Monthly Update || June 2019
Greetings from inside Ikigai Asset Management headquarters in Marina Del Rey, CA. We welcome the opportunity to bring to you our ninth 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 in a full-blown crypto bull market. BTC was up 60% in May, a top 5 monthly performance since 2013, and up 129% YTD. In our Monthly Update letter that went out May 1st we stated, “we are observing the first inning of the next bull market for crypto assets”. That observation proved correct in spades and we were well-positioned for it in May. The outlook for 2H-19 and 2020 is exceedingly bright. Last month we stated that new all-time highs were well within reach for 2020. We now believe that may have proven too conservative, and there is a meaningful chance new ATH’s are possible in 2019, and likely in 2020.
This swift increase in price is in no way set in stone right now – many risks are present. But the path to $20k BTC in 2019, if it indeed happens, will most largely be driven by a specific unfolding of the incredibly dynamic global macro landscape that we find ourselves in currently. We’ve been framing BTC this way publicly for months now, and it holds truer today than ever. We will explore this topic in detail further below.
We believe BTC is separating itself from the rest of the crypto asset landscape in terms of institutional investability. It’s not that venture and liquid crypto funds aren’t institutionally investable, because some certainly are. Equity in crypto infrastructure companies is also institutionally investable. But in terms of specific crypto assets, BTC is currently in a league of its own. BTC 1) is large; 2) is liquid; 3) is traded on regulated changes; 4) has both regulated and unregulated, cash and physically-settled futures; 5) has a deep OTC market; 6) has a burgeoning options market; 7) has mostly clear regulatory status; 8) is custodied by Fidelity; 9) is moving closer to an ETF; 10) has almost zero competition from other crypto assets; 11) is not centrally led; 12) has a clear value proposition in the context of monetary and fiscal policies globally; and 13) has clear value accrual characteristics via a monetary premium. For many current and potential institutional investors looking for direct exposure to crypto assets right now, their choices are limited, and most are focused on BTC.
That being said, we believe actively managed hedge fund strategies are the optimal avenue to gain exposure to this asset class. To be clear, BTC and the crypto asset space still present numerous idiosyncratic risks that could have swift and sizeable negative effects on price. Attempting to outperform a parabolic market during a bull run incentivizes imprudent risk exposure in an already high-risk environment. Opportunities abound across many crypto assets, making for a compelling environment to generate attractive risk-adjusted returns. While the future for the crypto asset landscape is exceedingly bright, the existence of risk in the magnitude present in crypto demands active strategies and process-driven risk management.
We have discussed reflexivity at length, and its particular strength in this asset class. As discussed previously, reflexivity and network effect are intimately related. Network effect is broadly understood and quantified with Metcalfe’s Law. Metcalfe’s Law describes not a linear relationship, but a superlinear one. That superlinear relationship is not only applicable to price action, but to many aspects of this asset class. Interest levels, technology development, information dissemination and value accrual all behave superlinearly. If it feels like things are moving fast in crypto, it’s because they are. These aspects tend to increase at an increasing rate – we are witnessing that play out now.
In May we travelled both domestically and abroad, speaking at conferences and meeting with dozens of ecosystem participants across the entire spectrum of the community. Interest is accelerating across multiple fronts. The reflexivity inherent in price action is noticeable in interest levels. It excites us to see that and furthers our conviction that this technology and asset class will completely change the world.
Microsoft Building Identity Platform on Bitcoin
Whole Foods Accepting Bitcoin Payments
Bakkt Bitcoin Futures Exchange to Launch in July
Amazon Patents PoW Cryptographic System
Binance Hacked; Customers Made Whole
Binance Launches Beta Version for Margin Trading
Widely Reported Rumor of Pending CFTC Approval of ETH Futures Contract
Binfinex Raises $1bn for LEO Exchange Token
|Symbol||May||April||Q1-19||YTD||% ATH||% Cycle Low|
|Top 100 Aggregate||55%||22%||14%||116%||-67%||169%|
A (Potential) Confluence of Global Macro Events: Is Crypto Ready?
To be fair, if you had told me a year ago that 1) the U.S. would get into a full-blown, tariff-slanging, trade war with China; 2) the Offshore RMB would rip higher as a result, and 3) BTC would rip right along with it… I wouldn’t have believed you. But that appears to be what is happening.
Under many circumstances, I would have chalked this up to spurious chance – even a broken clock is right twice a day. However, through our research into the Tether/Bitfinex NY Attorney General investigation, we discovered a great deal of evidence leading us to believe that Chinese capital flight via crypto assets is indeed very real. The precise details and quantities are difficult to ascertain, and the complete picture is opaque. However, the evidence is real, and it is showing up on multiple fronts.
The Chinese economy is in real trouble and that is undoubtedly being exacerbated by the trade wars. Although the exact extent of economic trouble is unclear given China’s penchant for fudging data, on May 28th China announced its first public bank failure in 30 years. The PBoC has injected a LOT of liquidity YTD, including more than 650 yuan in May alone. Based on evidence, we believe significant amounts of capital are trying to leave the country by any means necessary, including crypto.
