December 2021 - Monthly Market Update
/Monthly Update || December 2021
“On balance, forecasts are of very little value.”
Opening Remarks
Greetings from Ikigai Asset Management¹ headquarters. We welcome the opportunity to bring to you our thirty-ninth 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 we believe will fundamentally change the world and 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, November was a tale of two months for asset prices broadly – with most performing well in the first part of the month, including a brief new ATH for Bitcoin, before inflation fears, accelerated tapering fears and the Omicron variant spiked the VIX and pushed most risk assets lower into month-end. Bitcoin ended the month -7%, not terrible given the +40% in October and considering the VIX was +67% in November. ETH rallied hard the last few days of the month and ended the month +8% - continuing its trend of outperformance vs BTC – up a stunning 528% YTD vs BTC +97%.
The price performance of liquid Metaverse/P2E/Gaming crypto names matched the fervor of the centralized and decentralized fundraises announced in these sectors in the month of November. On the back of NFT summer, it was clear the world was already gearing up to run hard at Metaverse. But with Facebook changing their name to Meta less than six weeks ago, that pace has accelerated further still. We are at the top of the second inning for what’s to come in this broad area, a topic we discuss in detail further below.
From a macro perspective, the market is worried about the Fed taking away the punch bowl. The worry stems from this-
Source: FRED. As of October 2021.
Which led to this-
Source: Bloomberg. As of 11/30/21.
Which brings up a topic we’ve been talking about since summer 2020 – the Fed’s willingness (or lack thereof) to let inflation run considerably over 2% for a considerable amount of time keeping nominal interest rates exceedingly low so as to create significant negative real yields and flatten out the problematic spiking of Debt/GDP.
Well, yields and inflation look like this-
Source: Longtermtrends.net. As of 12/1/21.
Which is a nice start, but you probably need them to stay down there for multiple years.
Source: Longtermtrends.net. As of 12/1/21.
The playbook after WW2 was to keep reals exceedingly negative to juice GDP growth and work off that spiked ratio. And that playbook succeeded. Will that be the playbook the Fed runs again this time? Is the Fed worried about Debt/GDP heading meaningfully higher from here in the coming years? It’s worth watching closely.
There are, unsurprisingly, political ramifications to this. Mid-terms are less than a year away and it’s not looking good for Democrats however you slice it. Republicans need to win just 5 seats in the House and one in the Senate to flip control. I would guess Democrats are scrambling right now to figure out the best plan to defend their slim majority, and that includes economic policy. Many voters certainly vote with their wallets and the stock market and health of the economy really matter. However, inflation may be currently reaching levels that are viewed as politically untenable for Democrats. CPI says inflation is 6% but everyone feels it at a much higher level personally (e.g., rent, gas, food, real estate). The Fed’s decisions on the pace of tapering and timing of rate hikes will be influenced by the political strategy of Democrats, that’s just the state of things at the moment.
These things will matter for the prices of Bitcoin and crypto broadly. If the Fed decides inflation is running too hot, accelerates tapering and even hikes before mid-terms, that will likely be detrimental to risk assets everywhere. BTC could easily do a -50% move in that backdrop and I would expect ETHBTC to underperform and the large majority of Alts to underperform ETH in that scenario. Alternatively, if the Fed is told it is politically advantageous to let inflation and the market run hot into mid-terms, crypto should perform very well in that backdrop.
Whatever bear market may occur in 2022 and even potentially stretch over to 2023, it will not look or feel like crypto in 2018-2019. There are clear use cases for this technology outside of just Bitcoin. There is real adoption across dozens of projects. Hundreds of projects have already raised multiple years of runway and VC’s are fully cashed up and eager to deploy. The innovation will continue at a breakneck pace during whatever bear market may come. The projects that emerge from that period in the strongest positions will likely be incredible investment opportunities and I believe some will change the world for the better.
Invest
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Contact us to see if you qualify.
