are diligently working on today, will serve us in the years and decades to come.      

1. Ikigai Asset Management is the trade name for a collection of advisory and consulting businesses operated by Travis Kling, Timothy Lewis, Anthony Emtman, and their team.

November Highlights

  • Binance Launches Its First Fiat-Crypto Exchange In Uganda

  • Wallet Adds Stellar And Announces $125mm XLM Airdrop

  • Silvergate Bank Files For IPO, Has Nearly 500 Crypto Clients

  • ICE’s Bakkt Delays Bitcoin Futures Launch From 12/9 To 1/24

  • SEC Enforcement Against Airfox And Paragon ICOs Forces Refunds

  • VanEck Launches Index Tracking OTC Bitcoin Price

  • NASDAQ To Launch BTC Futures In 2019 With VanEck

  • Ohio Allows State Taxes To Be Paid In Bitcoin

  • US Treasury Sanctions Two Iranian BTC Wallet Addresses For First Time

  • Federal Judge Denies SEC Injunction Against BlockVest ICO

BCH Fork & The Move To New YTD Lows 

BCH Fork. As I wrote about in my internal weekly writeup, we did not see compelling value in a long BCH position going into the fork on 11/15. But a few days beforehand, the rhetoric between the ABC and SV camps turned noticeably more bitter as both sides publicly ridiculed and threatened the other in numerous ways and outright warned of impending collapsing prices. This tweet from SV leader Craig Wright crashed the market.


Wright’s partner and mining operation owner Calvin Ayre added fuel to the fire by declaring a “hash war” which he claimed could last for months and induce significant selling pressure from mining companies involved. On the other side, Roger Ver and Jihan Wu were spewing their own rhetoric in an almost equally juvenile manner. There were equal parts fact, FUD and conspiracy theory flying around during this period of time. Some aspects of the situation were visible – BTC/ABC/SV price; BTC/ABC/SV hash rate; block rewards; miner BTC wallet balances; and public commentary. On the other hand, some aspects were more opaque, and left up to conjecture by reading between the lines and extrapolating various participants’ incentives.    


The market became extremely turbulent while all of this was going on and significant supply from several mining companies did indeed pressure prices as short positions spiked and various mining companies dumped excess supply onto the market in the first weeks of November, taking BTC price from $6,300 to $3,600 from Nov 13-24. As of time of writing, it appears the BCH fork “hash war” has subsided – SV has implemented replay protection and both the ABV and SV chains will continue existing, although with significant damage done to an already questionable reputation.


We believe the manner in which this fork played out was meaningfully detrimental to the reputation and “trustworthiness” of this asset class to investors on the periphery or the outside looking in. It was ugly. It was bush-league. It was filled with lies, deceit, FUD, immaturity and intellectually-bankrupt bickering. It had ridiculous personalities involved that showed their worst sides. This fork also shined a spotlight on an aspect of the current crypto landscape that is often overlooked – mining power is centralized, and those miners’ actions have significant near-term influence over crypto prices. Fortunately, we believe many of the players involved in the BCH fork – Craig Wright, Roger Ver and Calvin Ayre – tarnished their reputations in the space so significantly that their ability to have a large effect over crypto markets in the future has diminished meaningfully. This is a good thing. The BCH fork was ugly and had a negative effect on near-term prices but we believe it was a positive event for the space as whole- it showed participants how unnecessarily costly those events can be and how wholly unimportant the outcome is likely to be (ABC and SV are unlikely to play significant roles in the crypto asset landscape in the future).            


Currently, BTC hash rate has declined significantly, as the price collapse this month has forced many miners to shut down rigs in the same way low oil prices force oil service companies to shut down drilling rigs. However, a beautiful and crucially important feature of the BTC blockchain mechanism design is also on display – mining difficulty is decreasing in response to the decline in hash rate and we expect this trend to continue, bringing mining supply and demand into balance.


Source: As of 12/1/18.


Source: As of 12/1/18.