Trump has continued to publicly pressure the Fed to cut rates. Now that the U.S. economic data is starting to turn down while the trade war with China turns up and a surprise tariff on Mexico is implemented, the market has strongly shifted towards expecting multiple rate cuts, starting this year.
Europe is in real trouble – specifically Deutsche Bank is in the midst of an attempted rescue merger from other European banks, but the outcome is currently unclear. New Zealand cut rates on May 7th, the first developed country to do so in the current cycle. Australia will cut rates in June. Indeed, interest rates across the globe are rapidly pricing in new rate cuts and more QE, and soon. The Germany 10yr yield has collapsed to -0.20%, multiyear lows.
I want to be explicitly clear here – central bankers globally have no plan to end the largest monetary policy experiment in human history. The Fed, with Trump in its ear, has become completely beholden to the market – that has been made abundantly clear over the last 6 months. Any kind of rate increase or Quantitative Tightening would crash all asset prices and send the world into a recession. The Fed, which has become politicized, has no political will to do that. I am not alone in viewing this as a dangerous situation. Ray Dalio wrote an in-depth article on May 1st about the inevitable implementation of MMT or other similarly radical monetary policy easing measures, as rate cuts and QE will prove ineffective at stimulating the economy in the coming downturn. On May 28th the CIO of Pimco’s U.S. core strategies called it “probably the riskiest credit market we have ever had”. Ray Dalio runs the largest hedge fund in the world. Pimco manages $1.8tn in assets.
The whole world is about to cut rates, juice more QE and begin discussion of even more radical moves in 2H-19 and into 2020. This is deeply bullish for a non-sovereign, hardcapped supply, global, immutable, decentralized, digital store of value. BTC is a hedge against monetary and fiscal policy irresponsibility by central banks and governments globally. It is an insurance policy unlike anything the world has ever had before, and the world needs it right now.
1) Chinese capital flight from a potentially collapsing Chinese economy, accelerated by a U.S. trade war; 2) U.S. trade tariffs against Mexico; 3) An unsteady European Union; 4) Slowing economic growth expectations worldwide; and 5) Market expectations of rate cuts and QE by central banks globally. This has been the backdrop YTD. And BTC price has increased 129% YTD. Granted, the crypto ecosystem has also enjoyed strongly net positive news flow YTD, a theme that accelerated in May. This crypto-specific news flow has been a great tailwind to crypto prices. But we very well may be experiencing a confluence of specific global macro events that are ideal for driving BTC price enormously higher, taking the rest of the crypto market with it. Risks are plentiful and sizeable – this setup could take a turn at any moment that would send crypto prices crashing. Markets tend to revert to the mean, so we are cognizant of that. Additionally, if the Fed proves to be slower in its actions than anticipated, we could enter a deeply risk-off, cash-centric environment which would likely have adverse effects on BTC price. But with proper risk management and a process-driven approach, the potential for attractive risk-adjusted returns is strongly compelling.
Market Update – Liquid Crypto Asset Investing
We have discussed at length our Four Foundations, one of which is Quantitative Tools. We have built dozens of these proprietary tools that generate signals which help us understand this market, and we continue building new tools regularly. The views we present in these letters are informed by these signals. Our tools served us well in May to understand the potential for returns relative to the risk present. We believe these tools will serve us well going forward.
Since first introducing the concept of the Risky Whale in our April 1st Monthly Update, we have given keynote presentations about it, talked on TV about it, and had online publications write articles about it. As discussed previously, the Risky Whales have played an integral part in pulling crypto prices out of a tailspin of negative reflexivity and moving firmly back to the upside. The Risky Whales are still present in this market, but their actions are not dragging the market higher to the same extent as earlier this year. In fact, like the mythical perpetual motion machine, the Risky Whales have given this market enough of an initial push and had enough help from the global macro landscape and crypto-specific news flow, that positive price action has taken on a life of its own – the very definition of reflexivity. The market currently still needs a nudge every now and then from Risky Whales, and chicanery in crypto is indeed alive and well (as discussed below), but a bullish trend has emerged that is looping in new investors every day. That trend is not without risk though – to the extent it stalls out and the Risky Whales are inclined to distribute BTC at current levels rather than push prices higher, we could see a meaningful retracement.
The crypto market has been heavily supported by aggressive dip buying throughout April than continued through May, shown in blue.
Specifically, in the five days leading up to the Consensus conference in New York on May 13th (red arrow), there was a large and aggressive bid in BTC, potentially from a single buyer. That bid appeared to be working a patient algorithm based on a VWAP and likely totaled many thousand BTC (blue arrow). Importantly, that bid was in spot rather than the Bitmex Perpetual Swap, a market structure we believe is healthy. That bid walked price completely unabated through the low $6k’s, a level expected to serve as massive resistance. That bullish advance was punctuated by an impulsive move upward the first day of the Consensus conference, where it was announced that 1) Microsoft Building Identity Platform on Bitcoin; 2) Whole Foods Accepting Bitcoin Payments; and 3) Bakkt Bitcoin Futures Exchange to Launch in July.
