Monthly Update || March 2022

Opening Remarks

Greetings from Ikigai Asset Management¹ headquarters. We welcome the opportunity to bring to you our forty-second 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, the importance of decentralization was on display in February to a degree rarely, if ever, seen. February saw the Canadian government freeze personal accounts for donating to the Ontario trucker protests, then asking crypto exchanges to help. February saw governments enacting massive sanctions against Russia via SWIFT, then asking crypto exchanges to help. February saw $20mm+ in crypto raised for Ukrainian war victims in a few days. As the saying goes, there are decades where nothing happens; and there are weeks where decades happen. I believe the world will forever look differently on decentralization after these recent events. The glaring need for a censorship-resistant digital transfer of value is becoming increasingly etched into the mind of believers and skeptics alike. Regardless of how you might feel about aiding truckers, Ukrainian refugees or Russian oligarchs, it is increasingly apparent that one day the government might come for your beliefs or your ethnic group. However unlikely that might have seemed a month ago, it seems more likely today.

Change is driven by motivation. Motivation is driven by inspiration. If you’re not paying attention, inspiration can pass right by you and you’ll miss it – too busy living your life doing whatever you’re doing. That’s why these moments matter so much. It’s why Gamestop and RobinHood mattered so much. It’s why deplatforming matters so much. Because these moments get big enough that they bubble up to the top of the collective consciousness. They’re front page news for days on end. They’re nearly the only thing you see on nearly every form of social media for days on end. That gets the everyday person thinking – what if I want to donate a little money someday to something I care about, and the government doesn’t like that?

So the everyday person starts thinking about and looking for alternatives. They won’t have to look far before they find crypto/Web3. They might have to get over the cognitive bias of “crypto is for scammers” and I wouldn’t blame them. But these types of events tend to be the illumination needed to see the crypto ethos in a new light. So maybe they buy some BTC and some ETH. Maybe they start doing some more research… this process can also more or less play out with uber-wealthy individuals too. Business leaders worldwide. Heads of state. Allocators of massive pools of institutional capital. Sovereign wealth funds. Sovereign nations. The inspiration that drives the motivation that drives change.

Likely even more important is a similar path that plays out but with developers. You know, the people that are actually going to build the stuff that’s going to lead to change. Because for as much as I love Bitcoin, it’s probably not all going to happen on Bitcoin. We’re not going to solve the Joe Rogan Spotify 1st amendment issue with Bitcoin. But we could do it with a Layer 1 smart contract platform and a dApp. There’s still a lot of technical innovation that needs to happen between now and then to get us there. So we need great devs to be inspired enough to be motivated to build the stuff that will enable change. If they’re neck deep in building whatever else they’re building, they might miss the spark that leads to the inspiration… unless they get hit over the head on social media for a few days about why decentralization matters. And then the wheels start turning. Next thing you know that killer engineer is quitting their FAANG job and heading to Web3 because the writing is on the wall about why it is worthwhile work. You get enough of that and you’ll change the world.

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February Highlights

• Russia Moves to Legalize and License Crypto Exchanges

• Biden Administration Asking Crypto Exchanges to Help Ensure Targeted Russians Follow Sanctions

• Crypto Donations to Ukraine Reach $20mm+ in Three Days

• State Street to Provide Crypto Custody

• BNY Mellon to Provide Crypto Custody

• Husband and Wife Arrested After DoJ Seizes $3.6bn in Crypto from 2016 Bitfinex Hack

• Congress Rejects Treasury’s Proposed Stablecoin Regulatory Regime

• Treasury Tells Senators They Will Leave Out Crypto Miners, Stakers, Developers and Hardware Providers from Upcoming Broker Reporting Rules

