Since our latest Newsletter as of May 7th, you have asked a lot of questions about our commercial activity and specifically the launch of DAFs. Furthermore, with the current ongoing crisis, you are wondering what could be the implications and the potential impacts that could hurt the NaPoleonX project.
a) Crypto AM Market
The just-released 2020 Crypto Hedge Fund Report by PWC & Elwood is corroborating quite well what we have experienced so far on our sales activity.
This research has been conducted in Q1 2020 and excludes data from crypto index/passive funds. We have selected the pertinent crypto AM industry highlights from this independent study below to illustrate the context.
i) Investor profile & investment amount
The large majority of investors in crypto hedge funds (90%) are either family offices (48%) or high-net-worth individuals (42%). These crypto hedge funds are directly comparable to DAF. More precisely, this study puts in light the average and median investment amount:
- “The median ticket size is US$0.3 million, while the average ticket size is US$3.1M;
- Almost two-thirds of crypto hedge funds have average ticket sizes below US$0.5M.
The biggest collectors in terms of AUM were historical players like Grayscale set in the US offering passive solutions, despite an investment vehicle not so protective for investors, high fees and a calibrated liquidity leading to premium or discount on the secondary market (hence a tracking error vs the physical BTC). European ETPs do not attract so much AUM. The biggest ones are listed ETP like Coinshares or WisdomTree BTC fund.
Another type of “investment vehicles” that can be found have been launched by infrastructure & investment platforms like Iconomi. These platforms have not massively collected despite a blockchain ecosystem obvious inclusion. Average AUM on this platform is 0.46M€ (median is 0.4M€).
From this report, it appears institutional investors have not yet jumped into the crypto Hedge Fund Business so far even though there are some active conversations. In fact, the one place where you can see increased institutional interest is the CME Futures market that gives access to BTC exposure through traditional derivatives instruments, without the usual custody concerns.
The conclusion is that this market is not yet mature to attract direct funds from institutional investors. So it is in essence still a “retail plus” market.
US and Cayman Islands represent 80% of fund domiciliation while over 50% of the fund managers are located in the US.
These figures illustrate that the funds’ structure are mainly offshore ones, i.e very light in terms of regulation and investment restriction, and driven by Anglo Saxon managers (like the classical Hedge Fund industry).
Europe is still marginalized and ill-represented in this industry.
iii) Investment strategies and historical performance
Almost half of the crypto hedge funds are quantitative ones and their performance were slightly positive during the 2018 crypto winter, but they underperformed badly Bitcoin in 2019.
On our side, we match the investment style and performance as well. For instance, one of our flagship strategy (the BTC Long Only), has done largely better as shown below:
This strategy and much more dedicated crypto ones have been available to our NPX token holders since the launch of our Napoleonx.ai platform in April 2018.
b) NaPoleonX project
i) Where do we stand?
Our conduct line has always been the same: regulation, quantitative solutions & institutional investors.
Since the beginning of the adventure, we have put this triptych at the heart of our project and we have been very transparent on this strategy. We have always disclosed that it could be long, and that our vision could be delayed in terms of market adoption.
We have consistently delivered on this vision with (i) the AM licence, (ii) the launch of our first French regulated fund and (iii) the launch of numerous additional crypto quant strategies.
Nobody saw the crypto winter coming. It hurt the crypto fund industry badly with the first wave of fund closures. 2018 was brutal with -73% performance for Bitcoin and -81% for ETH.
The strong 2019 BTC performance (but not so much ETH) has contributed to a comeback in confidence. However, the COVID crisis has hurt again in March 2020 and has provoked a second wave of crypto funds closures.
In this context:
● We have released the first right of the token in April 2018 (trading signals) and consolidated our expertise in the crypto strategies through important Research efforts releasing new performing strategies (not initially planned). It is fair to say that we have beaten our competitors on that part with sustainable and robust performance;
● We have obtained our French AM license, one of the strongest in the world, even if it implies lots of restrictions: for common investment vehicles, we can only target professional investors (and are not allowed to actively promote our products) and are limited in terms of instruments (cryptos exposure through listed futures in cash settlement only);
● Considering the restrictions above, we wanted to launch a first regulated fund, even if it was a pure market access and far from a pure Decentralized Autonomous Fund implying assets tokenization. The Napoleon Bitcoin Fund was launched in November 2019 and seeded by ourselves (300k€ above the 150 ETH segregated during the ICO and dedicated to the 1st fund). Since then, we have activated the licensing usage of the NPX token and paid the first fees early April 2020;
● Last, we have announced another usage of the token, not initially included, enabling to use it on the NapBots platform.
Through our monthly newsletters, we have tried to be as transparent as possible and communicated on the strategies’ performance and sales activity. We have tried to illustrate the state of discussions we are regularly having with prospects. However, it is true to say that we have failed in converting these discussions so far.
Since last December, we have had a good media coverage (see January newsletter) with monthly publication on Allnews CH and organized a conference at Palais Brongniart on January 21st with institutional investors.
2 clients subscribed into the Napoleon Bitcoin Fund and we received lots of interests (reverse solicitation & direct discussion, in respect of marketing restrictions imposed by the Regulator).
Here is the sales activity summary mentioned in our latest Newsletters:
● 10 prospects, mainly wealth managers, (reverse solicitation) thanks to our media presence.
