Monthly Update || December 2022

Opening Remarks

Greetings from Ikigai Asset Management¹ headquarters. We welcome the opportunity to bring to you our fifty-first 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, if November 2022 wasn’t the worst month in crypto history, it certainly missed a good chance. On November 2nd, Coindesk published an article with Alameda’s balance sheet as of June 30th. In particular, Alameda’s very large FTT position was a point of focus for the market. So, on November 6th when CZ tweeted that Binance was going to sell its FTT position, the market panicked. By the morning of the 7th, large withdrawals from FTX.com had been halted and a day later all withdrawals were halted. SBF later reported FTX.com had processed $6bn of withdrawals in 72 hours. That “bank run” on FTX uncovered enormous fraud by multiple people. Alameda had levered up against 1) customer deposits, and 2) massive FTT and SOL positions, then spent or lost billions of dollars, blowing an enormous hole in the assets held for customer deposits. FTX.com, FTX US and Alameda filed for Chapter 11 bankruptcy on November 11th.

Throughout the collapse of FTX, Sam Bankman-Fried has had more public communication than I would have assumed given the circumstances. He has blatantly lied in public dozens of times about numerous fact patterns. I’m certain of it. In his public appearances over the last few days, he appears to be executing a strategy whereby he distances himself from Alameda, then throws Alameda under the fraud bus, while claiming simple negligence for himself. The story he is trying to weave is one where he was negligent, Alameda was fraudulent, but he wasn’t Alameda. That is a lie. Sam committed fraud. In the last few weeks Sam has exhibited a level of sociopathy that is nothing short of terrifying. The velocity with which Sam has fallen from golden boy wunderkind to lying, sociopathic criminal is unlike anything I have ever witnessed. The person Sam truly is under the layers of expertly crafted deceit, and under the fraud he committed and allowed to happen, is simply shocking. What a piece of shit.

Over the last few weeks, the manner and scale of fraud committed at FTX has begun to come to light. It was egregious. The knock-on effects thus far have been wide-ranging and highly consequential. There are almost certainly more shoes to drop soon. The crypto industry today finds itself in shambles, with a fraction of the legitimacy it held at the beginning of the year (however misguided that legitimacy may have been). At this point, the pieces haven’t even started being picked up yet because they haven’t stopped falling on the floor. More than a million customers were caught in the FTX collapse. The top 50 largest creditors are owed a combined $3.1bn.

Ikigai is one of those creditors. #18 to be exact. We had the large majority of our total hedge fund assets on FTX.com, where we have conducted the large majority of our trading activity over the last two years. These last few weeks have been a real gut punch for our team and for me personally. We’ve had frequent communication with our ~300 investors over the last several weeks. The amount of support we’ve received has been astonishing given the circumstances, and deeply heartwarming.

I am profoundly disheartened by what I allowed to happen to my investors. It was a tremendously costly mistake, and it was entirely my fault and not anyone else’s. I lost my investors’ money after they put faith in me to manage risk and I am truly sorry for that. I have publicly endorsed FTX many times and I am truly sorry for that. I was wrong. My investors and people that listen to my opinion lost money because of my incorrect risk assessment and that weighs on me. If I keep doing this, I pledge to do better.

Invest

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We accept new investors on the 1ˢᵗ and 15ᵗʰ of every month.

Contact us to see if you qualify.

November Highlights

• Sam Bankman-Fried Is Discovered to Be a Criminal and an Absolute Sociopath

• FTX/Alameda Collapse in Massive Madoff-style Fraud, Stealing Many Billions of Customer Funds

• CZ Instigates the FTX Collapse, Likely with Knowledge of Underlying Fraud, Steps in At The 11th Hour to Rescue FTX from Bankruptcy, Then Walks Away Shortly Thereafter

• FTX.com, FTX US and Alameda Research File for Chapter 11

• FTX.com Experiences Hack the Day After Bankruptcy for Potentially Hundreds of Millions, Potentially by an Insider

