July 2019 - Market Update

Monthly Update || July 2019

A portfolio that contains too little risk can make you underperform in a bull market, but no one ever went bust from that; there are far worse fates.
— Howard Marks, on bull markets with less risk than crypto

Opening Remarks

Greetings from inside Ikigai Asset Management headquarters in Marina Del Rey, CA. We welcome the opportunity to bring to you our tenth 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 well on our way to new ATHs for BTC after a truly spectacular Q2-19 - the fourth best quarterly performance since 2012. In our Monthly Update letter that went out June 1st we said, “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 ATHs are possible in 2019, and likely in 2020.” Our conviction on that view increased in June as the reflexivity we know to be foundational to this asset class has strengthened its grasp on this market. We are anecdotally seeing that from many vantage points –1) mainstream media’s crypto coverage has exploded higher; 2) “no-coiners” are coming out of the woodwork; 3) exchange volumes have skyrocketed; 4) investor interest in Ikigai has increased; and 5) crypto conference attendance has increased. These are qualitative factors that feed into the Metcalfe’s Law relationship that crypto prices have with Network Effect and they are screaming bullish.

As we have stated for months, the backdrop for YTD crypto price action has been 1) strongly net positive crypto-specific news flow in conjunction with 2) a specific confluence of global macro events – the bullishness of this backdrop increased in June and the outlook for 2H-19 and 2020 is bright. Facebook’s Libra, arguably the most important crypto project since Bitcoin, was formally introduced on June 18th. Additionally, the global macro backdrop of 1) monetary policy irresponsibility from central banks globally; 2) fiscal policy irresponsibility from governments globally; 3) tariff wars; 4) Chinese capital flight; 5) government overreach; 6) Big Tech overreach; and 7) data privacy was furthered in the month of June. Make no mistake about it – we are living in a wacky time for global macro. Things are weird and getting weirder. Crypto broadly, and BTC specifically, is well-positioned to act as a hedge against, or alternative to, that confluence of macro situations. To borrow from the Old Testament, it appears that crypto as a technology and asset class has arrived “for such a time as this”.

As we have consistently stated, this setup is not without significant risk. Sentiment has swung into the beginning stages of euphoria, which is a cause for concern. In our Monthly Update from May 1st, we posed the question “does this market have the ability to range?” Well, price has increased more than 100% since then, even after a violent >20% pullback going into the end of June. Said differently, we still see little reason to think this market can range. Instead it moves up strongly, blowing through resistance level after resistance level until long positioning gets so heavily offsides that Risky Whales can make swift profits by positioning short and coordinating a dump. Active investing in this market structure requires patience, objectiveness vigilance, flexibility and strict adherence to risk management processes. That’s what we’re here for at Ikigai.

June Highlights

  • Facebook Releases Libra Project Details

  • Chairman of the Fed Addresses Crypto at FOMC Meeting

  • Binance Announces US Subsidiary

  • Binance Launches Margin Trading

  • Ripple Invests $50mm in Moneygram

  • LedgerX Receives CFTC Approval & Announces Retail Investment Product

  • Cash App Adds Bitcoin Deposits

  • Henry Kravis Backs Crypto Fund of Former KKR Employee  

  • Iran Confiscates Thousands of Bitcoin Miners

Symbol June May April Q1-19 YTD % ATH % Cycle Low
BTC 26% 60% 164% 10% 189% -46% 238%
ETH 8% 65% 105% 6% 118% -79% 248%
XRP -10% 42% 28% -12% 12% -89% 54%
BCH -7% 99% 154% -1% 152% -86% 423%
EOS -62% 76% 38% 63% 125% -75% 263%
BNB -1% 48% 86% 182% 427% 32% 663%
XLM -22% 34% -3% -5% -7% -89% 41%
LTC 7% 54% 101% 99% 301% -67% 431%
TRX -3% 38% 36% 25% 70% -89% 191%
Top 100 Aggregate 15% 55% 117% 14% 148% -62% 208%
Bottom 99 0% 50% 68% 18% 98% -78% 167%

The Most Important Crypto Project Since Bitcoin?

Facebook’s Libra project is tremendously important to the crypto ecosystem. While Libra competes with certain crypto projects, it does not compete with Bitcoin – it is a gateway to Bitcoin. With 2.4bn MAU’s across the Facebook, Messenger, WhatsApp and Instagram platforms, Libra has the potential to bring the concept of “value accrual in digital assets” to the world at a scale never before seen.

There has been a tremendous quantity of analysis produced by the crypto ecosystem in the two weeks since Libra details were announced by Facebook. Instead of rehashing that work, we have handpicked and aggregated the most thoughtful analysis below. If you read all of it, you will have a well-informed view of the project and its potential implications.