• IRS Rules to Not Tax Unsold Staked Crypto as Income

• BlockFi Settles with SEC for $100mm

• BlackRock Is Establishing a Crypto Trading Business

• USDC Provider Circle to Go Public Via SPAC at $9bn Valuation

• KPMG Canada Adds Bitcoin and Ethereum to Corporate Balance Sheet

• Canada Sanctions 34 Crypto Wallets Tied to ‘Freedom Convoy’ Trucker Protest

• New iPhone Feature Will Enable Bitcoin “Tap to Pay” Transactions

• Twitter Adds Ethereum Tipping Capability

• MicroStrategy Buys $25mm Bitcoin at $37,865

• Solana DeFi Bridge “Wormhole” Experiences $320mm Hack, Jump Trading Fills Entire Gap in 24 Hours

• Luna Foundation Raises $1bn to Create Reserve for UST Stablecoin

• Polygon Raises $450mm in Token Sale to Sequoia, SoftBank, Tiger Global, et al

• Helium Raises $200mm Series D at $1.2bn Valuation from Tiger Global, FTX Ventures, et al

• Alchemy Raises $200mm at $10.2bn Valuation from Lightspeed, Silver Lake

• Binance Takes $200mm Stake in Forbes

• Metaverse Land Investor Everyrealm Raises $60mm Led by A16Z

• MLB’s Washington Nationals Partner with Terra on First Ever Deal Between a DAO and Sports Franchise

• GameStop Partners with ImmutableX on $100mm Gaming Fund

• 1Password Partners with Phantom to Secure Solana Private Keys

• Arthur Hayes Found Guilty of Bank Secrecy Act Violations, Awaits Sentence

• ConocoPhillips Is Operating a Bakken Shale Bitcoin Mining Project

• Digital Identity Platform Verite Receives Support from Circle, Block, Coinbase, Metamask, Phantom, Solana, Compound and Others

Source: TradingView. As of 2/28/22.

The Trust Revolution, Tangential to War

First and foremost, my heart goes out to those effected by the Russian invasion of Ukraine. Many thousands of lives have been lost, including civilians. Many thousands more will likely die. At time of writing, the Ukraine invasion is a highly dynamic situation with an enormous amount of risk. Any number of scenarios could materialize soon that would lead to a catastrophic loss of life. I’m praying for a peaceful resolution.

Below I’ve included some thoughts that have come to mind as of late. Some of these have been broached at least in part in prior Monthly Updates but can be seen in a new way in the context of war. Few, if any of these are complete concepts, but instead are parts of ideas that still need further development. I welcome feedback.

• Humans have been around for ~200k years. Civilization for ~6k years. For the entirety of that time, humanity existed in a backdrop of scarcity. Just trying to live. Food. Shelter. Clean water. Try your best to not die before you reproduce. It was a brutal existence. For nearly that entire time, humans weren’t doing all that well at not dying.

• While frequency of war has ebbed and flowed some over human history, the vast majority of the time humans have been pretty steadily killing each other. The chart below makes that point. Back-to-back world wars, and the invention and detonation of atomic bombs, have successfully scared humanity into a time of relative peace over the last 70 years.

• Scarcity makes humans kill each other. When humans are scared that they don’t have enough, they get together in groups and go take things from other people outside the group. This leads to war. Civilization has been defined by this tendency. It appears to be deeply rooted in our DNA.

• Technological innovation drives increased life expectancy, increased quality of life and decreased scarcity. When man discovered fire, life got better. When he invented the wheel, life got better. Agricultural. Toilets. The steam engine. Electricity. Penicillin. All technological innovations that led to increased life expectancy, increased quality of life and decreased scarcity.

• The pace of technological innovation is increasing at an increasing rate. As technological innovation moves increasingly more digital, the pace of innovation speeds up. Innovation becomes increasingly less governed by the linear limitations of the analog world, and more governed by the super linear limitations of a digital world (i.e., an abstraction of Moore’s Law). Humanity can do different things to accelerate or decelerate this trend, but it is a fundamentally super linear rate.

• The opposite of scarcity is abundance. The coming decades will bring abundance driven by technological innovation. Hunger and malnourishment will be solved by technology. Cancer. Heart disease. Neonatal conditions. Dangerous work. These will be solved by technology, highly likely in this century and it might even be the first half. Life is set to get much better for humans because of technology.