• SBF Largely Shirks Responsibility for Enormous Fraud and Deceit, Both Publicly and in Private Messages

• Mainstream Media Is Overwhelmingly, Creepily Soft on SBF in Their Coverage

• BlockFi Halts Withdrawals and Files for Chapter 11

• Genesis Halts Withdrawals After Publicly Stating They Were Fine and is Rumored to be on the Verge of Bankruptcy

• Gemini Earn Halts Withdrawals Due to Genesis Exposure, May File for Bankruptcy

• DCG Is Attempting to Raise Rescue Financing

• A “Backdoor” in FTX.com’s Internal Accounting System is Discovered, Allowing Alameda Team Members Including SBF to Steal from Customer Accounts Without Alerting Auditors

• FTX Processes Millions of Withdrawals to Bahamian Customers After Freezing Withdrawals for All Other Customers

• SBF, SBF’s Parents and FTX Bought ~$121mm of Real Estate in Bahamas

• Class Action Lawsuits Filed Against Tom Brady, Larry David, Steph Curry, et al Over FTX Promotion

• DoJ, Bahamas, Preparing Criminal Charges Against SBF and FTX

• Congress Set to Hold FTX hearing on December 13th, SBF to Be Questioned

• Tiger Global Hired Bain & Co to Perform Due Diligence on FTX Before Investing $38mm

• Tether Freezes FTX USDT at Request of Law Enforcement

• Block One Reports 7.5% Stake in Silvergate

• Kraken Lays Off 30% of Workforce

• Fidelity to Open Commission-Free BTC and ETH Trading for Retail Customers

• Instagram Integrating Polygon and Solana NFTs

• Instagram Utilizing Arweave to Store NFTs

• Google Cloud Begins Operating a Solana Validator and Will Accept Crypto Payments

• US Attorney Announces $3.4bn Crypto Seizure in Connection with Silk Road

Source: TradingView. As of 11/30/22.

What Happened, What Needs To Happen

These aren’t going to be completely formed ideas and they may not flow all that well, but there’s various aspects to all of this that have been on my mind over the last few weeks, and I’d like to share them here. It’s been with a backdrop of a lot of volatility and uncertainty, so bear with me.

Crypto has a large attack vector from intelligent sociopaths. At this point, that statement should be considered fact. Do Kwon. Alex Mashinsky. Su Zhu. Kyle Davies. Sam Bankman-Fried. If I went back further, I could add dozens of names to that list. The ecosystem has taken so much damage from these types. We seem to yearn for a hero figure of sorts and then misjudge or ignore that person’s character when we crown these heroes. It has repeatedly come back to bite us. Intelligent sociopaths are drawn to crypto like a moth to flame. There’s no better venue for them to deliver their fraudulent punishment. Sam wasn’t actually a vegan for ethical purposes. He was using an amphetamine patch so powerful that if you ate meat on it you could die… Yeah. THAT level of sociopathy.

You can forgive someone and still refuse to allow them to return to positions of power and influence. You have to forgive people, for your own sake as much as for theirs. Regardless of whether you believe in a God, forgiveness is just a good life strategy in general. I’ve already forgiven SBF. I’ve forgiven Su and Mashinsky. You can forgive these sociopaths and still banish them from crypto. You can forgive someone for robbing an old lady at gunpoint and still send them to jail. You can forgive someone for murder and still send them to jail until they die. I believe in forgiveness but under the circumstances the bar for “reentry into positions of power” must be set very high. Too much is at stake, and we’ve been burned too hard too often. My involvement and Ikigai’s involvement in the crypto ecosystem need to be evaluated through that same lens. Is Ikigai worthy of positions of power and influence in crypto? If the ecosystem collectively decides we are not, we should be expelled.

