JULY 2018 CAOF UPDATE
CAOF Operational Updates
Receipt of Current Tokens
Many of you know that due to regulatory uncertainties, unfavorable valuations and adverse market conditions early in the first quarter we decided ICO investing posed more risky than we deemed prudent. However, we participated in four ICO’s this year before making this decision. Earlier this month we received our Current tokens, which is the project we are most excited about.
We believe one of the paths to mainstream adoption of cryptocurrencies and blockchain technology is through its seamless integration into well-conceived products for the masses. For example, consider that not many people understand how credit card processing works, but people use Uber without any hesitation which in turn uses credit card processing. Current is an incentivized, blockchain-enabled streaming ecosystem which lets you choose how to stream and pay for your media. The Current token will be used as part of the in app experience. We believe products like Current will pave the way for mass cryptocurrency adoption. To put this in some perspective, it is estimated that there are 15,000,000 global cryptocurrency users. Current has passed 1,000,000 users in the app store and hit the number 1 spot in 5 countries.
Current’s Marketing and Communications Manager, Josh Moyer, discusses their progress and place in the ecosystem well. “At this rate, Current is positioned to be one of the top blockchain-enabled products in the market — one with widespread adoption. For a lot of individuals, Current might be their first point of entry into the blockchain space. A critical narrative to share, more so than ever, given the sheer number of products in the industry with little traction and little adoption. It’s products like those that indeed pave the way for innovation and awareness.”
We fully agree with Josh. We were lucky enough to be involved in the friends and family round which raised $1,500,000 ahead of a high profile $36,000,000 ICO and eagerly await the launch of their mainnet.
I encourage anyone interested to follow Current for updates or to download the app and get involved.
Victoria Capital Consulting Services
Aside from our primary objective of providing positive and above market returns for our investors, we have always taken great pride in our role as communicators and educators to both our investor base and the broader market. Whether public speaking, blogging, or in our email communications, we have strived to provide informative insights and comments about the ever-evolving landscape of the cryptocurrency markets.
In this process, we have met many institutional investors who are still in the learning process. Many of them have expressed the desire for more educational resources. It is with this demand in mind we have a created a consulting service catered around cryptocurrency and blockchain education.
If anyone is interested in learning more about this, we encourage you to reach out.
Upcoming Speaking Events
Victoria will be speaking at the below events. If you happen to be in these cities please join us.
The Voice of Blockchain
August 24 & 25, 2018
Navy Pier, Chicago
Brandon Elsasser will be sitting on a number of panels on various cryptocurrency related topics.
The Trading Show
September 26, 2018
New York, NY
Brandon Elsasser will be sitting on a number of panels on various cryptocurrency related topics.
Quant World
November 8, 2018
Toronto, Canada
Brandon Elsasser will be moderating a Panel on the different token types.
CAOF Performance Estimate
For the month of July the CAOF was up an estimated 7%. These gains were predominantly driven by gains in our positions in the assets that Coinbase is considering adding to its platform (this will be discussed in depth in the pages to follow) along with strong gains in our bitcoin and bitcoin options positions. Bitcoin was up 21% on the month.
Our holdings in many other of the top cryptocurrencies weighed on our performance. The large gains in July in bitcoin are misleading when thinking about the market broadly over the course of the month. In fact 17 of the top 20 cryptocurrencies were either down or unchanged in July. This led to a strong expansion in bitcoin dominance, a concept discussed in significant detail below, this concept is critical to the market currently and is driving much of how our portfolio is allocated.
Estimated Historical Returns
News and Market Conditions
Bitcoin dominance
Bitcoin dominance is an important metric that cryptocurrency traders and investors pay close attention to. It is the measure of bitcoin’s market capitalization relative to that of all cryptocurrencies. It began the month of July at 42% and has accelerated rapidly, ending the month at 48%. For a point of reference on just how volatile this can be, on Thanksgiving of 2017 it was around 52% and 2 weeks later had exploded to 64% before ending the year at 38%.
What does this mean?