November Highlights
Paradigm Raises $2.5bn Venture Fund
Pantera Raises $600mm Venture Fund
Crypto.com Signs 20-year $700mm Deal to Rename Staples Center
ConsenSys Raises $200mm on $3.2bn Valuation
Commonwealth Bank Leads $400mm Fundraise in Gemini at $7bn+ Valuation
Blockchain Gaming Company Forte Raises $725mm Series B
FTX, Lightspeed Ventures & Solana Ventures partner on $100mm Web3 Gaming Fund
Reddit Co-Founder to Invest $100mm in Social Media on Solana
A16z Leads $150mm Fundraise for NFT Game Platform Mythical Games at $1.25bn Valuation
FTX Leads $150mm Fundraise in African Payments Firm Chipper Cash at $2bn Valuation
Kucoin Labs Launches $100mm Metaverse/P2E/Gaming Fund
StarkWare Raises $50mm at $2bn+ Valuation
Hxro Raises $34mm From SIG and Jump to Build Derivatives Infrastructure on Solana
Pokemon GO Developer Niantic Raises $300mm at $9bn Valuation to Build Metaverse
Alan Howard, Chris Dixon and Winklevoss Twins Back $100mm Metaverse Fund
Music Rights NFT Platform Royal Raises $55mm Led by A116Z
Neon Labs, Developer of EVM on Solana, Raises $40mm
Arca Launches $30mm NFT Fund
Bitcoin ETF Provider Valkyrie Launching $100m On-chain DeFi Hedge Fund
MicroStrategy Purchases 7,002 BTC For $414mm at Average Price of $59,187
Marathon Digital Raises $650mm Convertible Debt at 1% Interest to Buy Bitcoin and Mining Equipment
Bitcoin Activates Taproot Upgrade
DCG Raises $600mm Credit Facility
Citigroup Alum Matt Zhang Launching $1.5bn Crypto Fund
Microsoft to Debut Metaverse Apps and Games Next Year
Coinbase Users Can Borrow Up to $1mm Using Bitcoin as Collateral
New York Mayor Will Take His First Three Paychecks in Bitcoin
FTX, Lightspeed Lead $21mm Fundraise in Gaming Studio Faraway
Paradigm Co-Founder Matt Huang Joins Board of Stripe
Former Ikigai Researcher Phil Bonello to Launch Crypto Hedge Fund
Brave Partners with Solana to Integrate into Browser and Make Default for DApp Support
Tim Cook Personally Owns Crypto But Apple Has No Plans to Accept Crypto Payments
Decentralized Identity Platform Spruce Raises $7.5mm from Electric Capital
UAE-Based Phoenix Technology Consultants Places Order for $650mm of Mining Rigs
ConstitutionDAO Raises $40mm to Buy Physical Copy of Constitution, Gets Outbid by Ken Griffin, Returns Part of the Money
El Salvador Plans Bitcoin City, Funded by Bitcoin Bonds
Comprehensive Bipartisan Bill Is Introduced in House to Fix Current Infrastructure Bill's Crypto Tax Provision
Senate Banking Committee Sends Letters to Stablecoin Issuers Coinbase, Gemini, Circle, Paxos, TrustToken, Centre, and Binance US About General Business Practices and Safeguards
US Treasury Releases Stablecoin Risk Report
“NFT” Named Collins Dictionary's Word of the Year
| Asset Class | Nov | Oct | Q3-21 | Q2-21 | Q1-21 | YTD | 2020 | Instrument |
|---|---|---|---|---|---|---|---|---|
| Bitcoin | -7% | 40% | 25% | -41% | 103% | 97% | 303% | BTC |
| NASDAQ | 2% | 8% | 1% | 11% | 2% | 26% | 48% | QQQ |
| S&P 500 | -1% | 7% | 0% | 8% | 6% | 22% | 16% | SPX |
| Total World Equities | -3% | 5% | -2% | 6% | 6% | 13% | 14% | VT |
| Emerging Market Equity | -4% | 1% | -9% | 3% | 4% | -5% | 15% | EEM |
| Gold | -1% | 1% | -1% | 3% | -10% | -7% | 25% | GLD |
| High Yield | -1% | -1% | -1% | 1% | 0% | -2% | -1% | HYG |
| Emerging Market Debt | -2% | 0% | -2% | 3% | -6% | -7% | 1% | EMB |
| Bank Debt | -1% | 0% | 0% | 0% | -1% | -2% | -2% | BKLN |
| Industrial Materials | -2% | 3% | 2% | 8% | 8% | 21% | 16% | DBB |
| USD | 2% | 0% | 2% |
-1% | 4% | 7% | -7% | DXY |
| Volatility Index | 67% | -30% | 46% |
-18% | -15% | 20% | 66% | VIX |
| Oil | -16% | 9% | 5% | 23% | 23% | 45% | -68% | USO |
Source: TradingView. As of 11/30/21.