Crypto has a large attack vector from the daisy chain of secondhand due diligence and I don’t know what to do about it. Secondhand due diligence is when you build trust with a certain individual or organization and then associate them with specific subject matter expertise. You then go to that person or organization when you want to know their opinion on something within their subject matter expertise. This social construct is in place to varying degrees everywhere in business and in life, but it’s even more present in crypto. I believe the reason for this is that crypto has had a communicative and collaborative ethos since the beginning. Open-sourced software by its nature is communicative and collaborative. Also, the entirety of crypto is SO vast that being a subject matter expertise on all of it is virtually impossible or requires many dozens of brilliant individuals all on one team. And even then, you might still make the wrong call (e.g., Blackrock, Sequoia, Paradigm) because no one’s perfect. So this social construct of trusting other people and then adopting their views on important things is omnipresent here in crypto. I do this constantly, both in seeking answers and providing answers. It’s nearly impossible for me to imagine navigating crypto without at least some of that construct in place. It’s not something that can be entirely solved with regulations or “blockchain”. It’s partially a social construct and we just have to decide as a society to act differently in a way that lessens that attack vector. I’m not sure exactly what to do there.

Trust in general within crypto needs rearchitecting. We have normalized an unacceptable level of opacity. I mean, that’s a given at this point, right? If crypto is to recover and continue on its journey to make the world a better place, the entire concept of trust has to evolve meaningfully from its current state or seriously this whole experiment will fail. Bitcoin is trustless. Then we built all these trusted things around it, and those things have failed catastrophically. Centralized borrow/lending desks decided on opacity for “business competition” reasons and that failed catastrophically. We’re shooting ourselves in the foot with the same bullet we’ve been supposedly so worried about since the beginning of crypto – trusted middlemen. It is factually correct that if all crypto was traded on DEX’s and all leverage was executed on-chain through DeFi, this whole collapse wouldn’t have happened. Crypto has been burned so hard, so many times, for so long, from trusted middlemen. And it’s not like DeFi is perfect. Far from it. There are real risks there. But reasonably safe basic borrow/lending functionality does exist. Now is the time for the industry to step towards trustlessness. Now is the time to demand more transparency from the trusted entities that we do allow to exist in our ecosystem. “Don’t trust, verify” hits different in the wake of the last several weeks. It must be a call to action.

The good guys aren’t being loud enough. The space has not done enough to identify and expel bad actors. We’re letting way too many sociopaths get way too powerful and then we all pay the price. Ikigai is guilty of this. I am guilty of this. For years I’ve talked publicly about trying to do the right thing in crypto. Not supporting pump and dumps. Not playing the VC-retail exit liquidity game. Talking often about all the different types of risk present in these crazy markets. A bunch of other stuff trying to steer crypto in a positive direction. But I let a lot slide too. I often intentionally stayed away from acute, pointed accusations of specific people or projects. I took this approach for multiple reasons. I didn’t want to make enemies. I worried maybe I was incorrect in my assessment. I didn’t want to live my life as a paranoid curmudgeon. I thought my approach was sufficiently “doing my part” to help crypto move in the right direction towards maximizing the good it can do in the world. But I wasn’t doing enough. Most folks weren’t. We’ve been too tolerant. As an industry we have to realize that this ecosystem we care so deeply about is absolutely crawling with bad actors. We must accept this and act accordingly. Going forward the burden is on the individual or the organization to sufficiently defend their status as a good actor and not be labeled a scammer. Even then, you’ll have to expect good people to do scammy shit sometimes. If Ikigai continues on, we pledge to fight harder in this regard. It’s a fight worth fighting. We must hold ourselves to a higher standard. We must fight harder. Louder. More directly. More acutely. At this point it’s absolutely necessary.

We must more effectively ride the line between optimism and skepticism. Crypto needs both. There’s a need for optimists and optimism in crypto. Everything that exists in crypto was basically conjured up out of thin air, and that kind of innovation requires dreamers. People willing to imagine a world very different than the world they currently live in, and then hopeful enough to go build that different world. I’m all for that. We still need that. But when optimism steamrolls skepticism to a degree that the entire space implodes, we must reexamine the levels at which we collectively set the optimism versus the skepticism. There’s also a difference between skepticism and pessimism. I believe too many people in this ecosystem have been scared of being labeled the latter, at the expense of a healthy dose of the former. If we don’t find a better balance, this whole thing will legit fail.

