Monthly Update || April 2019
Two quick announcements:
I had an article published on The Block today. If you’ve been following my work, the theme should be familiar to you. I wrote this article primarily for investors that may not be intimately familiar with crypto, but are observing the current global macro backdrop, specifically in the context of never-ending QE from central banks, and think- "what are the chances this experiment ends badly?" I hope you enjoy.
Our Ikigai Q2 call is scheduled for April 16th at 11am PT. We will go into our business and the crypto markets in depth. Register here.
Now on to the main event!
Greetings from inside Ikigai Asset Management headquarters in Marina Del Rey, CA. We welcome the opportunity to bring to you our seventh 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 are seeing a crypto market that is bottoming and may very well have already bottomed several months ago – and that has been a fascinating development to observe unfold. This bottoming process has caught many market participants by surprise, as some aspects of the price action over the last two months have not been as expected and may not be indicative of a healthy bottoming process. This has been a hated rally – an indication market participants have been in disbelief and a good sign for bulls. This speaks to the tedious nature of the rally that is unfolding in real time – a topic we will dive into in detail here.
We see many signs that the crypto market we observe today is very different than the market of Q4-18 or January 2019. That market regime shift began in February and continued in March. We explore this shift in further detail, but two of the most notable signs are: 1) small-cap cryptos pumping; and 2) dips being bought. These are hallmark signs of a shift in risk appetite. Put simply, it is quickly becoming easier to be long than short – that is exciting.
Last month, we talked about hundreds of millions of dollars on the sidelines preparing to enter the crypto markets that walked away from deployment because of the mid-November price crash, amid a dismal macro backdrop for risk assets globally. We also talked about signs in February that interest was beginning to reaccelerate for crypto, specifically in the context of a more favorable macro backdrop for risk assets globally. We’ve seen that interest continue to accelerate and we believe a main driver for that has been central bank actions globally over the month of March.
The initial dovish capitulation by the Fed at the end of January was confirmed by Chairman Powell on 60 Minutes on March 10th and solidified by the FOMC statement on March 21st. On March 26th Stephen Moore, the President's recent nominee for the Fed board, publicly lobbied for his nomination by stating he would demand a 50bps rate cut if appointed. The Fed, billed as an independent organization unaffected by the political machine of Washington, has unequivocally become politicized. During February and March, commentary and actions from the ECB, BoJ, PBoC and RBA have echoed the Fed’s dovish capitulation. Global central banks have resoundingly taken their stand - rather than attempting to unwind the ‘experiment’ of Quantitative Easing, central banks and governments globally are going to keep printing money at a breakneck pace.
We will not stop banging this drum – current central bank actions are deeply bullish for a non-sovereign, hard-capped supply, global, immutable, decentralized store of value to gain mass adoption. There is a good chance this crypto bear market is over; and there’s a good chance Jay Powell put the bottom in.
Morgan Creek Digital Makes Investment in Ikigai Asset Management
Fidelity Digital Asset Custody Solution Launched with Initial Customers
Ernst & Young releases Crypto-Asset Accounting and Tax Tool
SEC Chairman Clayton Confirms ETH Is Not A Security
Binance Founder Lays Out Bold Plans for Binance Chain on Livestream
Japanese E-commerce Giant Rakuten Receives Crypto Exchange License
Coinbase Announces Staking Program for Tezos
Binance Launchpad Sells Out Third ICO Celer in 17 Mins; 5x Price Increase
|Symbol||MTD||YTD||% ATH||% Cycle Low|
|Aggregate Mkt Cap||11%||14%||-83%||42%|
|Aggr Alts Mkt Cap||14%||18%||-87%||59%|
The Precarious Crypto Rally Of 2019 – “Hanging on By A Thread”
Crypto price action was positive in March, but the price action of BTC was much more muted than the broader crypto market. As we have spoken about at length publicly, crypto prices are highly manipulated. These are largely unregulated financial instruments trading on largely unregulated exchanges and that leads to all sorts of chicanery rarely witnessed in traditional asset classes. We consider the price of BTC to be at least an order of magnitude more “real” than the price of other cryptos. While the price of BTC is certainly not free of all manipulation, it is much bigger and much more liquid than any other crypto, trades on the CME, has demonstrable fundamental value and can be shorted at large scale. Thus, we trust BTC price action much more than the price action of other cryptos.