Freeflowing Metaverse Thoughts
We’ve been spending a lot of time under the Metaverse/P2E/Gaming/GameFi/DAOs/NFTs umbrella (henceforth “Metaverse”). We like what we see. We’re still very early in doing the work we need to do and the space itself is still very early. Below are some bulleted points I’ve thought about with regards to Metaverse. Many of these still need fleshing out and many could just be wrong.
Humans are very likely to spend more and more time existing digitally and less and less time existing in analog.
Metaverse has all the ingredients to go be a tremendously big deal.
Current all-in Metaverse market cap is under $100bn. It’s a way better bet that's going to $2tn before BTC goes to $10tn.
The relationship between speculation and application usage has been a critical factor for crypto since the very beginning. The creation of the token was itself a step-change in that relationship, relative to traditional equity. P2E is an additional step-change in that relationship and it’s probably worth trillions.
The ebb and flow of speculation vs application utility has been in-place since the beginning of Bitcoin, and that will continue in the Metaverse.
The amount of attention/fundraising Metaverse is currently receiving is staggering, for centralized and decentralized projects alike. This will continue.
Covid was The Great Accelerator in all sorts of ways and that’s definitely true for Metaverse. The current state of Metaverse is giving you a glimpse into what is likely an inevitable future that has been accelerated by Covid.
Crypto showed you with DeFi it could actually ship product that works pretty well and people actually use over a couple year timeframe. Crypto hadn’t really produced like that ever before. Now, investors look out over the current Metaverse landscape and think “well they just did a lot in a couple years with DeFi, they can probably do a lot in a couple years with Metaverse”.
Token economic models will continue innovating to drive value accrual. It’s certainly possible all current token economic models are eventually rendered obsolete. Value accrual is still a wide-open question.
There are dystopian potential outcomes for Metaverse and there are much happier potential outcomes. The actual outcome that eventually unfolds will be a function of the individuals working towards the end goals of each outcome.
The funding for Metaverse, which will drive the innovation, that will lead to the adoption, that will cause Metaverse to eat the analog world - is only possible because of QE. The relentless hunt for returns amidst a sea of liquidity is force-feeding so much capital into Metaverse that it will come to fruition out of the sheer brute force of dollars. When no one wants to hold cash because its value is being inflated away, P2E suddenly becomes viable.
P2E is made possible by the vast wealth inequality gap globally, coupled with deep global broadband penetration.
The current P2E landscape gives a glimpse into what AI-training will look like in the future.
The concept of “work” will be entirely reimagined. P2E is itself an expression of proof-of-work.
The centralization vs decentralization fight is crystal clear here. The Trust Revolution is clearly at the heart of the buildout of the Metaverse.
No hate from me on the Web3 rebrand. It will likely be a meaningful reason crypto will win the battle for top young developer talent. I’m all for it.
Metaverse is an extension of memetic human interaction which has been and will continue to be at the core of our existence.