By closely analyzing both bitcoin dominance and the velocity of change of bitcoin dominance an investor can better understand where we are in the crypto market cycle.
Bitcoin dominance has historically spiked, like it has this month, in two scenarios. First, in extreme down markets traders sell “alt-coins” (alt-coin refers to any cryptocurrency that is an alternative to bitcoin) more aggressively than bitcoin and bitcoin dominance rises as bitcoin suffers smaller losses. The second scenario is that at the start of a bull market bitcoin has drawn in the new capital and sharply outperformed alt-coins for sustained periods of time. Once this has run its course, investors will then sell bitcoin to buy alt-coins, typically starting in the higher market cap alt-coins and then filtering down to the more speculative assets.
Many observers believe that this second scenario is where the market finds itself currently. While this would be a welcome development it is crucial to remain cautious and disciplined with risk management during the beginning of these cycles. Bitcoin dominance can increase much faster, much further and for much longer than one can expect and if you roll into alt-coins too early you will lose much of the purchasing power and miss out on an important part of this cycle.
The fund’s portfolio has a heavy exposure to both bitcoin and bitcoin call options. As a result of the call options we find ourselves more long bitcoin as it rallies, and therefore well positioned for a period of sustained bitcoin dominance.
A fund like the CAOF with a diversified basket of cryptocurrencies will always underperform bitcoin during these periods of violent spikes in bitcoin dominance as our non-bitcoin holdings lag. As highlighted earlier 17 out of the top 20 crypto assets were down or unchanged in July. We will continue to use the bitcoin outperformance to our favor and add to our alt-coin exposure gradually.
We will not be surprised if bitcoin dominance continues its run into the low 50%-’s. If it does, we will look to move from our bitcoin overweight into a much more concentrated exposure of high quality alt-coins. If bitcoin dominance extends and reaches 60% or higher it is likely we will be considerably underweight bitcoin at that point in time.
Major Announcements by Coinbase
Coinbase has established itself as the most trusted US based cryptocurrency exchange. They have recently been adding product lines that address the needs for the asset class as it is institutionalized. The expansion of Coinbase has historically coincided with the expansion of the broader market. This month has seen several major announcements by Coinbase which we deem to be long term bullish for the market.
Coinbase Custody, Coinbase’s solution for the custodianship of digitals assets for institutions, took in their first ten institutional customers this month. They hope to have one hundred clients by the end of the year. Many in the industry view this as a game changing development in custody.
Coinbase Prime, their exchange, which currently lists four cryptocurrencies, announced that in addition to the planned listing of ethereum classic they are exploring the listing of five additional crypto assets. XLM, ADA, ZEC, BAT and ZRX. This is a major development not only for these five assets but also for the market as a whole.
Finally, Coinbase also announced that their planned acquisitions of three separate companies are set to move forward. These acquisitions will give Coinbase the licenses needed to be the first federally regulated crypto trading venue and the ability to operate as a broker dealer, alternative trading system and registered investment advisor. This is critical as these distinctions give Coinbase the ability to list for trading and custody crypto assets that have been deemed securities by the SEC. This should lead to expanded liquidity for the entire market and goes a long way towards the institutionalization of the asset class.
We have time and again spoken about the need for enhanced regulatory clarity and custody solutions as prerequisites for institutional adoption. The development that Coinbase will now be an SEC regulated entity capable of trading and custodianship of both commodities and securities should in the long run be viewed as major step towards this clarity. We are very excited about what this means for the future of the space.
Bitcoin ETF
On July 26th the SEC rejected an outstanding ETF, exchange traded fund, proposal by the Winklevoss twins. A similar proposal had been rejected last year. The SEC cited concerns with BZX’s, the proposed listing exchange, ability to monitor the product.
“BZX has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices.”
The SEC went on to add that it was not just manipulation of the proposed ETF that concerned them, but of the bitcoin spot and futures markets as well.
The SEC commissioner, Hester Peirce, dissented on this ruling. She believes the market has matured enough for the approval of an ETF and that in order to mature further, regulatory support is necessary.