I keep getting this weird feeling about the last few years. The whole bull run and then the bear. Like, how much of that was just a mirage? A simulation? There was so much reckless lending, intertwined with fraud, used to heavily lever long to speculate on vaporware, that if you back all that out, what the fuck actually happened and what was just a mirage? Sure, you already knew a ton of it was just hype with little/no substance to it. It's like, yeah we all know crypto markets are manipulated. That's always been true. But it’s just the MAGNITUDE of the manipulation. The ratio of manipulation to "real" is so much more skewed than I ever imagined, that it makes the last 2 1/2 years feel like an optical allusion. That part has been messing with my head about how best to continue in this ecosystem. You really don’t know what kind of market you had in the last couple years.

I don’t know how to think about risk taking in crypto going forward. I don’t actually know if Ikigai is good at taking risk in crypto. Risks and potential returns for taking risk have been so deeply obfuscated and contorted by leverage and fraud, that I don’t know what the underlying actually looks like when you clear all that bullshit away. Three of the firms near the top of everyone’s list for best risk takers in crypto – Alameda, 3AC and Genesis – have collapsed. At least two out of those three committed clear fraud. Many more of the most highly regarded investors have seen their returns decimated, down 75% or more YTD even before getting assets stuck on FTX. Prior to my costly mistake, Ikigai had outperformed our benchmark by hundreds of percent over the last few years. Yet all of my investors are now deeply underwater with a large portion of our assets stuck on FTX. I felt like I had been SO paranoid over the last several years about avoiding landmines. It’s a tough pill to swallow to realize that I wasn’t being paranoid enough. In the search for attractive risk-adjusted returns, you must take some risk. But how do you price that risk appropriately? As a fund, how can Ikigai make sure nothing like this ever happens again? These are questions I’m searching for answers to.

There’s at least the potential for the signal to noise ratio in crypto to increase in the near future. This speaks to the above point. The market we’ve been experiencing over the last several years has been, to some degree, fake. Maybe a little fake. Maybe massively, overwhelming fake. But in any case, the mechanisms by which the mirage was perpetuated have collapsed. Under/uncollateralized lending has been reduced to nearly nothing. Borrow/lending in its entirety is a tiny fraction of what it was a year ago. Massive frauds have been revealed and subsequently collapsed. What’s left at this point? It’s hard to know exactly, and there’s likely more shoes to drop. But it would make sense to me that this market would be easier to understand going forward. The quantitative data produced by the crypto ecosystem would be more logically explainable. If we can keep the “reckless lending, intertwined with fraud, used to heavily lever long to speculate on vaporware” at bay, the signal-to-noise ratio for crypto might remain higher for years to come.

The insane influx of venture capital across all stages perpetuated an attitude of “growth at any cost”. This is not unique to crypto, but the effects are felt more severely here when intertwined with such irresponsible risk taking and massive fraud. So many companies were trying to scoop up as much cash as possible at as high a valuation as possible. That attitude perpetuated bad risk management practices across the board. This attitude became so widespread that “number go up” got confused with “invest-ability”. I assume at this point, so much permanent venture equity has been wiped out or severely impaired in crypto, that this brazenness will die down, at least for a while. Less YOLO investing and a greater search for quality businesses with durable returns would go a long way towards getting crypto back on the right path towards making the world a better place.

When looking at the totality of the facts that have come to light over the last several weeks with FTX and Sam, it’s easy to put on the tin foil hat. Conspiracy theory land is a natural destination as the fact pattern here has unfolded. The political donations. The alt-left, well-connected, Stanford professor parents. Sam’s frequent attendance in Washington, both in public and in private, with powerful politicians and regulators. The Effective Altruism ruse. The polyamorous harem of Alameda and FTX insiders. The magnitude of amphetamine use. Makes for a hell of a Michael Lewis book. I’m not sure we’ll ever know the entire truth, but it wreaks up and down of malfeasance.

