November update

Summary

In the month of November the fund increased 63%, compared to the blockchain market capitalization (blockchain index) which increased 74.5%.

Since the inception (Feb 2017) through Oct 2017 the fund has returned 2255% – the blockchain index increased 1387% over the same period. At the time of this writing the blockchain index is 329 billion USD.

A dream come true?

This month we saw the largest gross increase in the history of the market. To begin, I’ll reflect on last month’s sketch of what was to be expected.

Screen Shot 2017-11-03 at 8.39.52 PM.png
Sketch from October’s letter

I cautioned in October that it was not yet the time to sell due to Bitcoin’s surge towards 10k in anticipation of Bitcoin CME futures listings. I tried to prepare for the wave which would come as a result – I wrote:

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)

I also wanted to be mentally prepared for a wild upward swing, so I tried to rationalize what “made sense” if prices started to run – I wrote:

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.

And now let’s look at what happened in November:

Screen Shot 2017-12-02 at 2.45.03 PM

The dream of $10,000 Bitcoin came true and it drove the market wild. The media coverage was global and drove record search volume for buying Bitcoin. Here is the Google search volume for “buy bitcoin” compared to “buy gold” across the last 90 days.

Screen Shot 2017-12-02 at 3.05.39 PM.png

The activity crushed the systems again, everyone crashed or stuttered along to keep up with the activity.

Screen Shot 2017-12-02 at 3.19.21 PM.png

The bump in search activity seemed to mark another tipping point. You can see this as a sea-change in the global trade volume which rapidly doubled – I’ve noted it in red in this chart of 2017:

Screen Shot 2017-12-02 at 2.57.31 PM

This year we’ve grown from $500 million average daily trading volume to 10 billion average trading (20x).  On the peaks of November 12th and 30th we saw $25 billion change hands per day. Compare this to the NASDAQ which trades $75 billion daily meaning we’ve reached 33% the liquidity of NASDAQ. That makes the Cryptocurrency market impossible to ignore.

However this is a global market and so we must compare to other global markets. For example, the global fiat currency market trades over 5 trillion a day and so we are only 0.5% of that market. What happens if we break 1% of FX volume? The price of the market (roughly) tracks the trading volume so it’s time to think big, again.

A trillion dollar year?

I’m surprised I have to reflect on this for the second time this year but here was my 10 year goal written up in this fund’s January letter:

Screen Shot 2017-12-02 at 3.26.07 PM.png
From original thesis

This week I noticed my 10 year pipe dream became a conservative estimate by multiple parties in the national media. If I know anything about markets, it’s that they love the predictions of rich, bald white men. Suddenly it’s not a question of IF we will reach a trillion but how many trillions…

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The other thing I know about markets is they like to run ahead and touch analysts predictions way before they are justified. People will say to themselves “if it’s a trillion by 2020, why not buy it up now?”. Rapid upward price movements are easier when you have a growing pool of buyers entering a market, and it’s these new buyers I want to pause on and consider.

I believe we should think about all the people who entered the market in a bucket from late July through early November. They bought into the market around $170 billion on average, and have almost doubled their money today.Screen Shot 2017-12-02 at 3.46.51 PM.png

I saw evidence of the appetite of these buyers when early adopters (such as myself) took profits when the market ran way past 300 billion. I personally cashed in 15% of fund on the morning of Nov 29th to secure 6x ROI. I wanted to take the pressure off and I didn’t want to hold through the first sell-off. The sell-off happened about 6 hours later and the market dropped ~50 billion from ~330 billion to ~280 billion.

Screen Shot 2017-12-02 at 4.11.31 PM.png

I was honestly shocked that the market didn’t fall back to 220 billion. Instead we only corrected 15% which is quite small for this market (where 40% drawdowns are normal). My current theory is the “new early money” was propping up the market as I saw more buying pressure than I’m used to during the last pullback. From their perspective this was the first big “dip” they’ve experienced and saw it as a buying opportunity. I personally heard positive Bitcoin and Ethereum chatter in the waiting line for a driver license at Service Canada last week. Word is getting out – the network effect seems to be growing another layer deep to the friends of the friends of the early adopters.

