November 2023 - Monthly Market Update

November 1, 2023 Ikigai HQ

Monthly Update || November 2023

Opening Remarks

Greetings from Ikigai Asset Management¹ headquarters. We welcome the opportunity to bring to you our sixty-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, October in crypto was characterized by the parallel paths of a spot BTC ETF marching towards approval while Sam Bankman-Fried simultaneously marched towards a long prison sentence. The latter we will talk about in greater depth in the main section of this Monthly Update. The former was the overwhelming driver of the strongly positive price action for BTC, up 29% in October.

The way the spot BTC ETF approval news unfolded in October was CLASSICALLY crypto – filled with headfakes, misinformation taken as fact and non-events taken as significant. Regardless, the month-end result was: 1) no approval yet from the SEC; 2) a market that now strongly believes an approval is imminent; and 3) a Bitcoin price 29% higher. In terms of what is priced in currently, I believe the large majority of market participants now believe a spot BTC ETF (or multiple) will be approved by 3/31/24 at the latest. Some believe approvals will come in November, some believe January. I think only a small minority believe we won’t get the approvals.

Which begs the question, is BTC cheap here at ~$34,500 if spot ETFs are imminent? It seems like that would be the case. If we have spot ETFs approved and trading a month from today, I would think it’s highly likely price is higher a month from now than today. How much higher is a tougher call. A big driver of that will be the initial inflows into the ETFs once approved and trading. It seems to me that the longer these approvals hang out here as “imminent”, the stronger the initial inflows will be. Approvals in January would give the market another two months to “get ready” to deploy capital into the ETFs. Were the approvals to come in November, there might be a smaller pool of initial capital ready to immediately deploy in the first days of spot BTC ETF trading…or maybe a couple Bitcoin whales will come along and splash the pot with a billion or two just to get the market jazzed up. I could see that. Remember, “BITO” the futures BTC ETF reached $1bn of AUM in just two days, the fastest ever. But that was also a very different market, and the event marked the top of the cycle.

There was one other reason besides ETFs and criminal trials that crypto was on the main stage in October – terrorism financing (or lack thereof). On October 10th on the back of the Gaza conflict, the WSJ published an article titled “Hamas Militants Behind Israel Attack Raised Millions in Crypto”. The article stated that blockchain analytics firm Elliptic showed analysis that terrorist groups had received $134mm in crypto since mid-2021. Nic Carter researched these estimates, doubted their accuracy and began pushing back loudly and publicly. The report was brought up and debated in a Senate committee hearing. In the end, Elliptic issued a statement that the numbers used by WSJ weren’t accurate and the WSJ issued a correction. You can read a summary of the overall event here.

I call your attention to that overall situation partly because it was a major headline event in the month of October. But I also bring it up as an example of a form of effective self-regulation - a topic I’ve been writing about a lot over the last 11 months. What Nic led the charge on here and many others participated in, was a defense mechanism against a hostile actor towards crypto, wielding faulty data that painted an inaccurate picture of crypto. Nic has a big voice in crypto, and he used that voice to protect the best interests of this ecosystem. Like I’ve said numerous times here previously, this is not some impossible task. Different people have the ability to effect change in various ways and to varying degrees. But we all have our part to do to push this technology towards its potential to make the world a better place. What can I do? What can you do?