 Current Narratives

As we have discussed publicly at length, narratives drive crypto market prices. The current investing landscape has as many distinct narratives running through it as any period we’ve ever seen. Some important ones:

  • BCH Fork & Hash Wars – previously discussed and potentially declining in significance in real-time, but if miners are forced to continue selling BTC inventory to fund operations, we may continue to see downward pressure on price.

  • SEC Enforcement Actions Against ICOs – Airfox and Paragon enforcement actions, which require a return of USD to investors that contributed to the ICOs, set the stage for many other enforcement actions to follow for similar situations. Comments made this week by SEC Chairman Jay Clayton reiterated this view.

  • Bakkt Launch Delayed – there will be no Bakkt “hype trade” coming in December. It is likely the launch was delayed due to lack of demand, so the launch in January, assuming it does happen, may not come with much excitement.

  • No Bitcoin ETF On The Horizon – SEC Chairman Jay Clayton held several public discussions on crypto this week and made it clear that a BTC ETF is not a near-term event, citing lack of custody solutions and effective market surveillance.

  • Stablecoin Instability & Uncertainty – since last month’s USDT collapse, Tether has been revamping some of its features and go to market strategy. During November, USDT price oscillated between 93-98c, averaging ~96c. There is an impending DOJ investigation against both Tether and associated exchange Bitfinex. Meanwhile, competitor stablecoins TUSD, USDC and PAX have been increasing market cap and enjoying a consistent premium to $1.00. It is clear that stablecoins will be an integral part of the crypto ecosystem for years to come, but the exact nature of how that will play out is currently uncertain.

  • Technical Breakdown Of Crypto Charts – More on this later but suffice it to say that Technical Analysis, while certainly not the end-all-be-all, matters. Technical Analysis is the quantification of fear and greed, and fear and greed drive crypto prices. To that end, November brought a significant breakdown in technical patterns for BTC and other cryptos, implying lower prices are to come before seeing a final bottom.         

Potential Emerging Narratives

 Given the large effect of narratives on crypto prices, it is important to study the current environment to look for potential narratives before they take shape. Successfully identifying these narratives before they emerge not only requires effectively intaking, analyzing, diligencing and drawing conclusions from new facts as they become available, but also requires a large existing knowledge base of the asset class and market dynamics to serve as an accurate backdrop on which to make incremental adjustments as needed. Some of the potential emerging narratives we see coming to fruition in the coming months:  

  • Traditional Asset Class Stress – As we have discussed publicly, traditional asset classes have been under stress for months. While many sectors of the market have stabilized for the time being (emerging markets; periphery debt) other asset classes have suffered and the VIX remains elevated. We are not sure what the outcome of traditional asset classes will be in the coming months, but it appears to be heavily dependent on Fed actions. If the Fed continues to tighten – interest rates rise, the dollar strengthens and riskier assets are repriced lower – this market dynamic could pressure crypto prices.

  • ETH Death Spiral Round 2: “The SEC ETH Refund” – As we have discussed publicly, Round 1 of this narrative took ETH prices from $600 to $160 in a straight line this summer, as the market feared that ICOs would dump supply en masse for USD to fund future project buildouts. This time around, the SEC appears to be gearing up to make dozens of ICO projects refund investors in USD. To the extent these ICOs are currently holding ETH, they will need to sell that ETH to repay investors in USD. This could significantly pressure ETH prices, even from current depressed levels.

  • Fund Redemptions Into Illiquid Markets – As we have discussed publicly, crypto funds that raised capital from investors in late 2017 and early 2018 are almost all deeply underwater. Many of these funds likely had a one-year lockup on LP capital, which will be coming up for potential redemptions soon. Additionally, even if the LPs don’t want to redeem, many of these funds are so far under their high-water mark that there isn’t a path to getting back to flat and earning a performance fee. Many of these funds will close. We are already beginning to see this now, but we believe it will accelerate in Q1 and potentially Q2 2019. To the extent these funds hold smaller market cap names, we believe they will crash the prices of these cryptos, as there is zero demand to buy most of these at almost any price. That crashing of prices in smaller market cap cryptos will have a contagion effect on ETH as market participants will short ETH as a proxy for these smaller cap names, many of which are ERC-20 tokens.