The following is a timeline of this YTD crypto rally’s major events as we see it:
· TRX rallies >80% in early January on the back of the BTT airdrop, peaking on Jan 10th, the day of the airdrop, and subsequently collapsing >35% in the following four days
· ETH pumps once >30% in Jan for Constantinople, collapses after the hard fork date is pushed back to Feb 27th, and then pumps again >50% leading into the hard fork, before collapsing three days prior to the fork date
· BNB begins its pump the day TRX collapses on the back of excitement around Launchpad ICOs; CZ continues a relentless campaign of value-accretive announcements through February and March, driving BNB >200% in an almost straight line; every dip is bought with conviction
· LTC pumps 30% in a day on Feb 8th on massive volume on the back of loose talk about MimbleWimble being implemented on LTC; goes on to pump an additional 40% on essentially nothing over the next five weeks; every dip is bought with conviction on no news without regard to fundamentals
· Individual small-cap cryptos begin pumping in early Feb, in conjunction with and seemingly with “permission” from LTC; some pump on positive news, some on no news at all; most of the pumps don’t see subsequent dumps; pumps continue through March
Of the above price action, BNB is far and away the most substantiated by actual fundamentals. CZ is doing a great job driving value for BNB holders, albeit in his unique way. If you hold BNB, you’re able to participate in Launchpad ICOs (subject to regulatory jurisdictional clearance). If you invested in the three Launchpad ICOs to-date, BTT, FET and CELR, you’re currently up 6.3x, 2.3x and 2.9x. We have analyzed the order books for each of these ICOs. It is apparent that each of these tokens are heavily supported by “market makers”. CZ keeps a group of these market makers in his inner circle. It is highly likely these market makers receive advantageous terms (i.e., free or deeply discounted tokens) to provide liquidity for these ICOs. Put differently, CZ has entered into a social contract with BNB holders – if you participate in Launchpad ICOs you will make money. And you get to make money in this fun, exciting, gamble-y fashion that Binance customers love. CZ has re-created his own miniature version of the 2017 ICO mania. When you’re domiciled in Malta and count the Singapore sovereign wealth fund as an investor, you can play games like this.
LTC is a heavily manipulated crypto with little fundamental value. The number of developers actively committing to the LTC github has gone from >40 in 2017 to 3 currently. 64 addresses currently hold >$10mm LTC, while 648 addresses hold >$10mm BTC. 298 addresses hold >$1mm LTC, while 6,955 addresses hold >$1mm BTC. Shorting LTC at large scale is difficult/impossible. The current crypto market rally appears to be emanating from and led by LTC, which can have its price manipulated higher in a manner and to a degree BTC and ETH prices most certainly cannot. Historical volume profiles support this thesis with a clear increase in wash trading (evidenced by viewing aggregated exchange volume on Coinmarketcap) kicking off on February 8th, likely in response to LTC L/S positioning.
We believe a relatively small number of highly sophisticated, well-capitalized, highly risk tolerant market participants have been walking this crypto market higher over the last seven weeks, beginning with LTC on Feb 8. Let’s call these market participants Risky Whales - crypto’s own version of Wyckoff’s Composite Operator. The price action on the weekend of Feb 23rd/24th, where we saw a large, abnormal, unexplainable pump on Saturday followed by a larger, abnormal, unexplainable dump on Sunday, we have reason to believe was driven by a *single* Risky Whale – chicanery at its finest. BTC’s price has not been higher since that weekend, while many smaller cap, manipulatable cryptos have seen their prices soar.
