ELEMENT DIGITAL MASTER FUND
April 11, 2018
The market behavior this week has been fairly muted with the price of bitcoin trading range bound between 6500 and 7000. Most technical signals indicate bitcoin remains in a secular bearish trend. And though certain social media personalities have officially called this the bottom, we wouldn’t be so sure about that just yet. The way we work is a bit more thoughtful. To us, it feels to us like everyone is in a “wait and see” type of mode this week. It feels like there is a considerable amount of cash on the sidelines waiting to be deployed at the right time. Will it happen next week? Time will tell. In any case, here are some of our observations for the week:
The market is increasingly reactive. We have noticed that there have been volume prints recently on exchange that are relatively insignificant in relation to the amount of bitcoin that trades on exchange however these volume prints have been significant enough to result in sharp price moves for bitcoin. The chart and graph below highlights this observation. What we can surmise from this information is that someone has been placing block size market orders on exchange. This type of size is too big for a retail trader. And a smart professional trader knows to use limits and spread orders over a longer time horizon to minimize impact costs. So who on earth is placing $10m+ market bets in bitcoin? This may very well be the result of funding trades and liquidations that are occuring on other derivative exchanges. Our thesis has always been that the use of derivatives can be efficient in hedging and expressing views, but with a nascent asset class like cryptocurrencies, it could also beget structural risk, volatility and overall just bad news for non derivative traders. We’ll leave it at that.
Bitcoin continues to be volatile. No we’re not being facetious here or stating something you don’t know. We’re just saying that volatility relative to a couple years ago remains high even after the recent drawdown. Why? Because of the cast of characters still speculating on this asset. Because of social media, everyone is a market pundit and can influence the behavior of their cohort. Because it is still hard to fundamentally value individual names, the “fair value” tends to be a moving target. So all that being said, the price of bitcoin will continue to go up, down and sideways – violently at times. And we should get used to it and probably stop trying to gauge volatility as a signal for much. To illustrate our point, the below graph shows the daily returns of bitcoin (a simple heuristic to visualize volatility) versus the price of bitcoin going back to April 2013. If you look closely, you’ll see that volatility has increased a fair amount in the past year relative to the previous couple of years. And even in the past couple of months, this volatility remains.
The market has not reacted to seemingly good news. This one stumped us initially. In the past week, we’ve seen a number of positive headlines that, in the past, would have resulted in a massive spike ofprice. We’re talking about news of Soros and a Rockefeller backed VC fund entering the marketplace. That is a massive amount of money potentially that could trigger some short term price moves. This type of news should have been a straight adrenaline injection into Mr. Market. He should have been on fire. However Mr. Market really did not seem to care. He brushed the news off like it was nothing and continued trudging along slowly. We find this interesting and think that there is a deeper and more fundamental reason for that. To be continued.
As we diligently follow the markets and await for more meaningful catalysts to occur and for our short term thesis’ to manifest, we remain humble. Right now, it still feels like the market has the potential to go down just as easily as it can go up. Any questions or comments, just let us know. Thanks for reading everyone.
Portfolio Management Team
ELEMENT DIGITAL MASTER FUND
Thejas Nalval | Konstantin Antropov | Kevin Lu
This Commentary is for informational purposes and does not constitute investment advice, any type of recommendation or an offer to sell or a solicitation to purchase any securities from the Element Digital Funds or an entity organized, controlled, managed by or affiliated with Element Capital Group, LLC (“Element Group”). Any offer or solicitation may only be made pursuant to a confidential private offering memorandum which will only be provided to qualified offerees for careful review prior to making an investment decision. We aim to educate, report and/or opine on certain developments relating to the digital asset market. These are our subjective views, based on information and sources we believe to be reliable as of the date we publish, but we make no representations or warranties with respect to the accuracy, correctness or completeness of our opinions or any information herein and have no undertaking to update it. Please do not rely on it.
Element Group and/or its affiliates and personnel have made investments in some of the assets or instruments discussed here, and may in the future make additional investments (long or short) in such assets or instruments without further notice. Element Group does not, here or anywhere, provide accounting, legal or tax advice, or make investment recommendations. Please do not rely on us for the foregoing. We strongly suggest that prospective investors seek independent advice with respect to any investment, financial, legal, tax, accounting or regulatory issues discussed herein.
Certain information contained in this Commentary constitutes “forward-looking statements,” such as statements that include the words“may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “believe”. There are so many risks and uncertainties that actual events or results or the actual policies, procedures, and processes of Element Group and the Element Digital Funds and the performance of the Element Digital Funds may differ materially from those reflected or contemplated in such forward-looking statements. Please do not rely on forward-looking statements. Past performance is not necessarily indicative of or a guarantee of future results.
This Commentary is confidential, is intended only for the person to whom it has been provided, and under no circumstances may be shown, copied, transmitted or otherwise given to any person other than the authorized recipient.