May Update

A tidal rise

This month we had further confirmation of the bull run identified in previous months. To recap, here is how last month’s letter concluded:

Screen Shot 2017-05-27 at 2.20.35 PM.pngDuring May 2017 the blockchain index experienced a massive wave, almost doubling in value (from ~35b to ~66b) and at one point hitting 94b at the peak on May 24th.

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The volume of trading on May 25th hit a new high at 6 billion USD across 24 hours, a volume increase of 300%. The previous high occurring in April at 1.5 billion USD.

In fact, the volume was so high that it crashed several exchanges during peak trading.

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What happened?

A confluence of favourable events propelled the fund in May. Driven mainly by Ripple (XRP), Ethereum (ETH) and Bitcoin (BTC).


In the first half of the month we had a massive wave of interest in Ripple driven by news of new bank adoption. This caused the price to increase 10x, from 4 cents to 40 cents.

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In last month’s letter we explored the value proposition of Ripple, stating:

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Because of this bullish view on Ripple the portfolio had a relatively high allocated at the start of the month. Last month it was identified as a Tier 1 holding and it represented 8% of fund value on May 1st.

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In response to this wave, Ripple was trimmed into Bitcoin (from May 8th to May 19th) to keep the allocation around 12% during the run. Once the run subsided, its allocation was reduced to 3.5% in preparation for a pullback. Here is how the fund looked on May 19th:

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As soon as this run cooled off, another one started up…


In the second half of this month the price of Ether ran from 80 to 190 USD.

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Ethereum, which was outlined in March’s letter, was a point of focus in the market due to this major announcement by the Ethereum Alliance:

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The aforementioned runs (Ripple & Ethereum) resulted in an Altcoin market surge of 30 billion USD:

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As this happened, smart money began securing their gains into Bitcoin which surged towards 200 mid-month, driving a new round of media coverage…


During the first half of the month, the Ripple wave caused smart money to dump into Bitcoin resulting in a surge towards 2000 USD. This surge became a self-fulfilling prophecy as the media picked up the story and fuelled all-time high Google search interest in ‘Bitcoin’ as a search term.

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This was the first time in history that we had multiple coins in the media (Ripple, Ethereum, and Bitcoin), and all road lead to Bitcoin when new buyers look at this sector. This resulted in a run from $1250 to $2750 USD per Bitcoin – with a new support forming around 2000 USD.

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By May 25th it was clear we were in “mania” territory as the market cap of the sector briefly crossed 90 billion. As we stated last month:

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As usual, the market likes to put the cart before the horse and this level was hit less than a month after suggesting it. When this happened (starting May 22nd) we pivoted the allocation strategy identified last month from growth to defensive.

The defensive strategy began by pulling all alt coins back to their default or naive allocation (naive allocation = market cap of coin/market cap of sector).

However several exceptions were made in light of the fact that certain coins are more “defensible” in a down market: Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Ripple (XRP), Monero (XMR), Zcash (ZEC). These coins were given greater weights. Lastly, 20% of the fund went into Tether (USDT) to secure profits. Leading to the following allocation on May 27th:

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This allocation into Tether resulted in an interesting lesson this month regarding capital flows in this sector, resulting in a new opportunity.

The Tether trap

Tether (USDT) is designed as a stable coin, it’s always redeemable for 1 USD.

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One might assume the price of Tether would stay at 1 USD for this reason. We have been closely observing Tether for a few months and have realized it moves much more like the bond market. This month proved that thesis:

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First Tether began falling during the bull run (down to 92 cents USD) and as the run peaked it surged across the 1 dollar line, hitting 1.21 USD. Why?

The reason is simple. First, remember that most of the trading action is happening on Poloniex which doesn’t offer fiat pairs.  That means when investors on Poloniex want to secure their gains their only option is to sell into Tether. The other choice is to try and send coins somewhere else (time delay + daily withdrawal limits) and sell into fiat (tax exposure). So in a panic, people do what they always do, sell in the fastest way possible… into Tether on Poloniex. This creates a wave of buy pressure which resulted in the 20% price premium on May 25th.

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Tether price on May 25

This is amplified by the fact that over 90% of the Tether trading volume is on Poloniex at the moment:

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Practically speaking, this means Bitcoin trades at a discount on Poloniex during moments of panic. At the end of the month we saw this dip in action. On May 27th Bitcoin fell to 1538 USDT on Poloniex compared to 1816 USD on Bitfinex. 

The lesson is simple: buy Tether when it’s cheap (below a dollar, usually during Bitcoin bull runs) and sell Tether back into Bitcoin during panics. Using May as an example, this allows you to buy 92 cent dollars and sell them for 1.20 – on top of the profit you make on the Bitcoin swing.

Looking ahead:

While we are clearly in a bull market, it’s important to remain cautiously optimistic on our road to 100 billion. The gains we’ve just experienced were due to a lot of new money chasing unsustainable price movements. We are now looking at the following fork in the road when it comes to the market capitalization of the sector:

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At the time of writing, the blockchain index is sitting at 67 billion USD with a possibility of a second bull run in the short term (which will be mostly speculative). If this happens the allocation in Tether will be gradually increased towards 33%.

On the downside we expect sector volume to experience a gradual cool off in the near term. When this happens the index could fall back into the mid 50 billion level (with high 40b floor). In preparation for this, there is a 20% allocation in Tether (to be used to buy up cheap Bitcoin and Ethereum in a panic).

And so we look ahead with the following defensive allocation:

Screen Shot 2017-05-27 at 2.25.41 PM.png

Ripple has returned to an 8% allocation, Ethereum 15% and Bitcoin 36%. All smaller coins are sitting at a naive allocation except for the defensible ones: Zcash (ZEC), Monero (XMR) and Litecoin (LTC)

The fund thesis that 2017 will be “the year of the Blockchain” has come true. In just a few months we have settled at neatly 8x gain. We proceed with caution… recognizing that there are higher highs ahead of us across the 3-5 years time scale, but many more opportunities for negative news cycles and community disputes to depress prices in the short/near-term.

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