Why have these Risky Whales been willing to initiate these market manipulations over the last seven weeks? After all, if these trades go against them, they stand to lose millions. We believe it is because these Risky Whales are aware of a bid in BTC that keeps the entire market afloat. We know anecdotally of crypto funds buying BTC for a long-term hold. Fidelity has been buying some amount of BTC for its clients and will likely continue buying. We know anecdotally of global macro funds buying BTC because of central bank actions. Sophisticated crypto investors can see this bid in the market through on-exchange analysis, on-chain analysis and conversations with OTC desks. It is apparent from the relatively muted price action in BTC that this bid is patient and possibly price-sensitive (e.g., buyers at $3500 but not $5k). But the existence of this bid in BTC gives Risky Whales confidence that the bottom won’t fall out on them so they can begin initiating the chicanery in LTC and small-cap cryptos.
What does this mean for BTC and the health of the crypto market as a whole? Can these Risky Whales “fake it until you make it” all the way out of a bear market and initiate the next bull run? Here’s where it gets interesting. To lay out our argument, I will elaborate on three separate but interrelated topics: 1) Reflexivity; 2) The Marginal Buyer/Seller; and 3) The Damage of Punishment.
1. Reflexivity – Coined by George Soros, reflexivity is the theory that a two-way feedback loop exists in which investors' perceptions affect the market environment, which in turn changes investor perceptions. Reflexivity has a larger effect on crypto than any other asset class, because no other asset class derives such a significant portion of its value from Network Effect. The more people that are aware of, own and use BTC, the more valuable it is. If the world decides BTC is worthless and walks away from it, then BTC price can collapse to zero. Because Network Effect drives such a significant portion of the value of cryptos as a whole, higher prices beget higher prices, and lower prices beget lower prices. The collective market is constantly reevaluating the future potential adoption of crypto and price action has a large impact on this calculus. This reflexivity is foundational to the nature of crypto assets and worthy of a long conversation by itself, but for the sake of argument we’ll take it as true for now. Reflexivity in crypto means prices tend to snowball – both to the upside and the downside. We’ve seen this play out multiple times in BTC’s 10-year history. Flipping that reflexivity, from up-to-down or down-to-up is a tricky matter to understand. A body of academic research exists on financial market bubbles and crashes and the moment of trend reversion is still not fully understood. Specifically in crypto, ending a bear market and the related negative reflexivity of prices can come from a marginal buyer that is willing to ignore the circular implications of lower prices begetting lower prices and provide an exogenous shock of sorts – a bucket of buying thrown on a fire of crashing prices. Oftentimes, such as in February, this exogenous shock of buying is accompanied with a string of positive fundamental news events- Jack Dorsey pumping BTC; FacebookCoin; JPMorgan Coin; Cambridge Associates report; global resumption of Quantitative Easing. The combination of which is enough to get the reflexivity moving back to the upside, and quickly begins gaining reflexive momentum back up. Risky Whales may be throwing that bucket as we speak.
2. The Marginal Buyer/Seller – The price of an asset at any given moment is where a buyer and seller agree to exchange the asset. But that looks different in crypto, where most assets outside of BTC and ETH are highly illiquid. Market depth is so shallow, the relationship between buyer, seller and last price is distorted relative to traditional, more liquid markets. As such, when prices are reflexively spiraling down, all it takes is one seller to have a slightly more bearish view on the everchanging value of Network Effect for prices to continue making lower lows. The same is true to the upside. It’s not the entire market that needs to decide prices should be higher, just one marginal buyer willing to have a slightly more bullish view on the everchanging value of Network Effect; one marginal buyer with a slightly higher risk tolerance; or importantly, the illusion of a marginal buyer with a slightly more bullish view or higher risk tolerance, to move prices continually higher. Risky Whales may be providing that illusion as speak.
