June 2023 - Monthly Market Update

June 1, 2023 Ikigai HQ

Monthly Update || June 2023

Opening Remarks

Greetings from Ikigai Asset Management¹ headquarters.We welcome the opportunity to bring to you our fifty-seventh 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, crypto took a back seat to AI in May as Nvidia announced quarterly results, with their CEO calling ChatGPT an “iPhone moment” and issuing forward guidance that blew consensus expectations out of the water, leading to a $184bn single day increase in NVDA’s market cap. The buzz around AI has been deafening all year with the rise of GPT and its competitor and complementary products, but NVDA’s projections took it to the next level. This has certainly showed up in stocks with NASDAQ +21% through April and on the heels of a +8% May, now +31% YTD.

AI is set to become tremendously important, and it doesn’t seem like it’s going to take all that long. The rise of AI is worth contemplating from a host of angles, and one of them is AI’s relationship to crypto. How should we think about the two as they relate to one another? In what ways might they intersect?

There’s unequivocally potential for the two to be intertwined-

AI models need to be trained on data sets; open-source training can be facilitated with blockchain and be incentivized with tokens
AI models need Reinforcement Learning from Human Feedback (RHLF); RHLF can be facilitated with blockchain and incentivized with tokens
AI models need a lot of compute; that compute supply can be provided in a decentralized manner, facilitated with blockchain and incentivized with tokens
AI is set to transform the concepts of truth – deep fakes are already stunning in their accuracy and we’re just getting started; blockchain can provide absolute assurances of provenance
The value of a data set can be tied to a token with tokenomics, and that token can have governance rights over that data set, deciding how it is created, updated and monetized

The list could go on. The best way I can paint a broad brush across the opportunity for crypto and AI is a point I made here on February 1st –

“Humanity is becoming increasingly more intertwined with technology. You’d be a fool to think otherwise. We have every indication to think that humans are going to adopt technology as fast as new, captivating things come out. A very safe, compelling Neuralink for everyday use may not be available for 30 years. But when it is, I’d strongly bet it will be rapidly adopted. Humans YEARN for progress. It’s deep in our DNA. Take ChatGPT. The world is blown away by it and it’s experiencing record-breaking adoption. The adoption of ChatGPT will propel humanity further into reliance on technology. You can imagine how rapidly (50-100 years?) this journey will unfold, because that adoption is increasing at an increasing rate. With ChatGPT, OpenAI claims that GPT-4 will have 100 trillion parameters, as opposed to the 175 billion parameters that GPT-3 is currently trained on. That’s increasing at an increasing rate. What will THAT be like? Run THAT out for 100 years. The coming decades/century are going to get WEIRD. Ask yourself, how do you feel about that power being centralized in the hands of a few opaque, profit-driven organizations?

As I’ve stated multiple times here before, I believe that abuses of power by centralized technology companies are causing societal problems. I think crypto has the POTENTIAL to alleviate these problems. If humanity becomes increasingly more tribal from current levels, we’re NGMI. If we trend in that direction long enough, we’ll legit blow ourselves up. Social media, in its current form, drives divisiveness because conflict drives more eyeballs and eyeballs pay advertising dollars. This a big reason why we are so divided as a nation right now. THIS IS A FUNDAMENTAL MISLALIGNMENT OF INCENTIVES RELATIVE TO WHAT’S GOOD FOR HUMANITY. Crypto has the potential to alleviate this.”

In the broadest sense, there’s opportunities for crypto to: 1) incentivize human coordination; 2) ensure information fidelity; and 3) alleviate technology centralization concerns that lead to societal problems. These are good, noble, worthwhile goals for crypto. The opportunity to have a positive impact on the world through the intertwinement with AI is clear and massive.

Yet, I am deeply worried about crypto’s ability to execute on these opportunities. In my view, which I’ve written about a lot here in the last 6+ months, crypto has a host of problems and we don’t seem to be taking them particularly seriously. You cannot honestly assess the state of the crypto ecosystem right now and say “we are ready to execute on the AI opportunity”. It’s just not true.

