HGR 2019 Outlook
The last 18 months have been quite a ride in the crypto world. At the beginning of 2017, Bitcoin and Ether were at $1,000 and $8, respectively. Global mindshare and capital piled into the space throughout 2017 and early 2018, driving the two bellwether cryptoassets to a local maximum of ~$20,000 and $1,450, respectively, during January 2018. As we write this today, sentiment in the market is much more subdued and we are seeing a correction that has spanned almost all of 2018. Bitcoin is back down below $4,000 and Ether is below $150, reflecting that soaring price action did not follow a corresponding increase in underlying network fundamentals, but was rather a function of retail money flooding into the space. As an engineering and fundamentals-focused fund, we have always advocated a “back to the basics” approach to investing in cryptoassets. Particularly as we step into 2019, we must do the legwork to separate hype from reality, and think hard about when and how true adoption of this technology will happen in light of real usability bottlenecks of untested infrastructure, regulatory headwinds, and old money ideologies.
A bearish 2018 aside, given our conviction that many significant developments will be achieved during 2019 (e.g. institutional infrastructure, scalability solutions, rollout of middleware projects, regional real-world use cases), we still believe that the crypto space will generate considerable investor surplus over the long run. Further, we take comfort in that the narrative of the current bear market is different from the narratives of previous bear runs in 2011 and 2014. Following the price declines in 2011 and 2014, large crowds were calling for Bitcoin to die. The dominant narrative was that the entire space — the entire cryptoasset industry — was going to zero. Today, the narrative is different. There are a smaller sleuth of bears calling for the decimation of the whole industry. Sentiment is directed more to an “overvaluation” of the space relative to fundamentals, but most commentators now concede that the industry deserves to exist in some form, and the question is less “will the sector survive?”, but more “how big does this sector deserve to be?”. Is crypto a $10 billion, $100 billion, or a multi-trillion dollar market? It’s certainly not zero.
Though admittedly biased, we are still bullish on the asset class long term — as we write in a Forbes article here: https://www.forbes.com/sites/katinastefanova/2018/11/28/the-trade-of-the-decade-betting-on-bitcoin/#6f7e15e2458a
In summary, the article above attributes the underpinnings of our bull thesis on the following:
· Bitcoin as a Macroeconomic Hedge and “Holy Grail” Portfolio Asset
· Blockchain is Built on the Premise of Social Scalability
· Blockchain Technology Enables Financial Inclusion without Rent-Seeking Intermediaries
· Crypto’s Large Addressable Market Results In an Investment with Asymmetric Upside
We believe that while 2019 might not be a year of home runs, it could be a good year for singles — slow, incremental developments and correspondingly smaller, but safer and more defensible investment returns. From an institutional adoption perspective, it could also be the year of the “on-switch”, as regulations become increasingly coherent and institutional avenues for participation (e.g. Bakkt, potential ETFs and new derivative vehicles, professional services) surface. Whether or not old money turns that switch on is the trillion dollar question.
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