2019 Perspectives, Outlook for 2020
This is a summary of materials we sent to investors earlier in Janury 2020. It is meant as a high-level review of what DACM saw as the key, market-shaping events of 2019 and five thematics we are focussed on that have the potential to shape market action in 2020.
Introduction
2019 was a consolidation year for the digital asset sector with the market returning c.7% (Bloomberg Galaxy Crypto Index) — Bitcoin was the standout performer gaining 92% making it the world’s best performing liquid asset.
We believe blockchain tech, and the nascent markets that trade the associated coins and tokens, are starting to mature. Successful platforms are starting to find value propositions and user bases, primary funding markets are growing in sophistication and approaches to value continue to develop and be refined.
While the market remains in its infancy, the changes it’s driving are cataclysmic — make no mistake, money will never be the same. Bitcoin and the innovation it has driven is forcing the biggest changes in the world’s monetary systems in at least 60 years — digital assets continue to be the leading disrupters driving responses such as Facebook’s Libra and sovereigns, like China, to race to launch their own “digital currencies”.
As we look forward, 2020 will be a key inflection year for the sector. With adoption in areas like Decentralised Finance (DeFi) surging and investors increasingly embracing Bitcoin’s “digital gold” thesis, 2020 is a test to see if wider user growth and investor adoption can build off its current momentum.
Looking inward, 2019 was a year of further proving DACM’s investment strategies and methodologies work — through both bullish and, unfortunately, calamitous bear market conditons. Our three key Fund’s delivered substantial outperformance of market and peer group indices.
Recap of Market Performance
Bitcoin was the stand-out market performer with most other large-cap digital assets struggling to hold strong 2H19 gains:
Was Litecoin’s 350% rally into its halving a window into Bitcoin’s May 2020 halving? Potentially, although other market factors, and coin-specific events (MimbleWimble integration for example) need to also be considered. Notebly, Litecoin gave most of it’s gains back, so we hope not. The other noteworthy performance, or lack there of, was from the #2 and #3 assets, Ether and Ripple, both of which had negative years — Ripple’s performance reflects a significant fall in confidence as well as Ripple Co’s and insiders ongoing sales and overhang.
We are accustomed to a rapidly changing landscape however 2019 was surprisingly stable for a nascent sector — Binance Coin, Tezos and growth in Tether’s USD stable coin were the key highlights…besides Bitcoin:
With assets as volatile as Bitcoin, its important to keep the longer-term growth story in mind. As the above table demonstrates, Bitcoin’s domination of the sector grew over 2019 with all other assets, combined, providing effectively no net-growth. 2019 is a continuation of Bitcoin’s longer-term growth story which saw it as the year’s best performing liquid asset - it also remains the world’s best performing asset on almost any timeframe chosen since its launch:
Five Key 2019 Market Themes
It’s hard to refine a year, in such a volatile and dynamic sector, into five key themes. However, we beleive the five below provide a fair assessment of those that most influenced the 2019 market landscape.
Bitcoin Dominates
Bitcoin continued it’s outperformance from 2018 with market dominance growing from the mid-50% level to just under 70% by year-end:
Bitcoin continues to benefit from it’s unique positioning in the world’s asset markets as well as within its own digital asset sector. Key drivers of its absolute and relative performance included:
- Negative Rates — the proliferation of negative interest rates through western economies was supportive for non-income generating assets like gold, and, as the market has started to believe, bitcoin;
- “Digital Gold” Narrative — as a continuation to the above, there is increasing acceptance that Bitcoin’s decentralised qualities provide safe-haven attributes attracting new marginal buyers to it’s “digital gold” thesis;
- Regulated Derivatives — continued growth in CME futures, and the launch of ICE’s Bakkt futures, increases regulated venues for sophisticated investors to gain Bitcoin exposure and hedge risk;
- New Buyer Universe — the confluence of the above factors saw a new, institutional/family office buyer group emerge through the year, albeit at an early stage, providing significant incrememntal momentum and helping lift Bitcoin materially from its early-2019 lows
With this positive backdrop, Bitcoin’s market cap grew by $65bn through the year — the digital asset sector as a whole grew by $63bn… There are around 5,000 listed digital assets, 4,999 netted-out to close to zero gain:
The Rise…and Fall of Facebook’s Libra
We viewed the initial announcement of Facebook’s Libra as significantly bullish for the sector for three key reasons:
- Legitimacy — helped weaken the dark-web and crime narrative associated with “cryptocurrency” and launch it mainstream with validation from a dominant global online player;
- Adoption — would introduce Facebook’s 2.4 billion users to the concept of using a non-Government issued currency — traditionally one of the biggest barriers to decentralised cryptocurrency mass adoption; and
- Global On-ramp — adding billions of global citizens with an electronic wallet would deliver them one step closer to the “doorstep” of the decentralised digital asset ecosystem.