  • Zombie SAFTs – Many crypto funds are down >50% YTD. Some of the most well-known crypto funds are down >75% YTD. This performance includes investments in many SAFTs which are currently not publicly traded. These funds, even with current abysmal performance stats, have these SAFTs marked at cost or, in some cases even higher, at the latest round’s valuation. We believe these funds are highly incentivized to keep these SAFTs from coming to market and beginning to trade publicly, as they will likely trade at a fraction of where the funds have these SAFTs currently marked- further driving down fund performance and potentially triggering LP redemptions. As such, we believe we will see many of the most hyped projects that raised capital in the last 12 months delay their public listing by months if not longer. We are already hearing anecdotal reports of SAFTs being offered by funds at significant discounts to the last round’s valuation. We expect those types of offerings to increase and expect those discounts to get significantly deeper. See below research from BitMEX which lays out some of the concerning aspects of some of these deals.


Source: BitMEX research. As of 11/21/18. 


Source: BitMEX research. As of 11/21/18.


Source: BitMEX research. As of 11/21/18. 

Market Update – Venture Crypto Asset Investing 

Last month we discussed our overarching mantra of patience when diligencing venture crypto asset deals. That patience has paid off and our stance has not changed. Given the impending Zombie SAFTs market structure, we believe valuations for venture crypto asset deals will decrease significantly in the coming months from current levels. Not only will new projects be valued more attractively, but we believe we may have opportunities to buy SAFTs at deeply discounted prices. See a partial list below:

  • Basecoin

  • Hashgraph

  • Dfinity

  • Rootstock

  • AlgoRand

  • Cosmos

  • Thunder

  • Oasis

  • TZero

  • Mobilecoin

  • Orchid

  • Filecoin

  • Polkadot

  • Orbs

  • Kadena

This list is more or less the “who’s who” of hot venture deals from the last year. Many of these projects are included in the analysis from BitMEX shown above. We believe we will have the opportunity to invest in many of these projects at a small fraction of the valuation of their last raise. This will be a compelling near-term opportunity. Not only will the valuations be much more reasonable and, in many cases, pressured by forced selling from crypto funds that are shutting down, but we won’t have to take fundraising risk and in many cases project execution will be significantly de-risked. The project will have had many months to build out the technology, form partnerships and develop go to market strategies. The dev team will (or will not) have something to showcase – their talent will be much more accurately assessed than in the mania of late 2017 and early 2018. We believe this market dynamic presents a compelling near-term opportunity. We will capitalize on it with patience, objectiveness, vigilance and flexibility.      

Ikigai will also continue to identify, assess, diligence and potentially invest in more idiosyncratic opportunities. Good projects don’t disappear in bear markets. Smart developers build cool things in all market environments. We will continue to dig tirelessly to find these opportunities and if they’re compelling enough, we will invest in them. Some of these opportunities may come from our Internal Ventures arm, where we incubate crypto asset opportunities to the point where they are ready to receive outside investment. These opportunities may present the most compelling risk-adjusted returns of all.    

Market Update – Liquid Digital Asset Investing


Source: CoinMarketCap. As of 11/30/18. BCH includes SV.

As we expected and predicted many times publicly, November crypto markets brought new YTD lows. BTC price broke on Nov 14 before declining an additional ~$2,400 and bottoming at ~$4,300 on Nov 25. Since then, BTC has recovered to the low $4,000s, but the market looks weak. We would be surprised if BTC doesn’t go at least test a new low, and we believe it will likely make a new YTD low. We would not be surprised to see BTC in the $2,000’s range.  


Source: TradingView. As of 12/1/18. 

As we expected and predicted many times publicly, the repricing of the Bottom 99 is well underway – declining 36% in November and currently at $61bn. We have been publicly calling for months for that number to move to $40-$50bn. This call was initially met with disbelief from some crypto market participants because it was so low relative to current prices at the time.


Source: Ikigai.

