Monthly Update || April 2022

Opening Remarks

Greetings from Ikigai Asset Management¹ headquarters. We welcome the opportunity to bring to you our forty-third Monthly Update and hope these are helpful in better understanding some of what we’re doing and what we’re seeing. We have the privilege of deploying capital on behalf of our investors into a new technology and asset class that already has and will continue to fundamentally change the world – continuing to create trillions of dollars of value in the process.

We believe we are obligated to be shepherds of this technology – to help the world better understand the powerful potential of DLT and crypto assets, and to fund and be an ambassador for DLT projects that will change our lives forever.

To that end, March was a tail of two months: pretty much DownOnly the first half and pretty much UpOnly the second half. That price action was driven, in my opinion, primarily by equities and secondarily by Wild Man Do Kwon, a topic we’ll dive into in detail below.

The chart below illustrates my point my point above.

At this point it’s impossible to decipher between how much of BTC’s bounce was driven by equities and how much was driven by Do Kwon, but if the NASDAQ had gone in the other direction, I highly doubt BTC’s chart would have looked like the above.

Macro assets were weird in March. Really weird. Just how weird? Well, eight days into the month Nickel, Wheat and Crude prices had increased 175%, 39% and 33% in March, and have since given back almost all of that.

On March 8th, the SPX had eight intraday moves of 1%, the same number of 1% moves in ALL OF 2017. Uhh.

On March 9th the Goldman Global Financial Conditions Index hit its highest level since 2009.

While the US Financial Conditions Index is just getting warmed up.

30-year fixed mortgage rates have increased from 3% to 4.7% in a little over a month.

On March 14th, the Hong Kong stock exchange had its worst day since 2008.

And speaking of China, their credit data is saying we’re barreling towards a manufacturing recession.

The 5s10s is now inverted.

While 2s10s inversion is imminent.

And yet, from deeply oversold levels, equities were able to stage a face-ripping rally of historic proportions.

This occurring despite continued stress in the bond market.

In fact, the collapse in the VIX accompanied by such a spike in the MOVE (i.e., the VIX for bonds) was the most extreme since the financial crisis.

And don’t look now, but the WallStreetBets crew may be coming back with a vengeance.

Does that sound like a mess to you? Yeah, me too. So where macro goes from here is anyone’s guess, although April does have very strong seasonality going for it.

As for Bitcoin and crypto broadly, we have the Bitcoin Miami conference coming up where it appears Jack Mallers may have something up his sleeve with Apple. We still have Do Kwon buying. Saylor has some buys on deck. And very rapidly we’re moving into ETH 2.0 merge trade zone, which could catapult ETHBTC towards ATH. There are a lot of moving pieces and a lot of macro concerns to be worried about but check the Monthly Highlights below – the amount happening in this space is astounding.

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March Highlights

• Apple Rumored to Be Partnering with Strike for Bitcoin Lightning Payments

• Luna Foundation Buys 28,000 Bitcoin Worth ~$1.3bn as Treasury Reserve for Terra Stablecoin, To Buy Least $3bn Total and As Much as $10bn Bitcoin

• MicroStrategy Takes Out $205mm Loan from Silvergate Collateralized by Bitcoin to Buy More Bitcoin

• ConsenSys Raises $450mm Series D at $7bn Valuation from Temasek, SoftBank, Microsoft, ParaFi, et al

• Bored Ape Creator Yuga Labs Raises $450mm Seed Round at $4bn Valuation from A16Z, Animoca Brands, FTX, et al

• Helium Raises $200mm Series D from Tiger Global, A16Z, Pantera, et al

• Immutable Raises $200mm Series C at $2.5bn Valuation from Temasek, Tencent, Alameda Research, Parafi, et al

• Former Facebook Libra Employees Raise $200mm from A16Z, Tiger Global, Multicoin, et al to Fulfill Original Vision of Stablecoin Project

• ETH Scaling Solution Optimism Raises $150mm Series B at $1.65bn Valuation Led by A16Z and Paradigm

• Cross-chain Operability Platform LayerZero Raises $135mm from Sequoia, A16Z, FTX, et al

• Zero Knowledge Smart Contract Platform Mina Protocol Raises $92mm from FTX, Three Arrows

