When. Will. We. Bottom.
First let’s address the 800 lb. gorilla. The past few months have been painful for all markets, and the crypto markets are no exception. I have spoken with many peers and colleagues. All agree that we’re in very unusual times indeed, with inflation at 8.3%, interest rates rising faster than a loaf of bread in the oven, and quantitative tightening (QT) on the horizon, we are still in for some choppy waters. The Fed, in their May meeting minutes published on 5/25 telegraphed two more ½ point rate hikes, however they also did something a little unexpected; they noted that they may be softening their stance. Even so QT, which is basically the the Fed selling assets off their balance sheet, is scheduled for June. QT has historically had a negative effect on capital markets. So with that, we suspect we’ve not seen the bottom yet.
For those with a long-term perspective and a little foresight, this can provide an extraordinary opportunity, and can be a fantastic time for value investors. You see, while the Fed is fighting the inflation dragon, there is going to be a point where enough is enough and they are forced to shift. This was what was interesting about the May minutes, which, according to Bloomberg, had a “less hawkish than feared” tone. We are far from being out of the woods but, knowing this, we can prepare. Consider that during the next expected down leg there is going to be a great opportunity for amazing buys to prepare for the recovery and further expansion of the crypto marketplace. Importantly, when markets do recover, crypto historically recovers farther and faster, and this is where the gains will be made. Will that be July? September? Later? No one knows for sure in this dynamic market and, as I’ve stated before, market timing is a fool’s errand.
If you have a short-term trading perspective, you’re in for many sleepless nights. With a longer investment perspective however, we see amazing opportunity. Maybe this is why top investors like Paul Tudor Jones remain bullish. Importantly, Just this month Tudor Jones stated “It’s Hard Not to Want to Be Long Crypto” and noted that he maintains an allocation. That’s in the face of what is happening right now with the Fed and the current markets. I encourage you to read his comments on why he has this position, or view a clip form Anthony Pompliano on this topic. Simply said, don’t take my word for it. Take it from one of the best investors of our lifetime.
Meanwhile, Terra, whose coin is Luna, imploded like a star going supernova, sending shockwaves throughout the crypto universe by destroying hundreds of billions of dollars. This platform, which was polarizing from the beginning, suffered destabilization of their stable coin UST. While conspiracy theories abound (some say it was a coordinated attack by Blackrock and Citadel which, of course, the firms deny) the simple facts are that Luna was the backing of UST, an algorithmic stablecoin. Terra in turn was backed by bitcoin reserves. Following a run of UST redemptions that didn’t have complete backing, the system collapsed. This is very simplified of course, so for those that want to dive into an article that unpacks the facts I recommend this medium article.
Now, let’s add some perspective. It seems that every few years there’s a major blow up in the world of crypto, be it an exchange like Mt. Gox or a government action such as the one against Ripple or, in this case, a blockchain failing. This is not a referendum on stablecoins or blockchain in general. It is a referendum on this stablecoin and this blockchain, and it is an inherent risk with new technologies. Lest we throw the baby out with the bathwater, let’s remember that this was an event with one chain, and a controversial chain to boot.
The real challenge here from a practical side is the problem that occurs if one was overweighted in Luna and put (most of?) their eggs in that basket. If so, this was punishing to be sure, and again argues for a measured, diversified and, strangely, more conservative approach to deploying in this environment. Luna won’t be the last to fail. There will be others who achieve incredible success. Appropriate allocation, diversification, strategic analysis and risk management are some of the keys to realizing strong returns of investing in any new technology.
Liquid Venture II
Which brings me to the topic I touched on last month: Liquid Venture. (Which, as it turns out, is a potential solution to future “Lunacy”.)
You see, we’re in the midst of a technological revolution, and the technology driving it is blockchain. Blockchains have solved one of the top ten computer science problems of all time, the “Byzantine General’s Problem”. It allows peer-to-peer transactions without the need of central authority. This is the breakthrough – this is one key aspect of why we’re investing in crypto. Crypto assets are simply the ability to extract capital value from a blockchain, and therein is the key. Every time one invests in a crypto asset – a token – consider they are really making an investment in a new technology.
Venture capital, which makes direct investments into projects and startups, knows that investing in new technologies is where big rewards can come. For every Uber, however, there are hundreds of companies that implode. The difference now is that it is all on the public stage via secondary markets like exchanges and these implosions, when they happen, can be sensational. With crypto investment, however, we have an advantage that venture investing has never had.
Let’s get in the way back machine and go back to the year 1998. The internet was growing and so, too, was this concept of search engines. A savvy venture investor may have picked this up and decided to make an investment. One of the frontrunners in this budding world of search engines was AltaVista. If one made a direct investment in AltaVista, they would be betting on the success of that company and, ultimately, time would tell (set the oven to “bake” for 5-13 years to find out).
Suddenly, however, a newcomer “Google” shows up and causes a big splash. As an investor, one may want to make an investment in it as well. Of course an additional investment could be made into Google, but the original investment in AltaVista would still be in existence and unable to be liquidated. As it turns out in this story, in 1999, 83% of AltaVista was valued at around $2.3 billion, and an IPO was on the cards. But by 2001, its IPO was canceled and staff were laid off and investors lost their investment. This is venture.
Imagine, however, if one could exit the AltaVista investment and move it to Google. That would be amazing. This is exactly what we can do in crypto asset investing. If one has conviction in a theme, say, Smart Contract Platforms (or, in our example way back when, search engines), then the theme drives the investment strategy. There is no need to pick the winner out of the gate because, as the players evolve, the investment can be shifted to be in the best performers of the theme since the investment is liquid. This is what we do at TRADECRAFT by the way – we ensure that we have well-chosen themes and that we’re always in the best expression of that investment theme while also diversifying to minimize/manage risk.
We call this concept “Liquid Venture.” It is incredibly time consuming. Execution is an art and science in and of itself and, certainly, this is a more conservative style of investing. We’re not trying to get the next greatest platform at pennies and hope it becomes dollars. We’re not market-timing momentum investments or gambling on the most talked about meme-coin. It’s not a one and done. Over time, however, it allows an investor to greatly increase their chances of success while minimizing the risk of technology investing. As Warren Buffet has famously stated, “I’d rather be sure of a good thing than unsure of a great thing.” From our purview we are sure that this concept of Liquid Venture is a great thing.
Crypto is not for the faint of heart, but while many lament the volatility, it is the very thing that allows for outsized performance. Getting in early on any technological revolution is where big money is made, and while everyone is focused on day-to-day or month-to-month movements, I would argue this is simply noise. Markets go up. Markets go down. But technologies that transform the world stand the test of time.
The truth is we don’t know which blockchain will lead the pack in their respective space. We don’t need to. Smartly investing in blockchain via Liquid Venture provides the ability to sidestep Lunacy, surf the waves as they happen, and ultimately have the potential for everyone to participate, and profit, from technological innovation.
Until next time, be well, stay safe, and I’ll keep Decrypting:Crypto for you!