April Fund Performance and Market Commentary

MultiStrategy Fund Update

MultiStrategy Fund Update

April Return (as of 4/30/2020)*: 16.4%

YTD Return: 16.8%

Digital Assets experienced a strong rally in April 2020 and recovered most of the losses since February. The Fund’s algos were out of the market in the middle of the month and quickly switched to a long position during the latter half of the month enabling the fund to capture the significant move higher. YTD, the fund has captured more than 80% of the market gain, with just 39% of the volatility. We continue to use approximately 20% of the fund’s capital in a stable coin lending program to buffer some of the volatility.

Our Philosophy

We continue to manage the fund towards the target objectives. Our goal is to capture:

1. 80% of the upside of the cryptocurrency markets with 40% of the downside.
2. Half of the volatility of a long-only cryptocurrency portfolio, and
3. Little to no correlation to other asset classes.

These are audacious goals, but we believe they are attainable. Our confidence rests on the hypothesis that cryptocurrencies will remain volatile and widespread institutional adoption will take a very long time. These two factors should continue to provide fertile soil for our fund to harvest alpha. Of course, nothing in investing is certain, but we believe that we can achieve superior risk-adjusted returns that are uncorrelated to the other investments that so many of our clients already own.

We look forward to continuing to help you meet your investment objectives.

Sincerely,

Eric Ervin, CEO

Blockforce Capital

For a link to our fact card, click here.

Market Update and a look at the Bull Case for Digital Assets

I recently wrote an article for Forbes laying out the bullish case for cryptocurrencies. I was attempting to explain to even the most bearish cynic why they may want to have a portion of their assets invested in this asset class.

For the full article, here is the link.

A summary is below.

Cryptocurrencies saw one of their most volatile months in March only to reverse course in April. Federal governments around the world are responding to the coronavirus outbreak with stimulus of all kinds. This unprecedented response is just one more reason we feel digital assets should make up part of an asset allocation.

As an example, the Bloomberg Commodity Index, which is often used as an investable allocation to commodities for inflation hedging purposes, was down almost 25% primarily due to crude oil trading down almost 43%. Meanwhile, Gold and Bitcoin are up 11% and 22% respectively.

A Bullish Case for Digital Assets

I believe there are a number of narratives justifying a bullish move higher for digital assets. The two primary long-term justifications are:

1. as a potential store-of-value, and
2. as a currency.

The third and slightly more obtuse reason to appreciate cryptocurrencies is the volatility they offer to speculators. With volatility comes the speculators who bring liquidity, and price discovery, this inflow of capital and speculators then tempers volatility for the next wave of “investors”, point one above, and “users”, point two above.

Store of Value — Inflation Hedge

The store of value concept is prone to criticism at times due to the short-term volatile nature of bitcoin and other digital assets, however, for those looking to hedge potential inflation risk with a supply-constrained asset that can easily be traded for fiat currencies, the thinking behind bitcoin as a “digital gold” is very relevant. In fact, it is not difficult to make the case that bitcoin could be considered far more valuable than gold because of its enhanced utility. Bitcoin has the added benefit of being easier to acquire, transfer, and store than gold. To put a finer point on this, as of March 2020, the total estimated market capitalization of gold was about $9 trillion USD. By contrast, the bitcoin market capitalization is around $170 billion.

Let me say that again, $9 trillion vs. $0.170 trillion. If you are anti-bitcoin I appreciate your point of view, heck, I felt the same way when I first tumbled down the proverbial rabbit hole. You may very well be right, but isn’t it also conceivable that you might be wrong?

Significant potential payoff vs. relatively little cost, even a small allocation of 2%-5% can have a meaningful impact on performance. Given this, even the “bitcoin bears”, owe it to themselves to slow down and consider investing a small amount in this asset class regardless of their point of view. If they are right and bitcoin goes to zero, they invested little and the loss is negligible. If they are wrong, the potential payoff could be many multiples of what they invested.