• A16Z Invests $70mm in Ethereum Staking Provider Lido Finance

• Solana-based NFT Marketplace Raises $27mm Series A from Sequoia, et al

• Former A16Z Partner Katie Huan Launches $1.5bn Huan Ventures

• Electric Capital Raises $1bn Crypto Venture Fund

• Bain Capital Launches $560mm Crypto Venture Fund

• Spartan Group Raises $200mm Metaverse Venture Fund

• Spartan Group Raises $100mm Web3 Studio

• Former Polychain Partner Tekin Salimi Launches $125mm Crypto Venture Fund

• Bored Ape Creator Yuga Labs Acquires CryptoPunks and Meebits from Larva Labs

• Axie Infinity Sidechain Ronin Bridge Hacked for $620mm of ETH

• Ukraine Receives Nearly $100mm in Total Crypto Donations

• FinCEN States They Have Not Seen Widespread Evasion of Sanctions Via Crypto

• US Intelligence Chief Says It Would Be Challenging for Russia to Completely Undermine Sanctions Using Crypto

• EU Includes Crypto in Russian Sanctions

• EU Votes to Limit Anonymous Crypto Transactions and Enforce KYC on Unhosted Wallets

• Coinbase Blocks >250k Russian Addresses

• Binance CEO Says Blocking All Russian Addresses Would Be Unethical

• ApeCoin Is Launched and Airdropped to Yuga Labs, VC Investors and Bored Ape Holders

• Instagram to Launch NFTs

• Stripe Partners with FTX to Launch New Products Supporting Crypto Businesses

• eBay Teases Digital Wallet Product Launch

• State Street Partners with Crypto Custodian Copper

• Citadel Securities to Begin Crypto Market Making

• Bridgewater Said to Be Investing in Crypto Fund

• White House Releases Executive Order on Digital Assets Calling for More Focused Research Across Multiple Agencies

• Florida to Accept Bitcoin for Tax Payments

• Mixing Services CoinJoin Begins Blacklisting Certain Bitcoin Addresses

• UK Declares Bitcoin ATMs Illegal

• Former Chief Digital Currency Advisor to FinCEN Joins A16Z as Head of Regulatory

Source: TradingView. As of 3/31/22.

Wild Man Do Kwon

I’m not sure how it would be possible for you to be engaged enough in crypto to be reading this but not engaged enough to know about Terra, but just in case – Terra is a dual-token stablecoin payment platform built using Cosmos SDK and a dPOS consensus algorithm whereby a “mint and burn” mechanism of the LUNA governance/utility token is used to keep the price of the stablecoin TerraUSD pegged to $1.

New TerraUSD (UST) is minted by burning LUNA. When demand for UST increases, causing the price of UST to go above $1, an equivalent value of LUNA is burned, which then leads to new UST being minted and the price of UST goes back down to $1. If the price of UST drops below a dollar because demand decreases, UST is swapped for LUNA, in turn making UST more valuable and bringing the price back to $1. It is this easily exploitable arbitrage opportunity that keeps UST price stable. In that way, LUNA absorbs the price volatility of UST.

Sounds pretty novel, right? It is. And so far, it hasn’t worked perfectly but it’s worked pretty well.

If you make assumptions about what the growth of UST might be, you can also try and project LUNA’s price and come up with some pretty astounding projections. If you want to learn more this is super helpful.

Terra was founded by Do Kwon. Do is a gregarious fella. He realizes the key to LUNA’s success is getting more people to use UST. And he’s been doing a good job of that.

But there is a catch. Since $1 of LUNA is burned for every $1 of UST that is created, the supply of LUNA is dwindling due to the increased demand for UST. While LUNA’s price has been increasing faster than UST has been created, it has allowed the ratio of the two market caps to increase. But if they were to reach parity or UST market cap were to exceed LUNA’s, a “bank run” of sorts could occur as the market might lose faith in the mechanism’s ability to hold the $1 peg.

If this feels a bit like a Ponzi to you, you’re on the right track. It certainly has some Ponzi-esque characteristics to it. But then again, so does Social Security and the US Dollar and bunch of other things, so you just have to assess the risks and act accordingly. But it is a bit of a coordination game or a Prisoner’s Dilemma of sorts. Do Kwon is a smart guy and realizes that faith in the peg is integral to his project’s success. So how would Do go about maximizing the market’s view of the likelihood that the peg will hold? He would raise a Bitcoin reserve, which would just sit there unless there’s a major volatility event that causes the price of UST to decouple from $1 for an extended period of time, at which point you can sell the Bitcoin and buy UST, bringing it back to parity. $1bn was initially raised in late February from Jump and Three Arrows for this purpose and apparently Terra is on its way to raising at least $3bn total, and perhaps as much as $10bn to buy Bitcoin as a reserve asset. Fortune favors the bold!

So What?

