ELEMENT DIGITAL MASTER FUND
April 4, 2018
As we officially kick off Q2, most new entrants into this space are probably realizing what the phrase “past performance is not indicative of future results” means. It’s no secret that 2018 has gotten off to a rocky start and has been anything but friendly to the bulls. As of today, the overall marketplace is trading -45% for the year with large caps as the predominant bellwether underperformer. However, this has not been a shock to us. The market was overheated by a considerable margin last December and we all posited it was due for a correction to bring prices closer to fair value. So the recent move was necessary. What has been a shock, however, is the level of correlation that persists amongst most of the top 50 cryptocurrencies. When bitcoin moves lower on the day, seemingly so do most of the other 49 in unison. Dispersion in returns has been somewhat non-existent.
In any case, a bitcoin “7k bid” environment is a much more comfortable place to be than a “20k bid “ environment. That being said, we are a little cautious still. Here’s some of our observations this week:
- There are little to no marginal buyers right now. We’re talking about the large buyers (whales) and new buyers (newbies). We believe the buying activity on the screens may be automated market makers and bots attempting to earn spread. In an environment where it’s difficult to offload risk and when there are no clear demand catalysts on the horizon to beget a positional view, the practice of market making tends to change. It becomes harder and harder to earn the same level of spreads earned yesterday with the same effort. In order to earn the same spreads, a higher effort must be made. This effort translates into lower bids and higher offers (aka widening). Multiply this effort by the sheer amount of automated agents in the space and what we have in a down-trending market is negative gamma. Market declines tend to persist and accelerate quickly.
- Taxes are a bigger deal than most would like to believe. There’s a narrative circulating that the recent market weakness has been tax related, in that investors have been selling holdings to raise funds to pay their liabilities from last year. We think this argument, while difficult to prove quantitatively, holds some clout. Purely from a psychological perspective, a newbie investor that bought bitcoin last year and then sold at or near the highs in order to roll into another asset is likely in complete disarray as to how they will foot the bill for their tax liability. This investor probably sold their holdings, either to raise cash or out of pure frustration. Multiply this behavior across the hundreds of thousands of amateur investors and what results is a secular period of frantic selling with market orders. This is certainly not the type of activity that benefits a bull in a negative gamma environment.
- The macro environment is not helping. We’re talking about everything else happening in the world. An impending trade war between US and China, an impending actual war with US and North Korea, an extraordinarily overheated stock market, the Fed raising rates aggressively, inflation fears, flatlining householding spending and business investments……we can go on but we will leave it at that. There’s a slow but steady build up of uncertainty in the world and we believe this will have a direct impact on investor behavior and as a result, an indirect impact on Mr. Market in the short term.
All that being said, we believe it’s important to put everything in perspective. This morning we heard a commentary on a podcast where the host stated that the technologies of this marketplace are still in its early infancy and that we should be open to the idea that it will possibly need a couple decades to come into mainstream society. He went on to say that the thing that brings this to society may even be built by someone who’s not even born yet. Insert mind blown emoji.
We’re still at the beginning stages of this world. We’re all pioneers in our own right. We can’t speed up the future. We can only navigate it. And that is what we intend to do…and do it well. Thanks for reading everyone.
Portfolio Management Team
ELEMENT DIGITAL MASTER FUND
Thejas Nalval | Konstantin Antropov | Kevin Lu
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