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October Highlights

BlackRock Updates Spot BTC ETF Filing with CUSIP and Language Around Potentially “Seeding” The ETF, Price Spikes
BlackRock Spot BTC ETF Ticker Reportedly Added to DTCC Website, Price Spikes; Ticker Removed from Website for Several Hours, then Re-added; Later Uncovered Ticker Was on Website Since August
CoinTelegraph Mistakenly Reports SEC Approves Blackrock Spot BTC ETF, Price Spikes and Partially Retraces
SEC Elects to Not Appeal Grayscale GBTC Ruling, Grayscale Refiles for GBTC Conversion
Numerous Spot BTC ETFs Update Specific Language in Filings, Potentially in Advance of Approval
Sam Bankman-Fried Criminal Trial Almost Completed; Highly Likely to Be Found Guilty and Sentenced to Decades in Prison
Numerous Spot ETH ETFs Filed; Grayscale Files to Convert ETHE to Spot ETH ETF
NYAG Files Civil Fraud Complaint Against Gemini, Genesis, DCG, Michael Moro and Barry Silbert
Judge Rejects SEC’s Motion to Appeal Against Ripple Ruling
Senate Committee Holds Hearing on Hamas Financing, Crypto Accused and Defended
Senator Lummis and Congressman Hill Write Letter to Attorney General Demanding Criminal Charges Against Binance and Tether
Jonathan Farnell, Former Head of Binance UK and Current CEO of Binance Payments Processor Bifinity, Quits
Head of Binance France Quits
Binance Ceases Accepting New Customers in the UK
Brazil Congressional Committee Recommends Filing Fraud Charges Against CZ and Binance
WSJ Article Claims $130mm in Crypto Sent to Hamas, Underlying Blockchain Data Found to Be Flawed, WSJ Forced to Issue Correction
BinanceUS Suspends USD Withdrawals, Announces USD Deposits No Longer FDIC Insured
Class Action Suit Filed Against BinanceUS and CZ in California for Market Manipulation by Harming FTX
FTX Estate Offers 15% Settlement for Customer Clawbacks on Withdrawals >$250k Within 9 Days of Bankruptcy Filing; Implies 85c Recovery for Customers
FTX Estate Announces Three Bidders in Ongoing FTX 2.0 Auction, Winner Picked by January 24th
Google Invests $500mm into AnthropicAI, Potentially Up to $2bn
Coinbase International Receives Full License in Singapore
GAO Rules the SEC Did Not Comply with Regulations in Issuing SAB 121, Which Was Illogical for Crypto Custodians
Gemini Sues Genesis Over $1.6bn of GBTC Shares
Tether Freezes 32 Addresses Associated with Illicit Activity in Israel and Ukraine
Kraken Forced to Share Customer Data with IRS Following Court Ruling
CFTC Sues Voyager CEO Stephen Ehrlich for Misleading Customers
SEC Dismisses Charges Against Ripple’s Brad Garlinghouse and Chris Larsen
Tether Appoints Long-time CTO Paolo Ardoino as CEO

See this content in the original post

Source: TradingView. As of 10/31/23.

Sam Bankman-Fried, As It Relates To Morals

I don’t know how much you’ve been paying attention to the Sam Bankman-Fried criminal trial that’s been ongoing over the last month. Probably less than I have. For better or for worse, I can’t look away. The testimony has been riveting. I don’t think my fascination with the trial has been from a negative or emotionally unhealthy place. I don’t hate Sam and I forgive him for what he’s done. And the unfolding of the facts of the case has been captivating.

One of the weird things about observing this trial has just been the manner of observation. There are no cameras allowed in Federal court. So we haven’t actually seen a single moment of the trial. Instead, you have reporters either in the courtroom or in the overflow room, watching the trial on a CCTV. Those reporters have chosen to report on the case in variety of ways, but if you want the next best thing to being in the courtroom in real time, you’ve had to read the hundreds of real-time tweets from @innercitypress. He’s live tweeted the entire trial. Reading the endless Tweet threads has been like some kind of 90’s DOS text-based criminal mystery game or something. Like I said, weird.

There have been many others reporting on the trial. I think BitMEX Research has probably done the best job of summarizing while also including full quotes from the transcript. If you wanted to spend a few hours fulling catching yourself up on the case, the link above is ideal. Laura Shin has also done a great job with podcasts that summarize the trial days.

Closing arguments are being made this week and the jury will then enter deliberation. TBD on how long they will deliberate, but we could have a verdict by this time next week. My view is that Sam is highly likely to be found guilty of multiple crimes by the jury. Then the sentencing is done by the judge, who has shown repeatedly in this trial to… not be much of a fan of Sam. At this point if I were a Vegas oddsmaker, I would set the over/under on his sentence at 25 years. It strikes me as incredibly unlikely Sam won’t go away for at least a decade and probably a lot more. If Judge Kaplan gave him 40 years, I wouldn’t be shocked. Madoff got 150. WorldCom CEO got 25. Enron’s Skilling got 24. Elizabeth Holmes got 11.