At time of writing the Luna Foundation Guard (LFG, lol) is in possession of 30,728 Bitcoin. Tesla has 42,902 Bitcoin. MicroStrategy owns 125,051 Bitcoin. So Wild Man Do Kwon and his crazy stablecoin project are rapidly becoming one of the most important factors for Bitcoin’s price. It’s been funny to watch Bitcoin Maxi’s struggle with the dichotomy of this setup – an algorithmic stablecoin project (perhaps the worst kind of shitcoin in the eyes of Maxi’s) that is pumping Bitcoin’s price. Do Kwon and Dan Held make strange bedfellows, but here we are. Undoubtedly, Do Kwon is stepping into “systemic importance” to Bitcoin’s price, just as Saylor and Elon have done. If anything bad happens to the Bitcoin stack of any of these players, BTC price is in for a rough ride. But in the meantime, Saylor and Elon have both done a lot for Bitcoin, and Do Kwon is setting down the same path. Do is also following Saylor and Elon’s footsteps in showing the world what it looks like to implement a Bitcoin standard – to utilize BTC as “pristine collateral”. Saylor did it with a second-tier business intelligence company. Elon did it with the most popular electric car manufacturer in the world. Now Do is doing it with an algorithmic stablecoin, trying to convince the world that the peg won’t break.

The final point I’ll make about this situation is on the topic of reflexivity – a critical factor for Bitcoin and all of crypto that I’ve been talking about for years here. Do Kwon has been quite loud about what he’s doing with Bitcoin as a treasury reserve asset. He’s telegraphed his buys before he bought and continues to do so today, despite having likely billions more to buy. He does not appear to care much at all about acquiring the most Bitcoin at the lowest price possible. Instead, he appears to understand the importance of marketing for his stablecoin project (more UST = higher LUNA price) and trying to reverse the flywheel of reflexivity for the entire crypto market from moving decidedly negative (as it was from November to February) to positive. Buying $3bn of Bitcoin REALLY LOUDLY can make those buys act like $10bn or $20bn bought very quietly. Getting the snowball of reflexivity moving back in a positive direction means higher prices beget higher prices, and that’s good for everyone.

Market Update – Liquid Crypto Asset Investing

Source: CoinMarketCap. As of 3/31/22. BCH includes SV. Aggregate DeFi from Coingecko

After the aggressive short squeeze on the last day of February, Bitcoin resumed a downtrend in the first half of March, sitting at -14% MTD on the lows, before going on a 28% rally in essentially a straight line to end the month +5% and down only 2% YTD.

As discussed last month, the high $30’s range has now been aggressively tested multiple times – so much coin has changed hands there that it is the largest volume node of this entire range. The low-mid $40’s continues to be a level that Bitcoin doesn’t spend much time in – it slices easily down through it from the upside and easily up through it from the downside. Price now finds itself at arguably the largest resistance point on the chart – 200DMA; large volume node; and point of control.

I struggle to take any kind of discernable cue from traditional at the moment. Besides, at the moment BTC’s correlation to macro assets is low. As discussed above, macro is a mess right now and doesn’t know whether it’s coming or going. US CPI is likely going to come in white hot in April and the Fed is likely to go 50bps in May and perhaps another 50bps in June. The month after, the Fed’s balance sheet is likely to start rolling off. Yield curves are inverted. Eurodollar futures are inverted. Commodity prices have come in a lot from the peak in early March but are still sky high – to the point of teetering on demand destruction. Ukraine appears to be deescalating, but significant risks are still very much present.

Not a great backdrop for risk assets by any means. But where is capital going to go? The outlook for bonds couldn’t be worse. So the NASDAQ is 13% off the lows and only 11% away from ATH. Perhaps tech stocks are the new store of value? Their collective revenue growth and defensible business models might be one of the safest bets around in any asset class. What else can grow fast enough to keep up with the highest inflation in 40 years? Well… crypto has a growth rate like that. And look at the capital raises from the Monthly Highlights from this month and prior months. How could that growth rate NOT continue with so much capital pouring in?

That said, it would not be my base case that Bitcoin makes a new ATH this year. The Fed seems too hellbent on hiking until a recession occurs that will bring inflation under control, and I just can’t see BTC performing all that well in that backdrop. However, if the Fed changes its tune on tightening later this year for one reason or another, Bitcoin will absolutely fly. In the meantime, I believe we’re setting up for a tradeable rally in crypto for at least the next month. As mentioned above. BTC is very close to breaking through its most significant resistance level and Jack Mallers might be the guy to deliver that at BTC Miami on April 7th.

And then there’s ETHBTC. Which has about as bullish of a setup as I’ve seen, so long as macro doesn’t ruin the party.