This is a sensitive topic, but we need to be careful about blindingly worshipping entrepreneurs with autism/mental illness. I believe beyond a shadow of a doubt, that emotional intelligence is necessary to be an effective leader in crypto. To be an effective leader in the world. Empathy matters when you’re trying to build something to help the world. A leader with stunted emotional growth has the potential to make grave mistakes that a leader with a higher emotion intelligence would avoid. There is clear danger in glamorizing these types of people. Just because they are better than you at math does not necessarily mean they should get the keys to the castle. We’ve tried that approach and it has failed epically.

If you tilt your head a bit, the last few weeks have been an expression of antifragility. 2022 has been a year of blowups of enormous proportions. The dollar value of this FTX fraud makes Madoff look like pocket change. So much recklessness. So much fraud. The wipeout has been deep and wide. I‘ve talked about Bitcoin’s antifragility for years here. The FTX collapse, as painful as it has been for the entire ecosystem, my investors, and me personally, WILL make crypto stronger. The space will evolve and improve as a result of this pain. To what degree remains to be seen.

Finally, it’s hard for me to imagine the space bouncing back quickly from this ordeal. Too many got burned too hard. If this bankruptcy gets cleaned up two years from now that will be fast. We could have multiple quarters of more shoes to drop from the knock-on effects. At this point, crypto is an embarrassment to the outside world. Normies watch Sam on Dealbook with sly bemusement. The Nouriel Roubini’s of the world appear deeply vindicated. Traditional pools of capital that invested over the last year have already lost a lot. The traditional capital that chose not to invest has never felt more self-assured. The optimistic view is that crypto is actually MORE investable in the aftermath of all this. You’ve cleaned out so much of the “reckless lending, intertwined with fraud, used to heavily lever long to speculate on vaporware” that now sensible investors might actually be able to understand where the opportunities in crypto lie. There’s reason to believe that is true. But it will take months and quarters to come to fruition.

Market Update – Liquid Crypto Asset Investing
Guest Author: Ikigai Trader Asher Montague-Warr

Source: CoinMarketCap. As of 11/30/22. BCH includes SV. Aggregate DeFi from Coingecko.

Asher, who had been writing this section for the last number of months, was let go the week the bankruptcy was filed. I’m not going to write anything of substance here. November was a total wipeout event. I’ve barely looked at charts the last few weeks. Broader macro risk is trying to rally on a Fed slowing, but it’s not clear to me at this point that rally is sustainable. And crypto has been so damaged that the correlations have decoupled crypto has not really been able to follow traditional. Crypto is mired in its own idiosyncratic set of problems right now, and I’m not sure risk-on macro can drag it up in the very near-term.

The price action over the coming months will be dictated by the pace with which appetite comes back to own crypto. That appetite will be affected by macro risk appetite. It will also be affected by how quickly the rest of the shoes in crypto drop, how severe those shoes are, and in what manner the pieces begin to be picked back up. Make no mistake, crypto is rekt right now. I’m not sure how much charts matter. This mess will likely take time to work itself out.

Closing Remarks

There’s currently a lot of uncertainty about what’s going to happen next with Ikigai. We’ve made layoffs already and we’re making more in the coming weeks. Our business is shrinking a lot to move to a more sustainable cost basis given the circumstances. In the very near-term, we’re going to continue trading the assets we have left that are not stuck on FTX. I have applied to sit on the Unsecured Creditors Committee for the FTX bankruptcy. If I can get on that committee, it will likely be a big part of my life over the next couple years. If I’m not selected, the large majority of our hedge fund’s assets will be stuck in wait-and-see mode and we won’t be able to impact the recovery at all.

It's impossible to know right now what’s going to happen with the eventual recoveries from the FTX bankruptcy, and the timing with which those recoveries will occur. Too many unknowns that could swing recoveries around meaningfully. It will likely take multiple quarters to gain clarity on those factors.