We have numerous issues. One of the problems is that if you’re using a token, you have to figure out a functional economic model for that token. Sounds simple, but it has proven to be really hard. We haven’t figured out how to create sustainable economics in token ecosystems. That’s a problem if you want to go execute on opportunities with AI. We had some flashes in the pan. Axie Infinity was real. Helium was real. Stepn was real. All failed (to date) to create sustainable economic models. They got the users. Couldn’t handle the fluctuations in token price caused by speculation, and it crashed the ecosystem. Big unsolved problem.

Also the blockchains don’t work all that well during times of high usage. If the AI business model requires very cheap, very fast, very reliable transactions, we’re not there yet. Also, there’s massive regulatory risk, mostly in the US but also abroad. Also every UX in crypto history has been crappy.

There’s a palpable malaise in crypto right now and I believe a big driver of it is the ecosystem’s collective realization of how little we have to show for ourselves, and how ill-equipped we are to execute on opportunities right in front of us, like AI.

Maybe I’ll be proven wrong. Lord knows I hope so. Maybe the right founders come along with the right vision and introduce a revolutionary token structure right at the same time L2’s really get good and Congress passes a crypto bill. But does that seem like a long putt to you? Yeah, me too - that’s the malaise. It seems to me the foundations of crypto aren’t all that sturdy at the moment. 2022 pulled the curtain back on how utterly not ready this ecosystem was for the prime time and YTD we haven’t made enough progress towards being ready. Most of us inside the ecosystem know this to be true, and I don’t think we’re fooling all that many normies on the outside either.

Which brings up another lens to look at the relationship between AI and crypto through – crypto is no longer the shiny thing. AI is the shiny thing. And it’s easy to imagine why from a capital allocation perspective – just honestly compare the last couple years of crypto to the last couple years of AI. It’s not even close. Nothing in crypto has ever SNIFFED the “wow” factor of ChatGPT. You think that’s an apples to oranges comparison? You’re fooling yourself. Imagine all the stuff you DON’T have to deal with if you just stop investing in crypto and start investing in AI. Sure there’s regulatory concerns, but most people don’t outright hate AI. Most folks are fascinated by it and genuinely interested in how it will positively impact their lives. And they’ve seen immediate impact with a truly stunning pace of advancement (just think YTD). So that really pulls the marginal dollar out of crypto and shoves it in AI. It’s poetic that just this month Paradigm, the largest crypto VC fund, changed their website from crypto-only to include AI. If the largest venture name in crypto is doing that, imagine who else is too?

You take the above setup, and combine it with massively less leverage in the crypto ecosystem overall (CeFi lending mostly vanished), and you can start to imagine how a roaring crypto bull market might have trouble materializing. Combine that with the narrative vacuum and leadership vacuum I talked about last month, and that bull market gets even harder to imagine materializing.

Undoubtedly, a viable narrative could form quickly, from just a few news items or project launches. This is often the way with crypto. And that outcome is sort of what I worry about the most - that the Fed starts easing again soon and the price of crypto starts going up a lot but it doesn’t have sustainable foundations (again), and eventually it crashes and burns (again) and hurts even more people than the last cycle. I’d rather we toil in relative obscurity for the next five years and then actually figure something out than rise to even greater heights only to implode yet again and hurt even more millions of people. We waste the most time and hurt the most people if we learn nothing from this past cycle’s mistakes before the next wave of adoption begins. The clock is ticking.

Invest

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

Contact us to see if you qualify.

