May 2019 - Market Update

Monthly Update || May 2019

Investing scared, requiring good value and a substantial margin for error, and being conscious of what you don’t know and can’t control are hallmarks of the best investors.
— Howard Marks, on markets less scary than crypto


Greetings from inside Ikigai Asset Management headquarters in Marina Del Rey, CA. We welcome the opportunity to bring to you our eighth 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 observing the first inning of the next bull market for crypto assets – a bull market that came a few months earlier than we had expected late last year and early this year – but a bull market nonetheless. Our Monthly Update letter for April went out April 1st, about 4 hours before BTC price ripped 25%. In that Monthly Update letter, we stated that the market “is bottoming and may very well have already bottomed several months ago”. The price action immediately thereafter on April 1st and the days following solidified that view – this market has bottomed, and the stage is set for us to move higher through the rest of 2019. This sets up for a potentially spectacular 2020, with new all-time highs well within reach.

The crypto market bottoming was driven by 1) the backdrop of central bank dovish capitulation earlier this year – a theme that continues to expand as we move through 2019; 2) materially positive newsflow from the crypto ecosystem YTD; and 3) help from the Risky Whales, a group we introduced in last month’s letter that has played an integral role in crypto price action in 2019.

The price of BTC has increased 39% since the end of February and that has generated a palpable increase in interest from investors looking for exposure to this asset class. We are experiencing it first-hand at Ikigai and hearing about it anecdotally across the space. Crypto is well on its way to being the best performing asset class of 2019 again, just like in 2017. Except this time around the global stage in relation to crypto is notably different than 2-3 years ago.

In April 2019, the vast majority of sophisticated investors 1) have heard of Bitcoin; 2) have heard the elevator pitch for buying some; and 3) have some understanding of the underlying technology – blockchain. To a lesser extent, the same can be said for the average retail investor. This was not the case two years ago. I use myself as an example – until late 2016, I thought Bitcoin was magic internet money used by drug dealers to buy drugs on the internet. So, a good portion of the initial education on the asset class and the technology is already done. Investors also have memories of the eyepopping returns of 2017 that not long-ago dominated the headlines of mainstream media. Investors are seeing BTC roaring back to current levels and saying “this thing is back already? Wasn’t it just dead?”. Investors have also shifted their probability of the tail risk that crypto goes away entirely – Facebook Coin; JPMorgan Coin; Fidelity; ETrade; Bakkt; NASDAQ – there is a new level of confidence today that this thing isn’t going anywhere. Finally, the monetary and fiscal policies of central banks and governments globally have deteriorated significantly over the last two years – so an insurance policy against that ‘experiment’ is becoming increasingly more compelling, and that’s what Bitcoin is.

The above setup plays a critical role in reflexivity, a concept we unpacked in detail last month. We know reflexivity is more present in crypto than any other asset class, because no other asset class derives so much of its value from network effect. We know that reflexivity has the potential to drive incredible returns – just look at BTC price history. Reflexivity is why a BTC price chart is viewed on a log scale – returns derived directly from network effect aren’t linear, they’re super linear. The world’s familiarity in 2019 with this technology and asset class creates the setup for that reflexivity to explode to levels that will eclipse what we saw in 2017. We have the makings for a real firework show.    


  • Bitcoin Price Increases >20% In A Day and Breaks $5,000

  • eTrade to Add BTC and ETH Trading

  • TD Ameritrade Adds BTC Trading

  • SEC Publishes Token Guidance

  • Binance Launches Singapore Fiat-To-BTC Exchange and Mainnet Chain

  • Rakuten to Launch Crypto Exchange in June 

  • France Allows Pensions to Invest in Cryptocurrency 

  • Samsung to Build a Mainnet Based on Ethereum

Symbol April Q1-19 YTD % ATH % Cycle Low
BTC 30% 10% 43% -73% 67%
ETH 15% 6% 22% -89% 94%
XRP 0% -12% -12% -92% 20%
BCH 38% -1% 36% -92% 20%
EOS 16% 63% 88% -79% 204%
XLM -7% -5% -11% -89% 35%
LTC 22% 99% 144% -80% 223%
TRX 2% 25% 27% -91% 118%
Aggregate Mkt Cap 22% 14% 39% -79% 73%
Aggr Alts Mkt Cap 12% 18% 32% -85% 78%

The Second Time We’ve Talked A Lot About Tether

Tether (USDT) is the largest, most liquid stablecoin in the crypto ecosystem, with a market cap of $2.8bn and daily volume exceeding its market cap. Tether is systemically important to the crypto ecosystem, despite a cloud of uncertainty that has hung over it for years. That cloud has centered around 1) banking problems; 2) doubts as to whether each USDT is backed by $1; 3) co-mingling of funds between USDT and Bitfinex, which share a management team and owners; 4) ongoing legal investigations in multiple jurisdictions; and 5) loose KYC practices.