The catalyst of ETH 2.0 merge is incredibly straightforward and on everyone’s radar. Large pools of institutional capital have never been more willing or more able to buy ETH than they are today. And not buy a little bit of ETH. Buy a lot of ETH. I’ve discussed this at length previously, but the crypto market is shaping up to be a Multichain World. Investors want to own the innovation of Layer 1’s, not stodgy old digital gold. The aggregate market cap of the Top 10 Layer 1 smart contract platforms is currently ~$640bn vs BTC market cap of $878bn. If the Fed doesn’t bring the hammer down too hard in the coming months (or if the market is somehow able to keep ignoring that) I believe aggregate L1’s will flip BTC by Halloween.

One of the factors that leads me to believe April is setting up nicely for crypto is Bitcoin seasonality.

Another is how many Alts have very bullish charts. I’m seeing more Adam & Eve’s than Genesis.

Even some bluechip DeFi names, which have had a particularly rough go of it, are showing some very promising signs of life.

Metaverse names, where we’ve been spending a lot of time at Ikigai, are still mostly underperforming ETH YTD by a wide margin.

For the many, many hours we’ve been spending researching Metaverse, P2E, gaming, gamefi, in-game NFTs, guilds, etc we’ve generally struggled to find projects we really love that have tokens that currently trade at a reasonable market cap. DeFi Kingdoms is the notable exception here – we like it a lot and own a decent chunk. We find this current landscape to be encouraging rather than discouraging. It just means we’re still super early. We are still highly convicted this broad sector will become massive over the course of this decade. You’ll be hearing more from us on this.

All in all, the very short-term price performance setup is quite good for crypto broadly while price action for the entirety of the remainder of 2022 is still highly uncertain. The Fed’s seeming insistence on tightening until “something breaks” is far from the ideal backdrop for an asset class as risky as crypto. Caution is warranted.

Closing Remarks

In response to sanctions from the US and Europe, Russia has been scrambling to find ways around SWIFT and around reliance on the US Dollar. On March 7th, Credit Suisse’s highly influential analyst Zoltan Pozsar released a note entitled “Bretton Woods III” – calling for the birth of a new world monetary order. He ended the note by stating, “after this war is over, “money” will never be the same again…and Bitcoin (if it still exists then) will probably benefit from all this.”

Heady remarks from a former Federal Reserve economist widely regarded as understanding the global monetary plumbing better than the Fed itself. And when I couple Zoltan’s comments with some of the headlines from the Monthly Highlights, it is apparent to me that Bitcoin/crypto have historically never been as important to the global geopolitical landscape as they are right now. And they will never be less important in the future than they are right now. These are the facts.

We must accept this responsibility not only with the appropriate level of passion but with the appropriate level of soberness. For all the fun of cryptodickbutts and $10mm price bets on Twitter, the eventual outcomes produced by this technology and asset class are set to be of tremendous importance to humanity – whether positive, negative, or somewhere in between. It appears highly likely to me that crypto/web3/distributed ledger technology will be a core component of our existence in the decades and centuries to come. It is estimated that >100mm people worldwide use crypto and I would be shocked if that number isn’t 10x before the end of this decade. Those of us working full-time in the ecosystem is some tiny fraction of that 100mm - I’d be surprised if that number was more than a couple hundred thousand. So we’re talking about a pretty small total number of individuals responsible for shepherding this technology towards its eventual outcome. And those couple hundred thousand folks have different motivations and priorities and moral compasses. It's cool to make a lot of money and have nice stuff and provide for your family but it’s not what really matters here and you def can’t take it with you. Instead, we must focus on trying on our best to do our little part in this big machine to get the train moving down the track to make the world a better place. The opportunity is right in front of us.

“If you have no failure in life, you will fail in life.”

– Japanese Proverb

Travis Kling

Founder & Chief Investment Officer

Ikigai Asset Management

P.S.

Included below is an incomplete list of memorable tweets from the last month. Twitter is not investment advice and my views could easily be wrong. That being said, like it or not, Twitter matters for crypto. I have no interest in being a talking head for a living and babbling about on Twitter is a long way away from being a good steward of investor capital. However, this is a community with open-source software in its DNA, and participants want to crowd-source the truth. We are shepherds of this technology. Answers to fundamental questions about this asset class are not currently clear, so having a public platform to share your views with the community is important. After all, you’re helping shape the future :)

1. Ikigai Asset Management is the trade name for a collection of advisory and consulting businesses operated by Travis Kling, Anthony Emtman, and their team.

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