Humans are trending towards killing each other less in wars. If you expect that trend to continue, it would be logical that more games will be played, and economic-incentivized gameplay will grow to massive stakes. Kinetic war is itself a form of economic-incentivized gameplay.
The pace of innovation is accelerating. Metaverse has the ingredients to innovate much faster than anything we’ve ever seen before. The developer talent to build it all will be a major bottleneck and the hardware quality will be somewhat of a bottleneck.
The current NFT landscape is like a minigame version of a massive game that's coming, inside of a Metaverse minigame that will grow to be of omnipresent size.
Don’t underestimate how many people naturally gravitate towards what they view as the forefront of crypto. That was ETH for a long time. SOL is in active competition to take that title away from ETH. At the sector level, however many talented developers wanted to work on building DeFi pales in comparison to those that want to build the Metaverse.
LOTS of the Metaverse projects currently in existence look like Ask Jeeves.
DAOs are likely in the top of the 2nd inning of what they’ll end up doing. We’ve only just begun to see the innovation of human coordination that will take place in the coming years and decades.
DAOs will probably end up as the Layer 2 of human civilization.
The Metaverse speculation is so aggressive because the TAM is so obviously massive.
Lots of these Metaverse names trade super thin. The huge jumps in market cap are driven by real inflows, but the total current dollar amount is likely smaller than you think.
Delphi Digital has done an outstanding job.
It seems there is a severe shortage of game developer talent.
It seems there is a severe shortage of blockchain developer talent.
You’ll be hearing more from us on all this. It’s super exciting stuff
Market Update – Liquid Crypto Asset Investing
| Symbol | Nov | Oct | Q3-21 | Q2-21 | Q1-21 | YTD | 2020 | 2019 |
|---|---|---|---|---|---|---|---|---|
| BTC | -7% | 40% | 25% | -41% | 103% | 97% | 303% | 92% |
| ETH | 8% | 43% | 32% | 19% | 160% | 528% | 469% | -3% |
| XRP | -10% | 20% | 31% | 23% | 161% | 354% | 14% | -45% |
| BCH* | -5% | 21% | -6% | -11% | 45% | 38% | 71% | 30% |
| EOS | -13% | 18% | -5% | -14% | 85% | 54% | 1% | 0% |
| BNB | 19% | 35% | 28% | 0% | 708% | 1566% | 172% | 123% |
| XTZ | -13% | 4% | 100% | -37% | 142% | 174% | 49% | 192% |
| XLM | -10% | 34% | -1% | -31% | 220% | 162% | 184% | -60% |
| LTC | 8% | 25% | 6% | -27% | 58% | 67% | 202% | 36% |
| TRX | -5% | 13% | 31% | -26% | 244% | 260% | 101% | -29% |
| Aggregate Mkt Cap | 0% | 36% | 33% | -23% | 146% | 243% | 301% | 51% |
| Aggregate DeFi* | 6% | 31% | 64% | -27% | 339% | 632% | 1177% | 77% |
| Aggr Alts Mkt Cap | 5% | 33% | 40% | 1% | 246% | 583% | 274% | -1% |
Source: CoinMarketCap. As of 11/30/21. BCH includes SV. Aggregate DeFi from Coingecko.
Bitcoin was down 7% in November after being up 40% in October on the back of the CME Futures Bitcoin ETF. BTC again underperformed ETH by 15% and pockets of Alts were up much more than that.
Strictly from a TA perspective, it would be weird to have BTC price close a new daily, weekly and monthly ATH candle, only to roll over from a slightly higher level. After six months and a 53% decline, consolidation, accumulation and expansion, price should go higher than 7% above the prior high. But hey, TA is just pseudoscience.
In any case, we have now seen Bitcoin get sluggish five times this year in the $60’s. Supply has seemed to overwhelm demand at those levels. It may end up taking a few more months to churn through the supply coming to market at these prices. However, over a more medium-term timeframe it’s highly unlikely the $60’s act as more permanent resistance - they’re just a pitstop on the road to $100k and beyond.