  • Tweet thread from David Marcus, Libra project head at Facebook – introduces Libra, its partners, its purpose and its plans

  • Tweet thread from Erik Voorhees, CEO of ShapeShift – lays out the implications of Libra

  • Research report from Binance – provides an in-depth review of Libra

  • Technical review from Jameson Lopp, Bitcoin veteran – details the technical side of Libra

  • Medium post from Eric Wall, Human Rights Foundation crypto specialist – points out potential regulatory implications of Libra   

  • Article from The Block from last December – includes my own views on Libra from six months ago, which surprisingly are still accurate

Global Macro

As you well know, we believe understanding the global macro landscape is key to understanding crypto assets. Below is a collection of charts that we believe help frame crypto in the context of asset classes globally.

This table shows the market’s implied probability of Fed rate cuts at FOMC meetings over the next year. Quantitative Tightening? Yeah, we’re done with that. 


Correlation does not necessarily imply causation, but this is the YTD rise in aggregate negative yielding sovereign debt (currently >$13tn) vs BTC.


There is a view that BTC is most similar to the Swiss Franc on the global macro landscape, as both are “hard assets”. When CHF is cheap vs USD, so is BTC. The recent move in the 70:30 Treasuries/CHF basket implies $32k BTC in July 2020.


Offshore Renminbi (red) vs BTC (blue). Note that the recent CNH pullback led BTC by ~5 days.  


Gold (red) vs BTC (blue). Note that gold recently broke out to six year highs. Note that both gold and BTC pulled back together.         


The German 10yr yield is plummeting and currently stands at an all-time low of negative 32bps.


A key issue of the Democratic presidential candidate race is what to do with Big Tech companies. Multiple leading candidates are pushing for the breakup of Big Tech. All are pushing for increased regulation. This dovetails perfectly into the crypto narrative around self-sovereignty and privacy and provides further tailwinds for the growth of this asset class.


Market Update – Liquid Crypto Asset Investing

BTC price increased 26% in June after increasing 60% in May. We are in the midst of a raging bull market.Important to note, at time of writing we are experiencing a significant and much-needed pullback. At its peak on June 26th, BTC price nearly reached $14k and was +60% on the month. In typical BTC fashion, the pullback came violently – price declined more than $2k and then bounced more than $1k in a single hour. This price movement induced more than $260mm of long liquidations on Bitmex in a single hour, which we believe is the largest long liquidation spike in Bitmex history. 

This pullback came from deeply overbought territory and levels where previous pullbacks have occurred over the last several months, as shown on the 14D RSI below.


Note that this pullback, while violent, is in no way out of line relative to prior pullbacks within this strong bull market of the last three months. We have seen a healthy retrace of oscillators like the RSI and this reset is welcomed. We currently see little reason to think this bull run is over. While a deeper pullback in the near term is certainly possible, we believe it is most likely simply an engineered opportunity for Risky Whales to profit from short-term shorts and accumulate more BTC at lower prices before taking the market to new YTD highs.

Tether had another busy month, with more than $750mm in new creates in June. Below is USDT market cap (blue) vs aggregate crypto market cap (orange). Sometimes the simplest charts are the best. 


One of the defining characteristics of crypto price action in June was the strong increase in BTC dominance. BTC was +20% in June while aggregate Alt market cap was flat. Even that flat number hides underlying carnage, with EOS -32%, XLM -22%, XPR -10% and many others underperforming to a similar degree.


In June, BTC dominance rose to levels not seen since the peak of its last bull market. We believe this is a deeply bullish sign that the market is rewarding fundamentals. We have been saying publicly for nearly a year now that the value proposition for BTC relative to its status quo is much more clearly understood than the value proposition of any other crypto asset relative to its unique status quo. In our Monthly Update letter that went out June 1st we stated, “BTC is separating itself from the rest of the crypto asset landscape in terms of institutional investability”. That view played out in June. While Alts will never die, and we are excited about the innovation occurring in many different projects in the crypto asset landscape, we are paying close attention to how BTC is acting relative to the rest of the space and we believe it is a mistake to over-diversify just for the sake of diversification. The efficient frontier concept as it is presented in modern portfolio theory is not proven to be applicable to crypto at this point. We seek to generate attractive risk-adjusted returns on a consistent basis. There is a valid argument to be made that any time you own any crypto asset other than BTC, you are increasing your risk relative to owning BTC. Therefore, you must be compensated appropriately for accepting that risk. When, and to what degree, the market is poised to provide that excess return for the commensurate increase in risk is an area of market analysis we are closely watching.  

The other dominant feature of the market in June was volume, which was simply breathtaking. Bitmex, Binance and Coinbase all had record days and weeks. Bitmex has traded over $1tn notional YTD. The trailing 7-day avg volume at the end of June was a stunning 85% higher than at the end of May, which was 24% higher than the end of April, which was 33% higher than the end of March. Really clear situation.