Bitcoin and the broader market rallied following Libra’s announcement but gains dissipated as global regulatory resistance built — led from the USA and EU:
Digital asset markets are currently discounting any chance of Libra’s launch given the regulatory pressue — we are less sceptical and take a “genie is out of the bottle” view. If Facebook doesnt launch Libra, or some reworked version, we beleive some other platform will and bring the associated benefits to the digital asset market (albeit probably at a smaller scale).
Stablecoins — Unglamorous, but Initial Killer Use-Case
Outside of Bitcoin, stablecoins were the key 2019 sector growth driver benefitting from ongoing exchange integration, user adoption and growth in DeFi use cases:
Whilst a simple use of blockchain technology and, in many ways, the antithesis of its ìnitial, intended purpose, it’ a resilient use-case that continues to resontate with a global user base of both traders, arbitrageurs and transacters and drive a significant portion of underlying blockchain activity figures.
DeFi — The Emerence of Decentralised Financial Products
With $700m of collateral in the “system”, DeFi is emerging as a key new blockchain use-case . The growth, by traditional market standards, is incredible as is the disruptive potential of some of the products emerging. From a protocol perspective, Ethereum remains the key beneficiary, so far, with most of the current platforms using its chain for their operations and token settlement:
Initial products, with varying levels of decentralisation, continue to evolve and a number of competing, well funded platforms with more complex and innovative products are emerging.
Capital Market Slowdown
Funding activity slowed materially reflecting listed market weakness and a dissipation of retail demand for new issues:
The slow-down in the “institutional” segment of the market was high, but in our opinion less pronounced than the above chart suggests (albeit still significantly lower). Structures continued to shift with “Initial Exchange Offerings” (raisings exclusively to one digital asset exchange’s client base) emerging and then dissipating later in the year and equity (vs. token) structures becoming more prevalent (we estimate 34% of capital activity versus 20% in 2018). The funding market appears to have stabilised at $200m — $400m in monthly funding which, whilst materially below the peaks, is still a healthy primary capital market for an early stage technology.
Outlook — Five Key Themes for 2020
Looking forward, five key themes we beleive will shape the market narrative in 2020 are:
Bitcoin Halving — Reduce Supply, Focus on Scarcity
Halving block rewards reduces new daily issuance by $65m and the event itself focuses investor attention on what we beleive is Bitcoin’s key positive — scarcity. This reduction in new supply has had a material positive price impact over the last two halvings (261% and 68% respectively) and is rightly a key focus for digital asset markets in 1H20:
The one certainty around the event is volatility. With binary market views prevalent in the lead-up to May’s halving, a significant portion of the market is guarnateed to be wrong-footed no matter what price outcome eventuates.
DeFi — Will it Become to Ether what “Digital Gold” is to Bitcoin?