The last time we spoke at length about Tether was in our November 1st letter, when we unpacked the breaking of USDT’s peg to $1 as a result of losing its account at Noble Bank (which dissolved shortly thereafter) and subsequently losing its account at HSBC before finding an account at questionable Bahamas-based bank Deltec. At the time we stated- “if what we’ve already seen was the max pain relative to USDT worries and now it’s importance to the ecosystem will fade, that was a GREAT outcome for the space, as it removes uncertainty”.

Turns out Tether’s importance didn’t fade. Despite 1) continued difficulties around USDT redemptions for USD out of Deltec; 2) an increase in withdrawal fees; and 3) an explicit statement that USDT would no longer be obligated to be fully backed by USD, volumes on USDT pairs continued to increase, the peg remained at or above $1, and Tether’s overall dominance grew.

Specifically, after seeing ~$1bn of USDT redemptions after the October peg crash, USDT’s market cap began increasing in December and January, before exploding higher in April as more than $800mm new USDT were created.   


There has been much conjecture as to what has been driving the massive increase in demand for USDT over the last month, but it appears the demand is primarily coming from Chinese capital flight out of the Renminbi. This end demand has been willing to pay a premium for USDT, $1.03 or more, and OTC desks, under jurisdiction in places with light KYC rules, have been able to create new USDT at $1 and immediately sell to these end users for a riskless profit.

This entire process came under stress on April 25th as the NY Attorney General issued a court order (link to court order) enjoining Bitfinex and Tether from “further violations of New York law in connection with an ongoing activities that may have defrauded New York investors that trade in virtual or ‘crypto” currency”. The court order alleges a series of potentially fraudulent activities over a timeline stretching back as far as late 2017 but accelerating in November 2018. The court order stated that Bitfinex and Tether “have engaged in a cover-up to hide the apparent loss of $850 million dollars of co-mingled client and corporate funds”.

The court order initially sent shock waves through the crypto ecosystem, with BTC trading off 10% and USDT trading as low as 95c in the first two hours following the announcement. Interestingly, that initial reaction by the market proved to be the worst of it, as BTC stabilized down only ~6% and USDT at ~97c in the following days.

Speculation around the “missing $850mm” exploded in the community. The court order seemed to imply that while Bitfinex and Tether stated the $850mm was seized and in custody with government officials in Portugal, Poland and the United States, the money might actually have been stolen through payment processing company Crypto Capital, a relatively unknown player with ties to other questionable exchanges. Within 24 hours of the court order, Bitfinex issued a response stating the court filings were written in bad faith and that funds were not stolen but seized and safeguarded by government officials.

On April 30th, Bitfinex and Tether’s legal counsel filed a formal response to the NY AG (link to response) that revealed additional details around a $900mm line of credit that was issued from Tether to Bitfinex, $750mm of which is currently being utilized. That line of credit was collateralized by 60mm shares of iFinex, the operating company of Bitfinex. The response stated, “Tether has cash and cash equivalents (short term securities) on hand totaling approximately $2.1 billion, representing approximately 74 percent of the current outstanding tethers”. Later on April 30th, the NY Supreme Court ordered the NY AG to demonstrate why the court order should not be cancelled outright or modified to allow access to the line of credit. A response must be submitted by May 6th.

The market took the response from Bitfinex and Tether, and the NY Supreme Court order, as bullish - with both the price of BTC and USDT increasing on the 30th. At time of writing, USDT is trading at a remarkable $0.99, but the announcement hasn’t come without market ramifications.

The prices for BTCUSD and ETHUSD on Bitfinex have exploded higher relative to Coinbase, as Bitfinex customers cannot quickly (or at all) withdraw USD. Instead customers buy BTC and ETH and immediately transfer off the exchange, for fear of insolvency.


Those withdrawals of BTC and ETH have added up to the tune of $1.7bn over the month of April, including $700mm since the court order was released on the 25th.         


Those are scary numbers. We may very well be witnessing a “run” on Bitfinex. We know there is ~$850mm missing from the combined Bitfinex and Tether customer deposits. We also know Bitfinex’s cold wallet currently has 89k, or $479mm BTC in it. Current price levels for BTC, ETH and the broader crypto market may be propped up by demand to remove funds from Bitfinex – a squeeze of sorts.
But why has USDT remained so strong? BTC and ETH on Bitfinex are trading >5% premium – shouldn’t a similar discount, or even more, be present in USDT? The answer is difficult to ascertain at the moment. Access, or the lack thereof, to fiat onramps may be playing a part. Private dealings between Bitfinex and its largest clients may be playing a part. A lack of communication to Asian countries may be playing a part.
What is becoming increasingly clear is there is significant demand for an unregulated stablecoin. That demand appears to be sensitive to KYC and specifically avoiding stablecoins operating under US banking regulations. That demand appears to exist on a spectrum of risk tolerance – with some demand being more risk averse than others. That demand is likely assessing the risk associated with holding Tether in the context of the use cases and motivations for that demand, which vary widely. Some small crypto traders without a relationship to Bitfinex may view the risk of holding USDT as unacceptable. Other crypto traders that are close to Bitfinex may view the risk as acceptable. Chinese capital flight demand may view the risk as more acceptable still. And money launderers, who are used to taking large haircuts on gross dollar amounts in exchange for clean money, may view USDT as a great deal.                     
The Tether situation is evolving rapidly and could have a significant impact on crypto prices. To the extent the situation does not deteriorate further, the market’s resiliency in the face of this uncertainty is deeply bullish. The current slate of potential risks is high, and we continue to monitor the situation closely.  