We now believe Bottom 99 may move lower than that. That analysis assumed a $10bn market cap for ETH which we believe will not be the trough. The same can be said for many projects further down market cap. In aggregate, we have performed thousands of hours of fundamental research on each of these projects. We have an industry-leading understanding of the value propositions for each of these projects. We believe many of them are worth zero or effectively zero. We are not certain the market will reprice them this low, but we believe current prices are not low enough – so we make investment decisions with this in mind.     

Cross-coin correlation has declined some M/M but remains high. We believe the current trends in correlation are not indicative of a market bottom but we remain vigilant of these relationships and analyze them in multiple ways. We believe correlations and similar comparative analyses provide significant market insights.   


Source: As of 12/1/18.

As we expected and predicted many times publicly, ICOs increased their sales of ETH from treasuries as the price decline accelerated, exacerbating that price decline.


Source: As of 12/1/18.

There was also anecdotal evidence of BTC selling from ICO treasuries in the same fashion, although that information is not able to be tracked with same precision as ETH ICO sales. We do not believe this trend will subside in the coming months. We are not sure of the future pace of this treasury selling- it may stay at current levels or it may accelerate, but it is unlikely to abate. If our thesis around future SEC enforcement actions holds true, we believe this treasury selling will accelerate and short sellers may be aggressive.     

We have expressed many times publicly that on-chain metrics are pointing towards crypto assets being overvalued. These metrics repriced in November. We expect this repricing to continue and closely watch many different on-chain derivations of price to help detect when a bottom might occur and what that bottom will look like. 


 Source: Willy Woo. As of 12/1/18.

Closing Remarks

The broad market actions of the last month were as we have been predicting for months. The exact event that crashed the market, the BCH fork, we did not foresee many months out but we did identify it several days out. Our ability to do both – see this broadly coming months out and specifically coming days out – is a function of the frameworks -> processes -> tools we have in place and the team we have executing that spectrum. We believe that spectrum, coupled with our flexible, Long/Short strategy, allows us to manage through volatility and have a front row, but safe, seat to watching how this market develops. We believe we are seeing compelling risk-adjusted return opportunities emerge, both in the liquid and venture investing strategies.

 Catching a falling knife is not typically an attractive risk-adjusted opportunity. However, oftentimes a bottom can be called convincingly after some period of hindsight if the market analysis is sound. The returns that follow, say after the first ¼ of the recovery has occurred, can be some of the most attractive risk-adjusted opportunities that are ever present in any market. This technology and asset class will fundamentally rearchitect the foundational layer of the internet and change the world in the process. We are highly convicted of that. As such, we remain patient, objective, vigilant, and flexible.   

“After the rain, the earth hardens."

 – Ancient Japanese Proverb

Travis Kling - Signature.png

Travis Kling
Chief Investment Officer
Ikigai Asset Management


Included below is an incomplete list of memorable tweets from the last month. Twitter is not investment advice and my views could easily be wrong. That being said, like it or not, Twitter matters for crypto. I have no interest in being a talking head for a living and babbling about on Twitter is a long way away from being a good steward of investor capital. However, this is a community with open-source software in its DNA, and participants want to crowd-source the truth. We believe we have built a team and a process that will produce these truths more quickly and more clearly than our competitors. We are shepherds of this technology. Answers to fundamental questions about this asset class are not currently clear, so having a public platform to share your views with the community is important. After all, you’re helping shape the future :)

The information contained or attached herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. This presentation may contain forward-looking statements that are within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. This email is for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product, service of Ikigai as well as any Ikigai fund, whether an existing or contemplated fund, for which an offer can be made only by such fund’s Confidential Private Placement Memorandum and in compliance with applicable law. Past performance is not indicative nor a guarantee of future returns. Please consult your own independent advisors. All information is intended only for the named recipient(s) above and is covered by the Electronic Communications Privacy Act 18 U.S.C. Section 2510-2521. This email is confidential and may contain information that is privileged or exempt from disclosure under applicable law. If you have received this message in error please immediately notify the sender by return email and delete this email message from your computer. Copyright 2019 Ikigai Asset Management, LLC. All Rights Reserved.