May Highlights

Tether Buys $1.5bn of Bitcoin in Q1, Commits to Deploying Up To 15% of Quarterly Realized Profits into Bitcoin
Hong Kong Finalizes New Crypto Regulatory Framework, Goes into Effect June 1
Lots of Back and Forth Between SEC and Coinbase
US Chamber of Commerce Files Brief in Coinbase vs SEC Case, Claiming SEC Acting Unlawfully
Ishan Wahi, Former Coinbase Employee Found Guilty of First Ever Crypto Insider Trading Case, Sentenced to Two Years in Prison
Coinbase Launches Offshore Derivatives Exchange
Gemini Launches Offshore Derivatives Exchange
Jane Street and Jump Reported to Be Meaningfully Pulling Back from Crypto Amid Regulatory Pressure
SEC Claims Jump Made $1bn in Profits in “Secret Deal” to Prop Up Terra Luna Prior to Its Collapse
Binance Withdraws from Canada Entirely
Reuters Claims Binance Comingled Customer Funds and Company Revenues in 2020 and 2021
DoJ Investigating Whether Binance Violated US Sanctions Against Russia
Binance Temporarily Halts BTC Withdrawals, Falsely Blaming Mempool Congestion
Binance US Withdraws All Assets from Staking Pools, Prices Heavily Deviate from Other Exchanges as Exchange Liquidity Falters
Binance Has Started Layoffs, Rumored to Be 20%
Bittrex Files Chapter 11 Bankruptcy
Genesis Parent DCG Misses $630mm Payment to Genesis, Continues Discussions with Creditors
FTX Bankruptcy Estate Sues Genesis For $3.9bn Clawback, Including $1.8bn of Exchange Withdrawals
IRS Files $44bn Claim Against FTX Bankruptcy Estate, Mass Confusion as To That Amount Ensues
BlockFi Bankruptcy Judge Allows for $300mm Repayment of Custodial Accounts, $375mm Held in Interest-Bearing Accounts Ruled as Property of the Estate
Voyager Digital Winds Down Business, Plans to Return 36% of Assets After Binance Acquisition Falls Through
Michael Arrington-Led Fahrenheit Chosen as Winning Bidder in Celsius Chapter 11
Nexo Winding Down UK Operations
Mysten Labs’ SUI Blockchain Launches Mainnet, Hiccups Immediately Ensue
Gala Games Burns $600mm of Treasury Holdings
Sam Altman-Led Worldcoin Raises $115mm Series C from Blockchain Capital, A16Z, Bain, Distributed Global, et al
Wallet Provider Magic Raises $52mm Led by PayPal Ventures
Paradigm Buys $50mm of Coinbase Shares
River Financial Raises $35mm Series B From Kingsway Capital, Peter Thiel, et al
Cormint Raises $30mm Series A and 400 BTC in Bitcoin Debt to Scale West Texas Bitcoin Mine
Story Protocol Raises $29.3mm Seed Round, Led by A16Z
Blockworks Raises $12mm at $135mm Valuation, Led by 10T, Framework
Paradigm Shifts Focus from Crypto-only to Including AI
Ethereum Foundation Moves 15,000 ETH, Presumably to Sell
Public Critiques of the Shortcomings of Lightning Network Grow Louder
Nansen Lays Off 30% of Employees

See this content in the original post

Source: TradingView. As of 5/31/23.

Update On The FTX Bankruptcy

As you likely know, Ikigai had the large majority of our assets on FTX at the time of the collapse, and as such are the #18th largest creditor in the FTX bankruptcy. Thus, we have been following the FTX bankruptcy proceedings closely, as we evaluate the potential recovery of our funds and contemplate selling our bankruptcy claim on the claims market.

Given Ikigai’s position, we are quite familiar with the claims market for the FTX bankruptcy. And while I won’t talk specifics, the claims market has moved up a LOT since I first saw bids last Thanksgiving. If you sold your FTX bankruptcy claim in December, claims prices have gone up a lot since then. And if you’ve been following the news flow of the FTX BK, it’s easy to understand why. It’s been going really well relative to expectations during the first six weeks after the collapse. The estate has found assets. They’ve sold venture assets at ok prices. They’ve sued for multiple clawbacks and already gotten some back. Some of those clawbacks were for big amounts. The price of crypto has gone up (that matters because a portion of the assets are in liquid crypto).

But perhaps most importantly, the price of the claims market has gone up because some form of an FTX restart has been looking increasingly more likely for months now.