Market Update – Liquid Crypto Asset Investing

Last month we spoke at length about the Risky Whales in the context of three separate but interrelated topics: 1) Reflexivity; 2) The Marginal Buyer/Seller; and 3) The Damage of Punishment. I believe with a bit of hindsight, the identification of, and relationship between, these three topics in the context of Risky Whales, will prove to be seminal analysis of crypto markets. 

The Risky Whales appeared in full force on April 1st as BTC price exploded 25% higher, about 4 hours after we sent out our Monthly Update. After trading as high as +37% on the month, BTC price ended up 30% in April. That initial move up on April 1st appears to have emanated from large coordinated simultaneous market buys across Coinbase, Kraken and Poloniex, the three exchanges whose prices makes up the index upon which the Bitmex perpetual swap pricing is based. This spike in price caused $480mm in liquidations on Bitmex in two hours, and just like that, the bottom was almost certainly in for good for this crypto market.

Risky Whales are a critical part of this market – crypto’s own version of Wyckoff’s Composite Operator. Whether price action is generated by the chicanery of Risky Whales or more “legitimate” buying from trustworthy market participants matters, but it matters less than the effect the actions of Risky Whales can have on reflexivity. Regardless of the underlying drivers, the price action over the last month has unequivocally had a materially positive impact on reflexivity. Momentum is firmly moving back to the upside and once that train gets moving, it can be nearly impossible to halt. Look no further than the Tether situation – had that happened in January, prices would have almost assuredly plummeted. But bear markets ignore positive news and bull markets ignore negative news.

We see a host of signals across our various tools that make us bullish. Many of these are proprietary but feel free to reach out if you’d like to dive into more detail 1x1. 

Cross-coin correlation continues to retreat. This is bullish.


Fundamental Valuation indicators, including NVT, Realized Value, Delta Cap and Cumulative Value Days Destroyed are all forming compelling cases for a bottom in the context of price action. Note the similarities between early 2015 and current. 


Fundamental Valuation indicators, including NVT, Realized Value, Delta Cap and Cumulative Value Days Destroyed are all forming compelling cases for a bottom in the context of price action. Note the similarities between early 2015 and current. 


MVRV also shows a bottoming formation similar to early 2015. 


Volumes for BTC in April were monstrous, especially in the first part of the month. The trailing 7-day avg volume at the end of April was ~33% higher than the end of March. The move up this month occurred with conviction, a highly bullish signal and a key factor in our conviction that the bottom is in for crypto. 


After two months of decline, BTC dominance rose 5% steadily over the month of April before running into resistance.


We are paying close attention to the price action of Alts relative to BTC right now. February and March saw many low-quality names rally and outperform BTC. BTC clawed a lot of that relative performance back in April, and now stands +43% YTD vs Bottom 99 +32%. Ikigai seeks to generate superior risk-adjusted returns through cycles. The risk inherent in being long small-cap names, especially those with little network activity and unproven value propositions, may not be compelling enough to justify exposure. We continue to make investment decisions based on the signals generated from our Four Foundations: 1) Qualitative Research; 2) Fundamental Valuation; 3) Quantitative Tools; and 4) Event Driven Catalysts. That investment process has served us well to-date and as we incrementally improve our frameworks, which we strive to do every day, we believe it will continue to serve us well going forward.    

In light of April’s price action, with the context of what we know about reflexivity, we are currently asking ourselves – does this market have the ability to range? BTC daily just generated a “golden cross”, where the 50d MA crosses above the 200d MA. There is a host of capital that wasn’t ready to buy until that happened. BTC is now knocking on the door of low $6,000s, where a host of new capital will be willing to buy. That opens up the possibility to $10,000 where an additional host of capital will want to buy. Once $10k is gone, new ATH’s are on the table, which would in turn cause an additional rush of new capital into the space. I’ve been saying it for nearly a year now, the day we break $20k, we might see $30k the next day.

A test of the market’s willingness/ability to range may be coming up in the next month. Right now, assuming the Tether situation holds in ok, we look poised to go test low $6,000s. If we see a convincing fail into that resistance level, it may be a clear sign this market can stay rangebound – between low $6,000’s and the large amount of support now in place in the low $4,000’s. But if low $6,000’s prove too weak of a ceiling and we punch through to early November levels, the back half of 2019 could get even more exciting.  


Closing Remarks

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.

Tapping a stone bridge as you cross it.
— Ancient Japanese Proverb

Travis Kling

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.

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.