Our venture fund was unaffected by FTX. We offered all venture fund investors the option to redeem 90% of their committed capital. ~60% of the venture fund capital has been redeemed, although a large portion of that redeemed capital also expressed interest in reinvesting in Ikigai’s liquid hedge fund strategy, should we decide to continue operating Ikigai as an investment business. A number of our current investors have expressed interest in investing more with us. I can’t tell you how much that means to me.

On November 14th, I wrote a tweet thread explaining our exposure to FTX. It ended up being the most viral thing I’ve ever put on Twitter, with over 7 million impressions. Legitimately hundreds of people reached out to express their support. I’ve never experienced anything like it. Incredibly, we had many dozens of new investors reach out on our website, expressing interest in investing with Ikigai. We’re still months away from accepting new capital, should we decide to continue operating Ikigai as an investing business. But that type of support has been heartwarming and is driving our resolve to continue to stay in this fight to help deliver on crypto’s potential to make the world a better place.

In the initial days of the FTX collapse, it felt like Ikigai was surely going to cease existing as a going concern. With such a large majority of our assets stuck on FTX, I thought we would likely move into full wind down mode. But the magnitude and breadth of the support we’ve received over the last few weeks has strengthened my resolve. We want to figure out a way to continue operating Ikigai as an investment business. We’re working with that goal in mind. That will require rethinking the execution of our trading and custody activities to ensure that something like FTX never happens again. Even something as seemingly safe as a bank account in a US bank has to be reexamined. We also need to evaluate the market opportunity and have a compelling reason to believe we can deliver attractive risk-adjusted returns for our investors. Evaluating that is part of what we’ll be doing in the coming months.

I haven’t spoken a lot about my faith publicly, but I have spoken about it some. My faith is a big part of my life, and it has been for a long time. I believe in a God that loves me and has a plan for my life. I seek to live out God’s will in my life because I believe we as humans are purpose-built to yearn for that alignment. Ikigai the concept is sort of a back door, secular approach to a faith framework. I was cognizant of that when I named it Ikigai. My faith is a major driver of my actions, especially for something as important as what I spend the large majority of my waking time working on. In the first couple years of Ikigai, when we were very small and struggling to scale up, I would very regularly pray “God, if you don’t want me to do Ikigai, that’s fine. Pick me up off this path and put me on whatever path you want me to be on, and I’ll go do that. No problem.” And I prayed that for a long time and then we grew the business a lot and had some real success, and I felt like God wanted me where I was, doing what I was doing.

I’ve been praying that same prayer a lot over the last few weeks, with a fervor but also a peace I’ve never previously experienced. “God if you don’t want me to do this anymore, that’s fine. I’ll go do whatever you want me to. Just show me the path and give me the strength to walk it.” And I’m not entirely sure how that’s going to shake out. I still need to pray more about it and meditate and read scripture and go to church. But I do strongly believe that good and evil are wrapped up in this technology. I do strongly believe this technology has the potential to make the world a better place, but it’s really just all potential at this point. If you look at the totality of the good that crypto has done and then back out all the bad it’s done, the net feels like it’s marginally positive. Whether or not crypto delivers on all of, some of, or none of its potential to make the world a better place will be entirely dependent on the individuals that are working towards those various outcomes. And that is truly a fight worth fighting. God willing, we will keep fighting it.

“Even monkey fall from trees”

– 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.

The information contained or attached herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. This presentation may contain forward-looking statements that are within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. This email is for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product, service of Ikigai as well as any Ikigai fund, whether an existing or contemplated fund, for which an offer can be made only by such fund’s Confidential Private Placement Memorandum and in compliance with applicable law. Past performance is not indicative nor a guarantee of future returns. Please consult your own independent advisors. All information is intended only for the named recipient(s) above and is covered by the Electronic Communications Privacy Act 18 U.S.C. Section 2510-2521. This email is confidential and may contain information that is privileged or exempt from disclosure under applicable law. If you have received this message in error please immediately notify the sender by return email and delete this email message from your computer. Copyright 2021 Ikigai Asset Management, LLC. All Rights Reserved.

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