There are many angles of potential discussion around Sam’s criminal trial. I want to focus today on one overarching point as it relates to morality. This is a topic I’ve touched on numerous times over the years here, and more fervently in the last 11 months since the FTX collapse. Privately, I’ve been thinking and writing about morality a lot this year, as I have undergone a significant personal faith exploration. As part of that journey, I’ve been writing a document (which I haven’t shared publicly) about my faith and six major factors I see as significantly impacting my faith – religion; quantum physics/cosmology; evolution; philosophy; consciousness; and technological innovation. The document is ~35 pages at the moment and I think it’s about halfway done. I’m not sure what I’m going to do with it. It’s probably better consumed as a series of blogposts than an actual book, because it contains many hyperlinks to references. So maybe I’ll end up doing that. I may end up on some podcasts talking about these things or even starting my own podcast to explore these things. In any case, I look forward to sharing more publicly.

I mention all that to say that I’ve really been giving a lot of consideration to morality lately, and specifically how morality presents itself at the intersection of faith, religion and evolution. There is a fascinating field of study on the evolution of morality, or how morals evolve through time. There is a fascinating field of study on the morality of primates, where we can examine the moral frameworks naturally established by great apes in order to better understand our own tendencies towards morality. If you’re going to consider the existence of God, pretty quickly you ask yourself about the nature of how God interacts with humanity and why. In most any answer, moral frameworks quickly emerge – good vs bad, right vs wrong, rewards vs punishment. All major world religions have a moral framework attached to them – Jews, Christians, Muslims, Hindus, Buddhists and the like. Those moral frameworks have more in common than they have differences, although significant differences certainly exist. When it comes to Sam’s morality, something entirely different was present. Sam’s moral framework was distinctly agnostic/atheistic.

Over the last year we have garnered significant insight into Sam’s moral framework through: 1) public commentary since the FTX collapse; 2) Michael Lewis’ book; and 3) the ensuing criminal trial. Sam’s moral framework is a weird one. Additionally, you must consider the role of mental illness, which appears to have been a part of Sam’s life for a long time. You must also consider Sam’s choice of pharmacology, presumably in response to that mental illness. And lastly, you must consider Sam’s parents, and how they raised him.

I just gave you a couple hours of reading to do there with those links and maybe you’re not going to read them and that’s fine. You can take my word for it if you like.

Sam was born into a home with a warped sense of morality – utilitarianism. Like most of us, his own morality was heavily impacted by his parents’ morality. Barbara Fried wrote an article titled “Beyond Blame”. Sam grew up to be a person unencumbered with the traditional concepts of right and wrong the way most of us are. Like a serial killer in some ways.

Effective altruism is a movement that seeks to drive altruistic actions not through the emotion of empathy but through the concreteness of logic. This strikes me as a dangerous approach towards motivating people to do good in the world. The effective altruism movement was a natural fit for Sam’s warped views and served to warp his morality further still. Effective altruism and utilitarianism went hand-in-hand for Sam, which is not uncommon. The two combined in a way that allowed him to justify the means through a hypothetical, wager-based ends. Enormous fraud and financial collapse ensued.

Sam is likely a person that has struggled with mental illness for a long time – depression and inability to feel happiness. He is likely on the autism spectrum. I can’t help but view the depression as intertwined with the type of household he was raised in. It’s easy to imagine how sad it must have been being the child of Barbara Fried and Joseph Bankman. Sam medicated these illnesses in a way that likely impaired his sense of judgement and risk, potentially to a significant degree.

The parents. Utilitarianism. Effective altruism. Mental illness. Prescription drugs. All of these ingredients mixed together to form a person capable of doing the totality of what Sam did – the success in the run-up, the crimes, the collapse and his response since the collapse.

Over the last year, I have not seen what I would consider true remorse or accountability from Sam. He has feigned remorse and feigned accountability, but it is half-hearted at best and entirely unconvincing. Perhaps that will come with time, after being found guilty and sentenced. I could imagine the unwinding of those factors mentioned above while sitting in prison. And I could imagine that unwinding process leading to genuine remorse and accountability.