I struggle right here to make a short-term call on BTC into YE. It’s very close to breaking out as I write this, but I do expect some decent amount of profit-taking as traders take some much-needed downtime. Volumes thin out a ton into the back half of December and price can act wonky in either direction. It would not be my base case we make new ATHs in December, but I’ve been wrong before.
Source: TradingView. As of 12/1/21.
It would be my base case we reach new ATH in early 2022. I expect significant inflows from both retail and institutional investors alike to start the year. Institutional capital is often allocated mechanistically through investment committees. Many institutions will increase their allocation to crypto to start 2022 and that should bode well for prices broadly to start the year.
Undoubtedly, a major feature of Bitcoin’s sluggishness is the market’s appetite for EVERYTHING else other than Bitcoin. The poster child for that is ETH, and ETHBTC looks like it’s ready to go. Seven months of consolidation and it has all the wind at its back vs BTC.
Source: TradingView. As of 12/1/21.
But don’t think ETH doesn’t have its own competition. It does. The poster child for that is SOL.
Source: TradingView. As of 12/1/21.
SOL/ETH looks like re-accumulation. 3+ months of consolidation, including going through the large price catalyst of Breakpoint Lisbon. When I think about the fundamental and narrative backdrop of this setup, it makes sense to me that if ETHBTC is outperforming, SOLETH probably should too.
Along a similar vein - AVAXETH. It’s a weird looking chart for sure, but again if ETHBTC is performing, I would guess this would too.
Source: TradingView. As of 12/1/21.
Below is the price performance of some Metaverse/Gaming/P2E names since the day before Facebook changed its name to Meta.
Source: TradingView. As of 12/1/21.
Those are some serious runners. It’s interesting to note AXS has been basically flat, after producing some of the most earth-shattering returns ever seen earlier this year. My guess is the Axie market cap got to a size that made people start looking for “the next Axie”. The entire extended Metaverse umbrella is still well below $100bn aggregate market cap. Investors want to own the narrative but there’s very few places to deploy capital right now. So everything is getting bid up. It’s easy for me to see why that would continue in the near-term and then have some sort of meaningful consolidation of capital back towards the strongest projects later in 2022. It will be a volatile but growing space.
Closing Remarks
Heading into the holiday season and year-end, I want to publicly express my gratitude. I’m grateful for all the people around me that love me, support me and wish the best for me – these relationships make life beautiful. I’m grateful for an excellent, passionate, hardworking team at Ikigai – we’ve done all this together and we’ll do so much more still. I’m grateful for the struggle building Ikigai has been – “for without it I would not have stumbled across my strength”. I’m grateful for the concept of Ikigai which aligns closely with my faith in God – it has been an outstanding compass for nearly four years now. I’m grateful for the support from all of our 230+ investors – it is an honor to be stewards of your capital in this revolutionary technology and asset class. I’m grateful to every person, whether they’re a best friend or someone I’ve never met, that is putting time and resources towards pushing crypto to fulfill its potential to make the world a better place – we are brothers and sisters in-arms in that push. I’m grateful to the developers who have built and will build all of this – I cannot do your work so I’ll try to pick up the slack however I can.
Lastly, I’m just grateful for the opportunity. I’ve been listening to a lot of quantum physics podcasts lately and they always make me feel so weird listening to world class experts talk about how big the universe is and how long of a timeline it exists on. It helps me come to terms with the fact that our life here on Earth as we currently experience it in this consciousness, is over in a blink of an eye. Snap your fingers and its over. On to something or somewhere else. I find this to be both humbling and invigorating. It makes me deeply grateful that I find myself in this life as one tiny cog on one tiny wheel and if I can push that wheel one click forward, and love people along the way, that’s a job well done. Can’t wait for that journey to continue into 2022.
“Farm when it's sunny, read when it rains.”
– 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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