BTC monthly chart shown below. Nice and simple. 


We introduced the below chart in the June 1st Monthly Update letter. We like it for its simplicity and allowance for history to “rhyme” without repeating itself exactly. There’s good reason to think that the pullback we’re currently experiencing at time of writing is the beginning of the re-accumulation phase through 2H-19. This could be the period where on-chain network activity metrics catch up with the price action YTD, which has been primarily on-exchange driven. If that ends up being the case, fasten your seatbelts for 2020. 


Cross-coin correlation remained steady in June. This is healthy.        


Hashrate exploded to new ATH’s in June. This is bullish.


Below is our proprietary Adjusted Binary BDD metric, which we first introduced here. The red lines denote days where an above average amount of Bitcoin Days are destroyed. Note the recent cluster of red lines in the last week of June. This tells us that Bitcoin that had been held for a long(er) amount of time has been recently moving. This is bearish and requires close monitoring.


BTC daily unique addresses in use has been trending up since the market bottomed in December and recently exceeded 1mm addresses. This is bullish.


Trailing 24hr BTC realized volatility (yellow) vs BTC (blue). Since April 1st, volatility has exploded higher as price has moved up. This could be interpreted as a potential barrier to entry for institutional investors, who may not be comfortable investing in an asset with this magnitude of volatility. That being said, BTC is +189% YTD, so you are getting paid handsomely for exposure to this volatility.  


As we have been pointing out for several months, BTC price has accelerated away from Fundamental Valuation indicators with a velocity not previously witnessed in prior market bottoms and subsequent recoveries. From an on-chain metrics perspective, we have not really had a recovery that looked like this current recovery. We believe there is sound reasoning behind this recovery being more on-exchange led than on-chain compared to prior cycles. That said, we are watching these metrics closely. As stated above and last month, we believe that we may be entering a period of re-accumulation where on-chain metrics “catch up” with price before a massive explosion higher in both. 


We continue to ask ourselves “does this market have the ability to range?” To be frank, June price action tells us the answer is still no. Rather, off the lows from mid-Dec BTC has shown a tendency to increase at increasing rates, with now two mini blow-off tops along the way. BTC has walked through levels that were assumed to be strong resistance at 1) low $4’s; 2) ~$5.5k; 3) low $6’s; 4) ~$7.5k; 5) low $8’s; 6) $9.6k; and 7) $10k before failing into the all-time high monthly close at the end of June. The advance has been impressive, and the preponderance of evidence at this point is telling us that it is likely to continue in 2H-19 and into 2020.   


Last month we talked about the dangers of parabolic advances - they end in collapse. Fib retracements are one of the most effective tools for gauging the end of the pullback after a parabolic advance. At time of writing, we have retraced through the 23 Fib and are approaching the 38 Fib at ~$9.8k. It may hold or we may need to retrace even further, perhaps down to the 50 Fib at ~$8.5k before resumption of the uptrend. Either level of retracement can still be viewed as corrective within the context of an overall uptrend.    


Closing Remarks

Let’s take a moment to celebrate Q2 2019, the fourth best quarterly performance for BTC since 2012. As of June 30th, BTC price is 238% off the low of mid-Dec, a truly spectacular rebound. 

The velocity of this rebound is of historic proportions – we haven’t seen BTC accelerate this fast this far off the bottom before. But there is good reason for this. As we stated in our May 1st Monthly Update, when price was less than half of where it is currently, “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 theaverage retail investor”. What’s more, the last bull market of 2017 occurred while the Fed and other central banks globally were beginning a tightening cycle, not an entirely new round of rate cuts and increasingly exotic forms of Quantitative Easing. In 2017, there was no talk of Modern Monetary Theory, student loan forgiveness and Universal Basic Income. There was no tariff war with China. There were no threats of tariffs against Mexico, Europe and India. There were no two million person protests in Hong Kong. There were no calls for breaking up Big Tech companies over data privacy breaches and monopolistic abuses of power. That is the macro backdrop we find ourselves with currently, and it is deeply bullish crypto.     

With the work that’s been accomplished to date on the infrastructure side, it is easier to own crypto than ever before. There is more work being done currently than ever before. More financial capital and human capital pouring into the space than ever before. More technological innovation than ever before. More interest than ever before. The value propositions of crypto assets, or lack thereof, are understood with a level of sophistication never seen before. 

We’ve never had a setup this good before, so it’s reasonable to expect prices to move to levels we’ve never seen before.

Nothing is more expensive than free.
— Ancient Japanese Proverb

Travis Kling

Founder & Chief Investment Officer

Ikigai Asset Management


Ikigai is currently fielding interest from new investors. Contact us to see if you qualify.


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.