• Access to abundance will be vastly different in different parts of the world and for different social classes. Rich Americans mostly already have it, while 800mm people around the world still face chronic food deprivation. While a rising tide of technological innovation-driven abundance will lift all boats, this divide will remain wide. 

• It will take many generations to remove the scarcity mindset and will happen at drastically different paces across the world and across social classes. 200k years of DNA purpose built to deal with scarcity cannot be reversed overnight. There is a saying- “hard times create strong men, strong men create good times, good times create weak men, and weak men create hard times.” I believe we have an opportunity in coming generations to rework this as – “Technology creates abundant times. Abundant times create peaceful men. Peaceful men create more technology.” 

• A nuclear world war is undoubtedly one of the gravest risks to human existence. We’re in a race to: 1) get smart enough to 2) build technology that 3) brings enough abundance that 4) leads humanity to be peaceful enough to 5) not blow ourselves up. As Martin Luther King said – “we have guided missiles and misguided men.”

• In a world where technological innovation leads to abundance, technology companies are poised to have immense power, even more than they have today. However, much control companies like Google, Apple, Facebook, Amazon and Microsoft have now (which is massive), technology trends like robotics, AI, and metaverse are poised to be even bigger than email, cell phones and social networks.

• If you know that to be true, it is worth asking the question - is the current concentration of power in tech companies causing societal problems? Said differently, do you trust centralized tech corporations to drive this bus toward an even deeper reliance on technology by humanity?

• Technological innovation fundamentally leads to wealth concentration. It is the foundational nature of network effect and Moore’s Law. I am not a socialist and I believe everyone should have the right to work hard and earn whatever they can earn, but it is still worth explicitly stating that extreme levels of wealth concentration have historically not had great outcomes. Could this time be different? Should humanity actively try to avoid that outcome through taxes or other redistribution methods?

• One aspect which might help you assess those questions is: technological innovation will increase the quality of life of the “99%” much more rapidly than the 1%, even as the wealth inequality gap grows. Quality of life improvements will be delivered more digitally than analog. Analog experiences by choice will be the activities of the wealthy. Analog experiences by requirement will be the activities of everyone else. I believe in the coming decades there will be a push/pull between wealth inequality and the societal problems it brings, and an attempt by the most wealthy to placate those societal problems through various avenues. We’ve seen this setup many times historically, and I think it will be a defining feature of our time.

• When assessing the above from the lens of “whether decentralization can help”, I strongly believe it can, it will, and in some ways it already is. A decentralized approach seems to carry a higher likelihood of not abusing the immense power that will be bestowed upon tech companies in the coming decades. It has a higher likelihood of avoiding the democratic and free market capitalism rot that is so apparent in 2022.

• That’s just decentralization on the technology side. Then you think about decentralization on the money side, namely Bitcoin. Money in some ways is also just a technology, but it’s one tremendously important piece of technology.

• As years and decades of technological innovation roll on, it will become clearer to humanity about the fundamental flaws in human decision making that can be alleviated by technology. It makes more sense to have the money be controlled by open-source software code instead of a dozen of former bankers in a back room. Distributed Ledger Technology and crypto assets can provide a certainty of Truth without Trust in a world where both are going to become increasingly more difficult to come by.

• Misinformation is going to be a defining challenge in the coming years and decades – What is the actual truth? We can’t trust what people say is the truth. People are already feeling this to an increasing degree. Younger generations feel this more acutely than older generations. Younger generations know Fox News and CNN are both equally full of shit. That’s why they listen to Rogan. Digital information moves instantaneously via internet and social media. Everyone has a video camera in their pocket. How will Truth without Trust be obtained? I believe decentralization can play a pivotal part.

• As an exercise, think about how aliens would look at humanity. Where would they, as an advanced civilization, objectively and with the benefit of hindsight see clear misalignment of incentives as it relates to the prosperity of humanity? Where would they see opportunities to deploy technology to alleviate those misalignments, for the benefit of humanity? I believe decentralization can play a pivotal part.

