October update

Summary

In the month of October the fund increased 18.3%, compared to the blockchain market capitalization (blockchain index) which increased 24.5%. We lagged the market this month entirely due to an under allocation in Bitcoin.

Since the inception (Feb 2017) through Oct 2017 the fund has returned 1329% – the blockchain index increased 793% over the same period. At the time of this writing the blockchain index hit 200 billion USD.

High tides for Bitcoin

First I’d like to reflect on last month’s thinking:

Screen Shot 2017-11-03 at 4.42.27 PM.png
From September

This month that reasoning came true as it was announced Bitcoin will finally hit public markets via the CME offering of futures. This allows those in the traditional finance markets to wager on the future price of Bitcoin – without needing to own any. These futures will be the nuts out of which the first wave of Bitcoin ETF’s on the TSX and NASDAQ will be built.

Screen Shot 2017-11-03 at 7.38.52 PM.png

Following a race towards $10,000 Bitcoin:

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This leads to a overall market that may seem tempting to sell into:

Screen Shot 2017-11-03 at 7.44.34 PM

However there are two drivers of this growth I want to pause and think about:

  1. The fragmentation (forking) of the Bitcoin network
  2. Bitcoin leaping to traditional markets (from the 1% to the 99%)

A network of networks

Early cryptocurrency adopters have had to live through a strange birthing process by which coins are created out of “thin air”, resulting in dividends for original coin holders, and two groups of independent networks who genuinely hate each other. When this happened with Ethereum & Ethereum Classic I remember, as an investor, it felt like I was driving blind. I made the mistake of selling my Ethereum Classic as an emotional reaction to the uncertainty it caused in the markets. I watched my precious Ethereum fall in value from 12 to 6 dollars during the split.

What I learned from the process was more valuable: forks increase the total value of a network. Think of the original Bitcoin network as a network of networks (who don’t agree with each other on technological direction  and/or philosophy). These differences are another advantage if you let everyone go their own way. The most efficient way to monetize a network of competing ideas is to break it up and value each individually. That’s what public markets do and it leads to benefits (in aggregate) over time. Bitcoin in 2017 is looking something like this to the “average” investor:

Screen Shot 2017-11-03 at 8.06.47 PM.png

My thesis is that these networks are worth more if they separate and run their own coins. I first applied this lesson in August when planning for the last Bitcoin cash fork – here was the thinking then:

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Before the split Bitcoin alone was worth around 45b, and day after the split both the value of Bitcoin and Bitcoin Cash increased resulting in around 60b in value combined.

And just recently we had a smaller Bitcoin gold fork. At the time of this writing:

Bitcoin: $7200 USD

Bitcoin Cash: $635 USD

Bitcoin Gold: $130 USD (futures price)

Total value = $7945 USD

The next fork on Nov 16th will also result in another coin, which will now be part of a new currency basket to consider for investors: Bitcoin basket (Bitcoin Cash, Bitcoin Gold, Bitcoin 2X, Bitcoin). Holding all of these currencies guarantees you will be capturing the entire community. I believe the opportunity lies in not viewing Bitcoin alone, but rather as a basket when managing a portfolio in the year ahead.

The value of Bitcoin 2x based on current futures trading is around $2400 (this is due to the larger size of the network which is splitting off from Bitcoin). My prediction is this coin will likely trade for less than that once it hits the market (many “BTC only” believers will dump it, plus it’s importance is inflated right now), though I firmly believe the Bitcoin basket will grow post fork. So we need to prepare for where that could take us.

The total value of this Bitcoin basket will still “make sense” at 250b as that’s 5% of gold reserves and a key psychological level to test (and the one the media perpetuates). Psychological levels are the only thing we can grab onto when riding a tide with this much momentum.

But of course, this is all behind the scenes stuff only Bitcoin nerds would care about. The real opportunity is the leap to public markets.

Bitcoin’s dip in the deep end (public markets)

To make sense of the price of Bitcoin this year I think we need to consider the price history of Bitcoin before and after it hits the public markets.

Screen Shot 2017-11-03 at 8.39.52 PM.png

I think of right now as the pre-IPO days. And in these “old days”, buying Bitcoin was a long/scary process usually involving family or friends hand holding each other into the market. In the very near future, retail traders will ‘take a dip’ with 5% of their portfolio into Bitcoin with a single phone call or click. They have been hearing about it forever, and they won’t be able to resist the exposure.

I think we’ll have two waves to consider next:

Wave 1: Wave of buying leading into launch (what’s happening now);

Wave 2: The rush of new money when Bitcoin products hit the major stock markets.

Right now I think wave 1 makes sense towards 250b, but to prepare for a possible second wave of buying I need to imagine how to value the market in the near term if prices continue to climb.

Bitcoin basket: makes sense at 250b (alone)

Ethereum: makes sense at 50-100b (as the “platform” of the sector)

Everything else: makes sense 50-100b (~50 promising applications)

My mind can stretch to ~400b for this market, beyond that is speculation beyond my wildest dreams. For that reason I will continue with the following plan in broad strokes:

  • Take no more profits until we approach 250b (move to 5% USDT)
  • Move to ~15% USDT above 250b
  • Aim for ~25% USDT if we break 300b

On the downside I can imagine us easily testing 170b during any near term dips, and I feel strongly that 120b could be the ultimate floor when we get a panic. While I haven’t put a dollar into this market since February, I’m definitely a buyer in a 120b market. I don’t think a 2 digit market is possible anymore – without a complete collapse in confidence across all countries.

Bitcoin dominance

Bitcoin has regained it’s dominance above 60% as it retook centre stage in the markets. Other coins have suffered as a result, most notably the Ethereum hype has settled as all eyes are focused on Bitcoin. In the near term I expect a capital flight back into Ethereum from Bitcoin which could push it up to ~50b (up from its 28b, at time of writing). Long term I think Ethereum is an attractive asset, I can’t imagine it overtaking Bitcoin’s dominance unless an ecosystem of applications built on it hits the mainstream. I will use 75% as a rough level at which Bitcoin might be seen as ‘overvalued’ relative to the market.

Screen Shot 2017-11-03 at 9.32.49 PM.png

Looking ahead

Going into the next month I have the following high level allocation:

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