To frame your expectations, this is mostly going to be links to other people’s tweet threads. There are some folks on Twitter that are doing an incredible job covering the FTX bankruptcy to a level far beyond what I could. If you care about the FTX bankruptcy process, follow these people. If you care a lot, turn notifications on. They generate a lot of signal on this-

https://twitter.com/AFTXcreditor
https://twitter.com/MrPurple_DJ
https://twitter.com/wassielawyer
https://twitter.com/sunil_trades
https://twitter.com/loomdart
https://twitter.com/AltcoinPsycho

If you spend an hour scrolling back through AFTX and Mr Purple’s threads, you’ll learn a tremendous amount about this bankruptcy process. Hats off to them and everyone else I linked to and a bunch of other folks. If the FTX restart is successful, it will undoubtedly have a lot to do with the coalition of people publicly supporting it however they can. That coalition will be a crucial part of whatever ends up happening with FTX.

Below is a sort of greatest hits of the most relevant recent occurrences in the bankruptcy process-

Deep compilation of FTX restart tweet threads, from March 2023 to current.

Fee statements showing John J. Ray III (JJR3) spending a lot of time on FTX restart.

Fee statements referencing a “dynamic exchange portal”, alluding to the ability to easily transfer claims and potentially swape a claim for debt or equity.

Excellent thread on how an FTX restart could be structured.

Comparison of FTX restart to 2016 Bitfinex hack.

Encompasses a lot of customers’ feelings about an FTX restart.

Summarizes the opportunity with an FTX restart.

$3.7bn of Net Operating Loss carryovers potentially available for a buyer of the FTX business.

Some thoughts on massive IRS claim.

Blog post on massive IRS claim.

Optimistic view on massive IRS claim.

Thought-provoking thread on reading into FTX restart by examining Celsius restart process.

So What?

There’s still a lot we don’t know. The FTX bankruptcy estate is scheduled to file a Plan of Reorganization in July. We will learn a lot more then about the exact path forward and will be able to glean more into the timing and array of potential outcomes. We can say confidently at this point that some sort of restart is likely to be attempted. The structure of the restart can take a number of forms and the timing could be as long as a year away or even more. It’s difficult to probability weight the various outcomes of a restart because so much is still unknown. In my view, it will come down to- 1) management team; 2) transparency; 3) strategy and 4) structure. Any FTX restart will need to do reasonably well across all four of those buckets to have a good chance at being reasonably successful. Any reasonable amount of success I believe will push eventual recoveries to at least 75c, which will push the claims market towards and eventually beyond 50c.

There has been a decent amount of pushback against an FTX restart from the crypto ecosystem. It’s interesting to think about the potential motivations for this pushback. Seeing as I’m biased towards a restart, it’s helpful for me to imagine Ikigai wasn’t caught in the FTX collapse. That we were just doing our thing in crypto like we had been and weren’t holding any assets on the exchange. If that were the case, what would I think about an FTX restart – its necessity and likelihood of success? I honestly think I would arrive at about the same conclusion I currently have– if those four boxes are checked: 1) management team; 2) transparency; 3) strategy; and 4) structure, the exchange restart has a good chance to generate meaningful value for creditors vs not attempting the restart at all. Another way to think about it is, the total fees paid to service providers specifically for executing a plan to restart FTX might be $200mm, which is about 2c on recoveries. Should a restart occur, the likelihood it will generate >10c of additional recoveries I think is pretty high. So that looks like a good bet to me.

At the heart of this assessment are two factors. Most importantly is the built-in customer base. Creditors become customers and potentially equity owners. Hundreds of thousands. Perhaps a million or more. In the current exchange landscape, exchanges fight tooth and nail over customer acquisition. That’s why you see exchanges plastered all over UFC and F1 and the Super Bowl. Exchanges pay a lot for customer acquisition. If the restart checks those four boxes, the customer base will be massive and highly incentivized out of the gate. YOU CANNOT OVERSTATE THE IMPORTANCE OF THIS FACTOR. Liquidity begets liquidity. You could very well build a top tier exchange from the ashes of the FTX bankruptcy.