3. The Damage of Punishment – Markets get overbought and oversold all the time. Oscillators like RSI, stochastics and Bolllinger bands have been utilized for decades to understand when markets have gone too far in a bullish or bearish direction and a reversion to the mean is due. Over the last year, these reversions often happen suddenly and swiftly via “stop runs” – 10% moves in an hour are witnessed many times a day. By many measures, crypto prices are overbought right now, and a reversion is due. During much of 2018, these reversions would show up violently, with prices crashing violently lower. These crashes are damaging to investor psychology and in turn damaging to reflexivity and damaging to the marginal buyer. Risky Whales, who were rewarded during much of 2018 by slamming the market lower with shorts and inducing capitulative, high volume selling, allowing them to scoop BTC at rock bottom prices, are well aware of have precarious this rally in crypto is – after all, they manufactured it. Those Risky Whales likely made good returns shorting the market in 2018 and accumulating BTC at low prices, but the profits available for that type of chicanery were dwindling – volumes and volatility were drifting lower and retail investors were leaving the space entirely. A new violent slam lower at this point, to go retest the lows or make new lows, would be so damaging to the precariously positive reflexivity that Risky Whales have manufactured YTD, that the negatives of such a move would likely outweigh the profits made on the short.
These three interrelated factors 1) Reflexivity; 2) Marginal Buyers/Sellers; and 3) The Damage of Punishment as seen through the lens of Risky Whales, paint a picture of a precarious, manufactured rally. Many of our tools we use to evaluate this market jive with this picture – it has not been a “natural” or particularly “healthy” rally. BTC volumes have been lackluster. Quality has by and large not led us out of this bear market. But by understanding the drivers, positioning and intent of Risky Whales, we can better understand the nature of this rally, and its ability to continue.
Market Update – Liquid Crypto Asset Investing
BTC price increased 6% in March, its second consecutive positive monthly price performance, which is notable. The last time BTC prices were positive two consecutive months was November and December 2017, the peak of the bull market.
Last month we stated- “We currently believe there is a lower-than-previously-estimated likelihood that we make new lows, but it is still entirely possible”. This is still true, but we now believe it is a less than 50% chance that crypto prices make new lows. We believe a retest of the mid-December lows would require a large risk-off shift for risk assets globally. Given the newfound ultra-dovishness of central banks, we believe this is unlikely in the next few months.
As shown above, many small cap cryptos saw massive price increases in March. These small cap pumps have received much attention for their sheer size and breadth across market. We included the fundamental reasons for the price increases above as well, but the events themselves are less interesting than the market’s reaction. There has been a clear change in market structure and overall interest. For months, positive catalysts in crypto had little or no effect on prices. Now we see that trend has clearly reversed. While this was not our expectation for how a cycle bottom would look, when viewed through the lens of the Risky Whale, these pumps are explainable. To the extent this price action continues, it will increase our conviction this market has bottomed.
Last month, we talked about the decline in cross-coin correlation. We are pleased to see this trend largely continue in March, although some cryptos saw their correlations to BTC increase in the back part of the month. To the extent correlation continues to decline, it will increase our conviction this market has bottomed.
Hash rate continues its upward climb. This is a positive sign.
The Bottom 99, which we have discussed at length previously, made good progress in March, up 14% on the month and is now 59% off the cycle low. The increased volume since Feb 8th is also noteworthy and includes some big volume on positive price days. It is worth mentioning that these volume numbers are from CoinMarketCap, which includes rampant wash trading, so it is impossible to know for sure how meaningful these volume numbers are. The increased volume shown here is some mix of increased “real” volume and increased wash trading. But even an increase in wash trading could potentially be viewed as a bullish sign, as “market makers” are willing to turn the engines back on and show fake volume to try and incentivize real volume. Either way, this chart shows a clear upward trend that has already broken through several substantial resistance levels and is poised to break through another one here. We would expect some sort of pullback here during April, perhaps soon, but it may be shallow and short-lived.
BTC volumes on reputable exchanges, likely the most accurate measurement of volumes in the space as whole, decreased M/M. The trailing 7-day avg volume at the end of March was ~42% lower than the end of February. This is concerning and likely the single most bearish marker of March price action. One reason may be because Alts are pumping, so market participants are playing higher beta names to generate outsized returns, leaving BTC with anemic volumes. As discussed previously, we consider BTC price action to be much more “true” than anything else in crypto, so declining volumes are worth watching closely.