• It’s a decades long journey and there are numerous pitfalls for decentralization along the way. That is why I constantly say this – it remains to be seen whether Distributed Ledger Technology and crypto assets can fulfill all of, a portion of, or none of their potential to make the world a better place. And the outcome that eventually comes to fruition will be entirely a function of the people working towards each of those potential outcomes.

• I feel so blessed to be working on this, as challenging as it is at times. There’s a lot more we want to contribute. It’s worth doing.

Market Update – Liquid Crypto Asset Investing

Source: CoinMarketCap. As of 2/28/22. BCH includes SV. Aggregate DeFi from Coingecko.

I again want to reiterate here, before talking about something as trivial as financial markets when compared to human lives, I do not intend in any way to make light of the Ukraine invasion.

The first part of February saw traditional markets gripped by Fed tightening and inflation fears, while the last two weeks were consumed by the invasion of Ukraine. Crypto was on the global stage first with involvement in the Ontario truckers protest and again as a donation route for Ukrainians and a potential capital flight route for Russians.

It depends on how you measure correlation, but we observed BTC’s correlation to traditional markets peak in late Jan and decline for a month. It certainly didn’t feel that way while trading in the markets most February, and the below chart is noteworthy.

As you can see, Bitcoin traded structurally very similar to Nasdaq futures but was actually holding in better, then ran away with it on the last day of the month. In the context of the geopolitical events that occurred in February, Bitcoin +12% while Nasdaq was -5% is impressive strength.

From what we could tell, the crypto market was *extremely* bearish at the lows in Feb. And for good reason. The events and headlines were terrifying. Putin may be getting backed into a corner of sorts here and which could potentially lead to some very bad outcomes. But despite the fear present in the market, BTC never got closer than 4% above the Jan lows, so not even a proper retest. The bid strength was strong there but not enormously strong. It more seemed as though there weren’t enough sellers wanting to dump at the range lows, and the supply just dried up within hours of the official launch of the attack on Ukraine. This was the setup for the $6,000 short squeeze that occurred on the 28th, as those late shorts found themselves with very few offers to cover into.

As it currently stands, demand has now proven to overwhelm supply in the mid-low $30’s multiple times, including in the face of highly concerning macro events. How that supply/demand balance looks in the mid-high $40’s is less clear.

This current juncture is an especially important time to be watching Bitcoin’s (and in turn the rest of crypto’s) relationship to macro. It’s too early to say, but Bitcoin may be having a decoupling here. If that were to happen, with hindsight we would look at the recent macro events and crypto’s important role in them, and make a connection that buyers woke up to value of a non-sovereign, hard-capped supply, global, immutable, distributed, digital store of value. But it wouldn’t be my high conviction base case. If traditional markets remain under stress, like this -

…I would expect BTC to continue chopping in this broad $29k-$45k range. Even if the Ukraine situation doesn’t escalate further, which is far from a certainty, we still have Fed hiking to deal with. That said, assets price movements are often about the rate of change of expectations, and in that regard monetary policy expectations are meaningfully less hawkish than they were three weeks ago. We’ve gone from 100% likelihood of a 50bps hike in March to 100% probability of a 25bps hike in March in a couple weeks. We’ve gone from pricing in nearly seven (SEVEN) rate hikes in 2022 to about 4 ½ in a couple weeks. Perhaps Bitcoin’s recent price action is most accurately characterized by this shift in expectations regarding the pace of tightening. With four or five hikes in 2022, I do struggle to imagine risk assets doing particularly well with that backdrop, but I could certainly be wrong.

Inflation in 2022 should likely get worse as a result of the Ukraine invasion and the resulting sanctions. Energy prices, raw materials and fertilizer prices are soaring, which flows through to end products and services. The Fed’s inflation problem is worse not better than a month ago, even if they do have some political cover to tighten less. I’m honestly not sure how that shakes out for equities, bonds or crypto from here – it’s too dynamic of a situation at the moment. We’ll just have to wait for more to develop and then see.