Peirce commented “more institutional participation would ameliorate many of the Commission’s concerns with the bitcoin market that underlie its disapproval order. More generally, the Commission’s interpretation and application of the statutory standard sends a strong signal that innovation is unwelcome in our markets, a signal that may have effects far beyond the fate of bitcoin ETPs (exchange traded products).”
The market had been focused not on the rejected Winklevoss ETF, but instead on the ETF proposed by companies backed by The CBOE, one of the two Chicago based exchanges now trading bitcoin futures. What the recent rejection and dissent mean to the pending application is unclear.
Many in the community are optimistic that the CBOE backed application will overcome the commission’s concerns for a litany of reasons. Hopefully clarity comes quickly, a decision is rumored to be expected on August 10th on the CBOE backed application. An approval of the application would be another large step towards a more regulated market, with lower barriers to entry for investment.
The CFA Exam to Include Crypto
The CFA Institute announced that it will be adding crypto materials on the exam which verifies the world’s financial analyst. CFA’s advise investors of all walks and their requirement to have a baseline knowledge of crypto and blockchain as they do of other asset classes will help to educate investors globally. It is exciting that the mainstream investment community is beginning to take notice and further accept the asset class. As Stephen Horan, managing director for general education and curriculum at CFA Institute noted. “This is not a passing fad.”
The CAOF Portfolio
Potential Coinbase Additions
When Coinbase announced the five new cryptos they were considering adding, we had positions in four of them including a recently increased position in ZCash, a privacy focused cryptocurrency. Zcash was a larger position in our portfolio in May ahead of its listing on Gemini, a major US exchange owned by the Winklevoss twins. When ZCash was announced to be added to Gemini it experienced a rapid increase. Often when cryptocurrencies experience rallies on an announcement of listings they peak at the time of the listing as many retail traders chase the market. Expecting this, we considerably reduced our position in the days leading up to the listing as you can see in the chart below. We purchased it back gradually after it’s decline between June 29th and July 7th as highlighted below. We were therefore well positioned for the Coinbase announcement on July 13th and we will more than likely maintain an overweight in ZCash until it’s potential listing as we did back in May at which time we hope to reduce the position into strength from the event.
The above is an example of the way we attempt to position the portfolio around upcoming events. By staying abreast of the news and using data from the markets we attempt to find attractive risk reward scenarios. These scenarios do not always play out as we expect, but it is our goal to find attractive risk adjusted opportunities for our investors.
Initially after the announcement a number of these five assets rallied in anticipation of the listings. However, towards the end of the month due to the continued trend of bitcoin dominance discussed earlier many altcoins have suffered declines in bitcoin terms. Some of the potentially added Coinbase coins retraced to what we view as attractive levels and we have increased our allocations. This situation is an example of the attractive risk reward opportunities we seek.
Bitcoin Call Options
Over the last few months owning bitcoin call options has become an attractive alternative to holding bitcoin. When you buy a call option you pay a fee (premium) for the right to buy a bitcoin at a certain price (strike price) on or before a certain date (expiration date).
As the market has moved lower in price we have been selling bitcoin to buy bitcoin calls and increase our cash balances. This has allowed us have the ability to opportunistically add to positions as the market sells off while at the same time making us synthetically quite long bitcoin. This is discussed in more detail in the previous section on bitcoin dominance.
Articles
Below are some additional articles from the past month that we wanted to pass along.
Bitcoin Transactions on Credit Cards?
This PDF may have included some information about the CAOF and cryptocurrencies in general. This information is confidential, and by opening the attachments, you acknowledge and agree that you are obligated to keep the contents confidential and not transmit or forward it to any other person. Performance estimates are subject to future adjustment and revision. The information provided is historical and is not a guide to future performance. Past performance is not necessarily indicative of future results. Any decision to invest must be based solely upon the information set forth in offering documents furnished by Victoria Capital regardless of any information investors may have been otherwise furnished. This is neither an offer nor solicitation for the sale of a security.