The Fear & Greed Index remains elevated near yearly highs. Importantly, we saw a decline in F&G during March with little corresponding negative price movement in BTC, before resuming its uptrend. We believe this is a bullish sign and the elevated levels of F&G over the last six weeks could be good evidence of a regime shift.
Realized Cap currently sits at ~$4300 and we believe could serve as resistance against further BTC price increases in the near term. The range between Realized Cap and Delta Cap may serve as support and resistance for the next several months, which could make for a great trading environment in BTC and Alts.
Based solely on BTC price action, we are due for a breather in the near-term here. There are TD Sequential 9 Sells on the 3D and 1W; horizontal resistance here; the 200W MA (orange) here; diagonal resistance at $4500 (yellow); and declining volumes. Never without the chicanery, the market may spike on a bull trap to $4500 or even a bit higher, but we would likely expect a swift retracement from there. Our current base case is we chop around from ~$3500-$6k for the next several months, if not the remainder of 2019.
BTC and the Bottom 99 are up 10% and 18% YTD, respectively, and the resulting shift in sentiment can be felt everywhere. The S&P 500 is up 13% YTD. Risk assets globally have rallied strongly on the back of central bank dovishness. While crypto news flow in March was not as resoundingly positive as February, the trend is certainly moving in the right direction.
Last month we talked at length about the mixed signals we were seeing from our Four Foundations – Qualitative Research; Fundamental Valuation; Quantitative Tools and Event-Driven Catalysts. We were correct in our characterization of the market as uncertain in February. Those mixed signals continued in March, but we believe we know why these signals are mixed. This crypto rally YTD has been walked higher by the Risky Whales, which is why it has felt so precarious, unnatural and unhealthy. But that does not mean it can’t continue and that does not mean that we cannot put a bottom in this market via the actions of these Risky Whales. Regime shifts come in all shapes and sizes, and in the wild world of crypto, it should come as no surprise that those regime shifts may come with a little hair on them.
What this setup means is that we must tread carefully. We have consistently stated that we will not be in the business of catching falling knives. Sub-$100mm market cap cryptos pumping while BTC price is mostly flat is not a compelling setup to swan-dive into longs. We will look for further confirmation of sustainability to this rally before moving to a more risk-on stance.
With a few months of hindsight, it may make complete sense that the U-turn on central banks’ monetary policy put the bottom in for crypto. Look around at the world – politicians, Wall Street, big tech companies. The world needs Distributed Ledger Technology and crypto assets and the potential they bring now more than ever. We are in the midst of a Trust Revolution. That trend will not reverse. These problems will not go away. Our blossoming industry will deliver the solution.
Crypto prices increased in February, with BTC generating its first positive month since July and its second since April 2018. The rally emanated from LTC on 2/8, which put in a stunning +30% that day on the largest volume since December 2017 and inducing the largest “stop run” for LTC in BitMex history. ETH was able to rally meaningfully in advance of the Constantinople hard fork on 2/28.
Last month we stated- “a retest of the mid-December lows of ~$3150 appears likely to occur in February, and we believe it is likely only a matter of time before that support level breaks and we make new lows” . BTC price came within $200 of that mid-December low before rallying ~15% into month-end. We currently believe there is a lower-than-previously-estimated likelihood that we make new lows, but it is still entirely possible.
Shown below, the largest increases in tokens were event-driven in nature: 1) The Samsung Galaxy S10 was revealed to have a native Enjin wallet; 2) Theta Mainnet launch announcement March 15; and 3) Ontology launches development platform on Google Cloud. It is a sign of a healthy market that these price increases are occurring around fundamentally positive news events – whether they can hold those gains remains to be seen.
BTC volumes on reputable exchanges, likely the most accurate measurement of volumes in the space as whole, increased M/M. The trailing 7-day avg volume at the end of February was ~23% higher than the end of January. This is encouraging, and a continuation of these increased volumes with flat-to-up prices would be a sign we may have seen the bottom.
Founder & 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 :)
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.
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