Partner, Business Development & Head of Trading
Welcome back from the extended holidays! It’s been 3 weeks since our last Two Satoshis writeup, and that is an eternity in crypto given how fast and violently these markets move. For reference, the prices of many cryptoassets are up almost 100% since the Dec 14th lows. We forgive you if you didn’t notice this run-up, as the uncharacteristic equity, credit and commodity volatility over the past month probably garnered most of your attention. But this lack of correlation is precisely why everyone NEEDS to be paying attention to crypto. The crypto asset class isn’t going away, and despite finishing 2018 with yet another month of negative returns (5 straight), the crypto markets rebounded with a nice year-end rally which has continued thus far into the first week in January (+9% last week).
While we weren’t writing over the holidays, we were of course actively managing our fund, building our company, and sleeping/eating/breathing all things crypto. So before we dive into what happened this past week, below is a quick collection of random thoughts from the past few weeks:
Make no mistake about it, crypto valuations are still very difficult to ascertain. Until there is consensus on valuation and a long enough history to validate when prices are “cheap” or “expensive”, crypto will continue to trade based on sentiment, emotion and large underlying themes. One of these underlying themes is a rallying cry from the Ethereum community. While Ethereum is still the 2nd largest token, and arguably the most well-known besides Bitcoin, much of the 2018 sell-off can be contributed to poorly structured and ill-advised ICOs built on Ethereum, and an overall lack of scalability, speed and efficiency of the underlying protocol. That said, Ethereum still has the largest and most well-funded community of leaders and developers… and they finally had enough of the Ethereum bashing.
Over the past 4 weeks, Ethereum supporters came out of the woodwork defending their beloved protocol. This lead to previously bearish analysts turning slightly positive, Ethereum leaders like Joe Lubin calling the bottom, and more importantly, real hard data that not only offset the death spiral, but encouraged investment. As a result, ETH rallied from lows around $85 to current prices of $155. While it’s likely that prices will continue to be volatile, and may even retest lows at some point, we suspect that this “coordinated defense” may be a formula for success going forward. And other companies / projects took notice, and went on the offensive in recent weeks. We saw a slew of coordinated and well-timed press releases from Tron (TRX), Waves (WAVES), Neo (NEO) and many others, designed specifically to push token prices higher (and most worked). This response is to be expected after the carnage of 2018, as many of these companies and projects now must be more transparent and aggressive to build interest in their tokens.
As we’ve pointed out in previous weeks, crypto is in a distressed environment. And that means, price doesn’t really matter, and neither do percentage gains/losses. All that matters is deciding which tokens will exist in a few years, and whether or not growth in usage can ultimately accrue value to the tokens. For those that fit this description, the tokens were probably a buy at the lows on Dec 14th, they are probably still a buy up 100% from here, and will likely be a buy even if we retest the lows.
We’re still so early that, for those that do survive, the trend is almost assuredly higher.
So with 2018 behind us (and the hideous -75–85% returns that came with it), let’s take a second to reflect on why we’re even talking about crypto in the first place. Bitcoin turned 10 years old last week! And while the crypto markets have, and continue to, evolve beyond just Bitcoin, the anniversary of the first genesis block of Bitcoin reminds us that Bitcoin is a lot more than just “new money”. In fact, Bitcoin matters for Freedom.
The crypto markets rose almost 10% last week, and while correlation remains high between tokens, it’s a healthy sign that some tokens rose decisively more than others following real catalysts and announcements.
Charlie Bilello of Pension Partners wraps up 2018 with tons of charts that show the carnage across all asset classes.
…. We listen.
You often hear that crypto is “the internet in 1994”. To further illustrate that point, go back to 1994 with this article discussing a pioneer of consumer commerce on the internet, and see the parallels for yourself.
You can now buy 10 Nasdaq securities, including AAPL and AMZN, via a digital token that represents the shares. This is foreshadowing what is to come, and enables global access to US stocks without the need to have a brokerage account or a bank account.
Not light reading, but this is a great place to start your 2019 journey into crypto — understanding where Bitcoin came from, and where it is headed.
Our friend, David Nage, put out a great 2018 review citing why crypto wasn’t ready for primetime… but it’s not dead yet.
What happens when service providers grow in value much faster than those they service? This article is rich with detail on why cryptoassets are underpriced, citing historical valuations of US equity exchanges relative to equity prices.
The Bear Case
Despite the positive sentiment in the market right now, it is the start of the new year, and with that comes skepticism and predictions. We appreciate a healthy dose of skepticism about blockchain, and thoughts on what crypto needs to do to become relevant. Perhaps most interesting was McKinsey’s honest analysis of how little blockchain has actually solved to date, suggesting that a simple solution may be its best use case.
And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.
The Arca Portfolio Management Team
Jeff Dorman — Portfolio Manager
Katie Talati — Head of Research
Hassan Bassiri — Junior PM / Analyst
Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this document.
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