We beleive a key driver of Bitcoin’s continued value appreciation is the increased acceptance of the “digital gold” narrative. This narrative sees investors allocate increasing funds to Bitcoin as an asset as well as increasing the amount of coins held for long-term investment purposes. Ether’s use as the prime DeFi collateral has the potential to create it’s “hodl” narrative and positively recalibrate its velocity, and the quantum of investment capital allocated to it. We are seeing DeFi replace ICO Treasuries as a key source of Ether demand /hodling . We beleive this is a much more sustainable use-case:
It’s a rapidly developing space and clearly Ether’s success as the key source of collateral is not assured. There are non-Ethereum competitors emerging (Kava and Pegnet for exmaple) as well as projects like Maker launching multi-collateral DAI with support for Basic Attention Token as collateral (albeit still an ERC-20 token). Ether, however, has a clear early-mover lead.
Tokenomics Re-engineered
We beleive the concept of “equity” is changing in global markets. With the increasing prevalence of founder-driven companies using super-voting structures and the rapid growth of index-driven, passive investors, equity investor influence, as a whole, on the companies they own is decreasing. In addition to governance, companies like Amazon, with a marketcap of US$900billion and having never paid shareholders a dividend, are changing the way equity owners are rewarded.
Whilst we would never claim that the tiny, in comparison, token market is driving any of this change, interestingly we are seeing, and think we will continue to see, a trend of successful projects re-engineering their token models and making them more “equity-like”.
Platforms creating value from a tangible user base will take the opportunity to adjust how this value is redistributed with token holders rewarded for providing the initial growth capital. There are a number of mechanisms that can be used which all have the impact of more directly linking tokens to the economic activity of the platform, such as an exchange or lending platform — it will ultimately see tokens become more equity-like.
Mechanisms we expect to continue to see adopted in 2020 include:
- Buybacks/Token Burns — use of fees paid on an platform, such as an exchange, to buyback and/or burn tokens creating a more direct link between platform usage and demand for the associated token;
- Usage Incentives — providing fee or other discounts for users of a platform that pay for its service using the native token;
- Creation of DAOs — Decentralised Autonomous Organisations, controlled by token holders, to have direct input to platform economics, such as fees or borrowing rates and thus creating a closer link between token holders and platform economics/governance; and
- Staking — incentivising staking of tokens in the network through payment of a “yield” reducing velocity, distibuting tokens to those willing to make a longer-term investment commitment and increasing participation in platform Governance.
We beleive this re-engineering has the potential to deliver significant upside to token holders if they are well constructed and the platforms they represent continue to grow. It is however not without risks — these models remain untested in terms of linking token value to platform performance and as these tokens move more towards equity they also run the possible risk of inheriting equity regulatory requirements.
Digital Gold — Growing Acceptance = Substantial Upside Potential
Bitcoin’s similarities to gold have long been discussed with increasing correlations, as well as observed trading through severe 2019 traditional market stress incidents, potentially indicating accelerating acceptance by the wider investment community:
The current value of gold investments (excluding jewelry and industrial metal) is approximately $5 trillion — Bitcoin is currently valued at 3.0% of this value. If the “digital gold” thesis continues to get traction it represents substantial upside in Bitcoin — at only 10% of gold’s value each coin is worth $23,618, at 100% its worth $236,190.
Government Coins
Given the growth in technology, competitive forces and plain, old simple cost savings, we expect a number of G20 countries, including China, will launch or announce “digital dollars” (or equivalent) in 2020 — this is a major change in the global monetary landscape:
We dont beleive these currencies infringe on the use-case for their truly decentralised couterparts. However, in our opinion, anything that entrenches “money” further in electronic interfaces is positive for true decentralised digital assets bringing an ever increasing universe of potential users closer to the doorstep of decentralised digital assets.
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This is summary of materials provided to DACM’s investors earlier in January and is DACM’s opinion only and should not be relied upon for investment purposes. Investment funds managed by DACM own Bitcoin, Ethereum and interests in DeFi platforms as well as a number of other digital assets. For any questions regarding the above or DACM in general please reach-out to us at: investorrelations@dacm.io