Bitcoin Dominance has risen since the late Jan lows but remains in this historically low range since the market top in April 2021.

I continue to think Dominance only goes up a lot from here in a deeply risk-off scenario, which could materialize for any number of reasons in the coming months. If risk assets somehow thread the needle in 2022 and deliver decent returns, you could see Dominance break to new lows. I think my base case is probably for Dominance to chop high 30’s-high 40’s for the rest of the year. When the Fed eventually starts easing again, this will likely resume a structural downtrend.

Layer 1’s have almost all been deep underperformers vs BTC YTD. The one standout there is LUNA, which saw price move up 85% in a straight line in the weeks following their $1bn treasury backstop fundraise. This is a dogfight and the eventual value swing amongst these names will likely be measured in trillions

Specifically for ETH, a major catalyst is emerging in the not-so-distant future. ETHBTC price action has been flagging since May 2021. Either macro stress or the merge failing are likely the only ways this flag doesn’t resolve higher.   

Metaverse names have been crushed YTD, following a steep decline in December 2021. As crypto has been in a downtrend, these names have been punished harder than most. It remains to be seen whether that will work to the upside as well. Innovation in this broad sector will continue a breakneck pace regardless.

Over the last year, we have seen meaningful degradation in the quality of our signal from a number of quantitative metrics that contribute to how we manage the exposure of our fund. This is not new to us – market structures change and alpha decays. You end up on a never-ending treadmill of new alpha discovery and existing alpha decay, and that’s just part of the gig. Positioning metrics broadly are cloudier now than they have been in the past. On-chain metrics have experienced a similar degradation in signal quality relative to 2019 and earlier. Few, if any on-chain metrics can be utilized effectively in a vacuum, but instead can be combined with other signals to look for confluence across numerous factors. That said, the Bitcoin 1 year HODL wave is hitting all-time lows and in a firm downtrend. This is definitively bullish and indicative of being much closer to a bottom than a top.

Last month I mentioned the surprising display of buoyancy for NFT activity in January. That trend reversed in Feb, with activity levels declining ~50% from prior month levels. The trend isn’t going away, but that doesn’t mean it’s not a currently a bubble.

Closing Remarks

I hope you come away from this Monthly Update with a slightly better understanding of why decentralization matters. A better understanding of the problems that we currently face and will face in the future, and how decentralization can be part of the solution. I won’t stop talking about this topic – it’s at the heart of why Ikigai exists. I’ve learned an incredible amount over the last 4 ½ years of spending all my time on this, but it’s impressive to me how some things haven’t changed. I was worried about centralized power failing the people at multiple levels back when I was slanging long/short equities in 2017. That worry has been vindicated, and the mission is clearer today than it ever has been previously.

We are in the midst of digital technology weaving itself throughout humanity to a degree that would have read like a science fiction novel just a few decades ago. Digital technology is almost guaranteed to continue gaining increasingly more of a hold over our lives in the future as it does today. That trend feels inexorable. That trend will define humanity in the coming decades. Thus, with that trend comes enormous responsibility. Responsibility I believe is best wielded with decentralization.

Last week Mark Zuckerberg had a two-hour podcast with the brilliant Lex Fridman. Zuck showed at least an attempt at vulnerability and “down-to-Earth”-ness rarely, if ever seen from him. I highly recommend you at least listen and preferably watch the entire thing. I’m not sure if Zuck is a good guy or a bad guy. He’s not a glaringly good guy in my opinion, but he’s admittedly got a tough job. And he exists within the constructs of CEOs of major tech companies housed in publicly traded corporations. When I watch that interview closely, it brings even more clarity to the question of why decentralization matters, even beyond Canadian truckers and Ukrainian refugees. Power corrupts and absolute power corrupts absolutely. Decentralization serves as the technological platform to fight against that for the good of humanity. It’s a fight worth fighting and we’re here for it.

“Of flowers, the cherry blossom; of men, the warrior.”

– 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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