The most aggressive test of the strength of this bull market came on May 17th, when we believe large coordinated market sell orders were executed over a 15 minute period on Bitstamp, Kraken and Coinbase – the three exchanges that constitute the reference rate on which the Bitmex Perpetual Swap is priced. That caused a cascade of liquidations on Bitmex totaling ~$235mm. Price collapsed more than $1,450 in less than an hour. Most interestingly, the price dump was aggressively bought – with the 1hr candle generating a $600 wick. The market action was so abnormal yet obvious, Bitstamp felt obligated to report publicly on it.
While history may not repeat itself, it often rhymes. We believe this to be an accurate characterization of Bitcoin. Sometimes the simplest charts are the best. Vertical black lines denote block reward halvings.
Sticking with the “simple is best” theme.
Cross-coin correlation continued its precipitous decline until May 10th, when it bounced sharply across all names, before stabilizing into month-end. Something very different happened in the crypto markets on May 10th – we saw it across many unrelated proprietary signals we have. We’re not certain what changed on May 10th. It may well have been a surge of new capital coming into the space. In any case, we are watching this chart closely.
We pay close attention to Bitcoin Days and have created numerous signals based on derivations of this metric. We are paying close attention to the high turnover circulating supply.
Fundamental Valuation indicators, including NVT, Realized Value, Delta Cap and Cumulative Value Days Destroyed have been left in the dust. Much comparison has been made YTD between early 2015 and current periods. We may be seeing an acceleration of price increase relative to Fundamental Valuation indicators that is more aggressive than 2015. We believe that would fit the current market fundamentals. Remember that history often only rhymes.
Last month we stated that NVT Signal was elevated. NVTS increased further in May and currently sits near the top of its historical range. Broadly speaking, the rally of the last few months has not been on-chain driven as much as on-exchange. At Ikigai, we have discussed this market structure at length. We believe there are valid explanations for it. On-chain metrics may look very different this cycle than the prior bull market cycle due to institutionalization and more activity moving away from Bitcoin’s blockchain and becoming more exchange-centric. We also believe that we may be entering a period of re-accumulation, as denoted by the pink boxes in the chart at the beginning of this section. This coming period may prove to be where on-chain metrics “catch up” with price before a massive explosion higher in both.
Exchange volumes, put simply, look outstanding. We have made a series of higher lows and higher highs. The trailing 7-day avg volume at the end of May was ~24% higher than the end of April, which was ~33% higher than the end of March. Doesn’t get much more bullish than that.
BTC Dominance rose sharply in the first half of May, peaking at 60% on May 13th, before collapsing back to 56% by month-end. We pay close attention to Dominance, in conjunction with other signals, to help us understand the broad appetite for Alts exposure at a given point. We believe we may be seeing signs of increased appetite for Alts, but its currently unclear to what extent or duration that may be. We are also aware that Binance IEO’s are likely pulling significant liquidity out of other names.
In the Monthly Update from May 1st, we asked ourselves “does this market have the ability to range?” We talked about the potential for BTC to punch through the low $6k’s and show an unwillingness to range, at least at those low levels. That proved to be the case with conviction. Rather than respecting resistance in the low $6’s, mid $7’s or low $8’s, BTC just walked through all those levels on impressive volume. The path that was created on that move is referred to as a “parabolic advance” – increasing at an increasing rate. Specifically, in this case the slope moved from approximately 12 to 24, to 48, to 64 degrees.
Parabolic advances are dangerous. They end in collapse, typically 38-62% of the total parabolic move. The argument could be made that the move described above on May 17th was a sufficient break in the parabolic advance to retest low $6’s and “reset” the parabolic move. It is too early to know for sure. A large retrace is more likely than not to happen sometime soon. As always, we take the preponderance of evidence that is generated by the dozens of signals we track and make investment decisions accordingly. Right now, we believe that evidence points to higher prices this year.
Let’s take a moment to celebrate May 2019, a top 5 monthly performance since 2013. BTC price is now 168% off the low of mid-Dec. If BTC increases another 168% from current levels, price will be $23,000.
The drivers for this outstanding rebound have been 1) a dovish capitulation by the Fed that was echoed by central banks globally; 2) strongly positive crypto-specific news flow YTD; 3) more institutional-grade infrastructure; 4) Chinese capital flight; and 5) the actions of Risky Whales. This confluence of events remains in-place presently and could potentially accelerate through 2H-19 but could also take a turn for the worse and push crypto prices lower. The presence of risk is high. So are the potential returns. The balance of the two is compelling.
Near term crypto-specific catalysts are compelling, specifically TD Ameritrade is launching their Bitcoin product imminently. The meme “the herd is coming” is actually beginning to play out. The meme of “get off zero” is gaining real traction. Many new projects are set to launch through year-end. Human and financial capital are pouring into the space to provide the necessary products and services to scale crypto to a multi-trillion-dollar asset class. It’s happening, and it’s happening quickly.
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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