Now we need to prepare for the network of buyers to (at least) double very soon. Google trends data and waiting line small talk don’t lie. While it’s hard for early adopters to imagine, we have to start thinking about the near future on the 1 trillion scale.

Next I’m trying to imagine new buyers entering this market above 300 billion after seeing Bitcoin stabilize above 10k USD. These folks are looking to “double or triple” their money as the market runs to 1 trillion (and Bitcoin runs to $25,000). On the downside I’m still prepared for 200 billion to get tested. Especially if we get a post Bitcoin futures sell-off. It seems pretty clear to me that we will run upwards into 18th of December when Bitcoin futures go live and we are officially in a “post IPO” Bitcoin world – a world where the Bitcoin price is on every financial ticker/newspaper on Earth alongside the price of gold.

Screen Shot 2017-12-02 at 3.42.01 PM.pngWhen considering these two moves (running to 500 billion vs. testing 200 billion) I like to following the old adage from Reminiscences of a Stock Operator: “the market tends to follow the movement of least resistance”, and right now the direction of least resistance is still upwards (due to rapidly increasing supply of new buyers).

Looking ahead:

I’m doing a slight reallocation to prepare for a continued bull market. I’m thinking about about the coins in three main buckets.

  1. Bitcoin – The coin everyone is going crazy over right now.
  2. Coins new buyers will look to after getting exposed to Bitcoin (Ethereum/Litecoin)
  3. Coins early adopters will consolidate profits into (such as established ERC20 tokens such as Golem, Auger, Sia, OMG)

Right now I’m:

  • slightly underweight bucket #1
    • currently holding 50.25% Bitcoin against 56.5% market weight
  • overweight #2
    • currently holding 22.5% Ethereum against 13.5% market weight
    • currently holding 4.8% Litecoin against 1.6% market weight
  • mix of underweight/overweight #3
    • slightly overweight projects such as: DGD, BAT, ZEC, NEO, GNT, EDG, GNO, SC, ZRX, PAY

I also reduced my Bitcoin Cash position to 4.5% when it hit 1700 USD. I feel like the case for Bcash is harder to make with Bitcoin about to enter the spotlight on December 18th. I’m still holding a market weighting of Bitcoin Gold.

At a high level I noticed a biased developed in the fund towards North American coins and smart money should be heavier (or at least market weighted) into Asian coins – you can see these coins correlate into two distinct price patterns. This is something I will address in a future letter.

We look ahead with the following high level allocation:

Screen Shot 2017-12-02 at 4.45.57 PM.png

December is shaping up to be an exciting month (is there ever a dull one?) all eyes are on Dec 18th…

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5 thoughts on “November update”

  1. You have sketched a detailed analysis of the crypto market activity over the past year . Your predictions are based upon a solid understanding of this sector and i am looking forward to the ride over the next month !

    Like

  2. Hello,
    you blog is really interesting, since I follow it from September.

    I would like to point something and wanted to know if you had the answer.
    there are rumors (@bitfinex’d on twitter) that some are manipulating the market in emitting fresh new tethers coins in the market. consequently, it dilutes the BTC value.
    the wave of new incomer is so high that it was almost not a breaking news when tether were hacked 30Million USD.
    it could cause a confidence crisis with repercutions on market cap. What is your point of view ?

    Like

    1. Awesome nice to have you. I personally don’t pay much heed to these theories. Bitfinex has so much money to be made from legal fees that there is no reason for them to break new laws. I also don’t think tethers need to be “backed” by USD 1:1 (the USD isn’t backed by gold anymore and that’s no problem) all we need is people to trust that others will accept them. I personally don’t have enough faith in USDT to hold large positions in it anymore, I wish I did…

      Like

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