● Conversion of 2 prospects above (2 subscriptions)
● Dedicated meetings with 2 Tier 1 French AM
● Pipeline: 3 family offices looking seriously at Bitcoin, 3 AM companies (1 Tier 1 and 2 Tier 2) and 3 Private Banks
● Sophisticated prospects that could be interested in seeding our DAF#1 that follows the BTC Long Only strategy
● 16 spontaneous reverse solicitations from potential investors in February concerning our Napoleon Bitcoin Fund, mainly from private investors based in France, Monaco and Switzerland
● More discussion with 2 January prospects
● A French family office and a Tier1 Wealth Manager looking to diversify its commodities pocket
● A crypto bank is looking attentively our BTC LO strategy
● Sales activity completely frozen during this Covid-month where clients were more looking to protect themselves for safe seeking rather than looking for an investment opportunity
● Discussing in-depth with 5 new prospects, 4 from France and 1 from Luxembourg
● Approached by a distributor for our Napoleon Bitcoin Fund
All in all, we have approximatively 30 prospects and 2 conversions. We are very proactive to feed them and try to convert their interest. These investors are not stricto sensu institutional investors, and empirically, our observation is similar to the one of the above study: European institutional investors are far to be crypto converted despite our regulated solution.
Last, the Swiss crypto bank, which had shown interest in our BTC Long Only strategy, is currently closing its business.
From our regular client conversations, we have also understood that an entry ticket of 100k€ into our Napoleon Bitcoin Fund is way above what our prospects are ready to commit.
ii) Next steps
Our action plan for the DAFs is the following:
- We will intensify our marketing presence through webinars to target wealth managers (mainly Switzerland, Luxembourg and Liechtenstein) during the confining period.
- We are working on the issuance of another Napoleon Bitcoin Fund share class with a minimum investment of 25k€. It will still be addressed to professional investors but should remove some reluctance. This issuance could be done before or during the summer, but legal and regulatory constraints may always add some delays.
- We also think about transforming this market access fund to embed the BTC Long Only strategy. This is not straight forward in terms of regulation (due to performance fees) and for our partners, notably our custodian.
- We are currently in discussion with a well-known name in the crypto sphere to manage a fund embedding the new ETH/BTC/USD LO strategy, which would be the DAF#2. This fund would be distributed by this partner with our support as an expert on the strategy side and should be live this year. We have been successfully onboarded by their compliance team, mainly due to our AM license, and we have received a LOI from them. This fund will notably be distributed to North America professional investors. But, according to our partner, the COVID crisis has also slowed down the marketing activities: one hand, lots of investors have decided to freeze any investment and to stay in a ‘wait and see’ mode. On the other hand, no meeting is currently possible, and it is much harder to sell a product through zoom app than by meeting people in real life.
As you can see, we are fully concerned about the success of our project. Once again, even if we are far away from our institutional investors target and fund vehicle structuring (Decentralized Autonomous Fund) — all the infrastructure projects aiming to tokenize the assets have not delivered so far, even the biggest ICOs — we try to adapt like entrepreneurs must do.
Despite being challenged, we are fully focused on our mission because our interests are aligned, and above all, we are convinced that these cryptos will impose, hence our perseverance.
2) NaPoleonX future
You are legitimately concerned about the NaPoleonX future in this turmoil and special times. Confining and deconfining have huge impacts in terms of business but also pragmatically, for our organization. Running a business in these conditions is not an easy task. We have to balance day to day operations with strategical thinking.
We have sold tokens during our ICO to implement our vision. Unlike a lot of other ICOs, we have been managing wisely from a financial standpoint despite the huge drop in crypto prices vs when we launched. We will invest more money on the BTC fund transformation into our first DAF and for marketing and sales purposes. However, as a private company, we do not disclose our financial situation.
So far, we have delivered on most of our promises. We are adjusting our strategy by committing ourselves to transform the Napoleon BTC fund into our first DAF. This could be done in the not too distant future provided we are able to include performance fee in a fund that has not been designed to have any. This is an important point we need to validate with the AMF. On top of this, we hope to openly announce the launch of the second DAF with our partner.
Even if the Decentralized Autonomous Fund does not embed the initial tokenized wrapper, we do our best and still have an action plan (see above). We think that we are loyal to our values and your support, even if the plan is delayed, which is frustrating for everybody.
Our revenues come as well from our ability to launch and sell products. However, we decided not to burn a lot of cash too early with massive marketing spendings. Having done that in 2018 and even 2019 for the DAFs would have just been a sword stroke in the water.
The fact that we have survived, developed our infrastructure and product range, deployed new resources should be enough to reassure you about our commitment and professionalism, as well as our interest aligns.
As you are aware, we have given an extra right to our NPX token. People will be able to use it to pay up to 25% of the NapBots monthly subscription if they decide to use this service. We initially announced a pricing mechanism based on the last 30-day average price. But to make it more simple, we will now use a fixed price of 0.001 ETH, the same as the ICO price (before any bonus).
Concerning the community, for those :
- Who do not believe in us (anymore), who have never run a business and think managers should be 24/7 on telegram answering their fears instead of trying to develop the business, who do not understand (or who refuse to see) that the market the NapoleonX project has initially targeted is not here or who would never be happy with their tokens, maybe you can find a better project elsewhere. The main advantage of an ICO is the ability for the token buyers to sell their tokens. If you don’t believe in our project, just leave it. As simple as that. You will feel better and the one remaining also.
- Who have supported us from the beginning, who are mature enough to understand that the difficult market conditions, the crypto winter and the COVID crisis may have a major impact on our business development, who understand that a company can’t afford to continuously answer questions from its tokens holders, but should organize its communication through a professional process with regular statements, who still think European institutional investors may enter the crypto market quite soon and who want to help us, we are very happy and proud to have you on board. It is during the difficult times that we need support, not when everything is easy. We fight on a day-to-day basis to make this project work. We also need your support. If you are or you know professional investors, do not hesitate to talk to them about us and our project. As a community, you also have a role to play in the success of this project!
We hope that we have answered your concerns. Thank you one more time for your support, we are focused on transforming the essay. And above all, during these special times, stay safe!
Stéphane, Arnaud and Jean-Charles.
The co-founders of the NapoleonX project.