As a Currency:

The second most common narrative is, digital assets as a form of currency or medium of exchange. Equally as important as the store of value narrative, though possibly a bit harder to imagine for those of us with access to the traditional banking system. We tend to take for granted the utility that cryptocurrencies provide. I realize, it is difficult to think of digital assets as currency, but just remember, it is big world, not everyone has the access to banking products that we take for granted.

The subtle but changing utility of the US Dollar

Like the boiling frog analogy, the United States Dollar has historically held a position as the world reserve currency because it offered a number of strong competitive advantages over the alternatives. It was easy to use and backed by a “stable government committed to maintaining stability for the currency”, this was the case for mostly everyone around the globe. However, over time, fiscal deficits, loose monetary policies and the onerous banking regulations are each steadily chipping away at the US Dollar’s stronghold as the world reserve currency. With the Bank Secrecy act, the Patriot Act and many other banking regulations, it is becoming far more difficult for global economic to do business with the correspondent banking system. AML and KYC requirements steadily become more and more oppressive for even the most reputable people and businesses this added difficulty leads participants to seek alternatives. Cryptocurrencies make it easier to use alternate forms of payment for goods and services.

Speculators are vital

Another very valuable and often maligned use case for cryptocurrency is the power of speculation. The speculative nature of bitcoin and other cryptocurrencies is an asset, not a weakness. Like all markets, speculators bring liquidity, adding even more utility to the “users” of a digital asset. Just like in the futures market for commodities, speculators and hedgers exist in a symbiotic relationship each bringing value to one another.

Until very recently, volatility for all asset classes was hovering at historic lows. Loose monetary policy from major central banks left capital markets desks flush with capital forcing them to compete to squeeze out arbitrage spreads from almost every nook and cranny of the markets. More adventuresome trading desks, in search of volatility, started trading cryptocurrencies over the past few years. The beneficial side effect of this was significantly more liquidity, tighter spreads, and more price discovery. As this first wave of institutions entered the market seeking the instability of wider bid-ask spreads and higher volatility, they ended up paving the way for the next wave of investors seeking more stability and confidence. The speculators pave the way for the investors (store of value camp) and the users (currency or medium of exchange camp) All three groups work together stabalising and leaning on one another for added utility. Metcalf’s law is alive and well in the digital asset realm. The more users who find value in a network, the more valuable the network becomes, enticing more users and so on.

Cryptocurrencies are no different in this regard, though many would argue that cryptocurrencies are only good for speculation, let them rant. They do not understand the other subtle societal benefits cryptocurrencies offer, and to be frank, they don’t need to. As of May 4th, the market capitalization of cryptocurrencies was just over $240 billion USD. That is more than a mere experiment. Something very real is happening here, and those who ignore it are likely to face some significant regrets in the future.

The Time is NOW

If any of the points laid out above resonate with you, stop trying to pick your entry point, you never will. Prices will always seem too high and valuations will always be impossible to justify. One thing is certain, there will be moments of regret. The key to this asset class is that it will always deliver unrelenting punishing volatility. The intense feelings of FOMO and buyers remorse are almost too much to bear for any sane investor, so follow some simple strategies to make the journey easier.

• DO dollar cost average.
• DO think of this as a small piece of a larger asset allocation
• DO tinker around and see what all the fuss is about, moving money from one account to another, send some to a friend, experience the freedom of not relying on a bank or intermediary. You will get frustrated because the UI/UX has a long way to go, but just venture in with a small amount of capital, because you are bound to make mistakes. Go ahead.
• DO NOT invest more than you can afford to lose.
• DO NOT invest everything at once, and
• DO NOT deviate from your plan.

Given those thoughts, if you are still wondering how much or when to invest, consider the Rule of Three.

• No more than three percent of your investment portfolio.
• Dollar cost average with three percent of your income.
• Have a three year time horizon.

So come on in, the water is warm, dip a toe in the shallow end. If you have any questions or would like to learn more about how we, at Blockforece Capital navigate the volatility, please reach out for more information.