The second factor is one’s assessment of the current exchange landscape. Is there an opportunity there? How do you feel about the management teams, transparency and strategies of other major crypto exchanges? My view of that is there is a clear opportunity to come in an compete. It’s not a sure thing, but it’s a good bet. Naysayers either don’t know what they’re talking about or have a personal vendetta against an FTX restart that illogically skews their public view. The only thing Americans love more than kicking a dog while its down…is a comeback story. It’s going to be fascinating to see play out and I get the sense that Ikigai will be right in the middle of it.

Market Update – Liquid Crypto Asset Investing

See this content in the original post

Source: CoinMarketCap. As of 5/31/23. BCH includes SV. Aggregate DeFi from Coingecko.

BTC was down 7% in May with ETH flat, bringing their YTD performances to +64% and +57%, respectively. That’s pretty solid performance. And if I told you no other stat than the NASDAQ is +31% YTD, I think that would be a pretty good way to frame it. Crypto certainly isn’t up this much YTD because of anything positive happening in crypto. To the contrary. The newsflow has been overwhelmingly negative. Trading volumes are atrocious. Project usage is abysmal. New interesting use cases are non-existent. The aggregate crypto market cap is +43% YTD because we’re coming off deeply oversold YE-22 levels after the FTX collapse and because macro has been supportive. Crypto is up in 2023 IN SPITE of itself, not because.

Over the last couple monthly update letters, I’ve made my views on crypto fundamentals pretty clear – they’re shit and I don’t see anything compelling on the horizon that makes me think they’re about to get a lot better either. But I’ve also clearly stated that with the right macro tailwinds, prices will likely just… go up. We can argue about how much they’ll go up and which names, but I believe with the right macro tailwinds, the crypto market will just pick up whatever narratives are laying around at the time and start running with them, regardless of validity or sustainability.

So if that’s the setup, where are stocks going? Here’s a wild chart that may provide a clue-

Specifically as it relates to tech stocks, we know what’s been going on YTD – the rise of AI. That’s driven NASDAQ to +31% YTD, but as I mentioned last month, the lack of breadth to the performance has been disturbing-

As of 5/27/23.

As you can see, the stock market has been dragged higher YTD by very few names. Can that continue to work? Perhaps. What’re the chances funds keep flowing into “America’s Magnificent Seven” in 2H-23?

One factor to consider is the debt ceiling, which is tentatively set to be raised in June. As I mentioned last month, there’s the potential for this to suck liquidity out of the system and be negative for asset prices. This will likely come down to the sources of the cash that buys all the Treasury issuance coming down the pipe. If that cash comes out of money market funds and RRP, it might not hit asset prices much. If it comes out of bank reserves, it may have a more negative impact. Without getting into too much detail here, it remains an open question but there’s good reason to think a decent amount of that cash to buy Treasuries will come out of bank reserves, which will in turn put downward pressure on asset prices. TBH the domain experts all seem to be pretty focused on this but there doesn’t seem to be a clear consensus on how asset prices will be effected. We’re living in an age where Fed balance sheet actions have a larger-than-ever effect on asset prices, so the territory is a bit uncharted.

What does seem clear is that the Fed is likely very close to being done raising rates. Maybe they hike once in June and done. Maybe a “pause” in June, a hike in July and done. If inflation and labor data over the next few months remains stickier than hoped, maybe they have to hike twice more. Maybe they pause in June and the data is light and they’re already done now. Then we’re in wait and see mode as inflation goes from 5 to 4 to 3 through YE and hopefully to 2% in 1H-24. If the economy doesn’t fall off a cliff, that’s the soft landing everyone has been talking about for over a year. YTD, economic data has been pretty strong. The economy is growing, albeit slowly and the labor market is tight, albeit starting to loosen. A goldilocks soft landing feels too good to be true, so we’ll just have to watch how things unfold.

As for the charts, NASDAQ is coming directly into major Fibonacci resistance at the “golden pocket”, and it’s overbought. So I could see this chart consolidating around these levels for the next couple months.