Agnostics and atheists have spent plenty of time forming and defending a moral framework devoid of a God - enlightened self-interest; beauty; reciprocity; cooperation; pleasure. All frameworks used to enact morality without triangulating that morality around God. And I won’t sit here and argue those frameworks are without merit. In some ways there is significant overlap with the morality of major world religions. But we can safely say that humanity got this far with a belief in God, and the belief in God drove actions that, in totality, pushed our species towards incredible advancement. Despite all the pain and death caused in the name of God, our species’ belief in God has made an enormously positive impact on the human trajectory. It’s scary to me to imagine the most developed societies of humanity so rapidly turning away from an empathy-driven, God-based moral framework. I’m not saying humans have enacted religion perfectly - Lord knows that’s not true. But when I observe atheistic moral frameworks devoid of a God, it is not my kneejerk reaction they are superior to a God-based moral framework. The saga of Sam Bankman-Fried is this point personified.

Humans have a deep tendency towards hero worship. You look across the course of human history, and this tendency seems to be engrained in us. It is a dangerous practice and that is especially true in the wild west of crypto, with its loose regulations and vulnerability to manipulation. Sam, without a doubt, was worshipped as a hero in crypto. I did it myself. His rise was meteoric. The richest guy in the world under the age of 30. He acted emotionlessly based on “EV”, and we praised him for it. He barely slept and took large quantities of mind-altering prescription medications, and we praised him for it. He refused to allow proper governance of his company, and we praised him for it. And all that came back to bite us horrifically.

My point is not that if Sam had believed in Christianity’s “turn the other cheek” or Hinduism’s karma, that he wouldn’t have done what he did. I don’t know that to be true, and people claiming to be Christians and Hindus and everything else have done all sorts of terrible things over the years. I understand why religious morality is getting a bad rap lately. Catholic priests really did a number on people. So did radical Islamic terrorists. So did racist and homophobic Baptist preachers. The list goes on. We live in the information age, so the curtain has been pulled back more fully and more widely to reveal the brokenness of religion in developed nations. Science has also pulled a lot of people away from a belief in God because science is getting good enough to show us that the Bible was not literally accurate. These advances in science, which seem to contradict many traditional religious beliefs have made a lot of people question the whole premise. I get that. I understand why people would be turning away from God and the accompanying moral framework.

My point is I believe that would be a mistake. A mistake at the individual level and a mistake for humanity. Morality without God is shaky, unproven grounds for humanity, at least at scale. Joseph Bankman and Barbara Fried and Sam Bankman-Fried tried this approach and it ended with incredible pain across many, many lives – the diametrical opposite of “effective altruism”.

I invite you to look through the flaws inherent in religion to find a deeper connection to our Creator, and to let that be the guide to your life. Feel free to reach out if you want to talk about any of this sort of thing. It’s been top of mind for me.

Market Update – Liquid Crypto Asset Investing

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Source: CoinMarketCap and CoinGecko. As of 10/31/23. BCH includes SV.

Bitcoin was up 29% in October. As discussed, this price action was driven essentially exclusively by a series of events which caused the market to significantly increase its likelihood of a spot BTC ETF being approved, and potentially soon. So where does that leave us?

source: TradingView. As of 11/1/23.

I’ve shown the above chart the last two Monthly Updates and it’s played out impressively accurately. Price is now firmly in the orange “ETF approval” window and price is sitting a bit below the first yellow X target. To be clear, I’m not married to this specific price target and I’m not necessarily going to be selling Bitcoin if and when price gets there.

Price action in the coming weeks/months as spot BTC ETFs assumedly get approved is going to be driven largely by how much we pump in the run-up to the actual approval and in the days between approval and actual launch. At current prices of ~$34,500, I don’t think we’re set up for a “fade the news” situation where price dumps upon actual ETF launch. Now, let’s say we ran to $40k this month, get approval at month-end and start trading ETFs in early December. And let’s say price goes from $40k to $47k in the days after approval before launch. At that point, I would be more worried about a “fade the news” scenario where initial inflows into the ETF disappoint and price trades off sharply.

There’s also a path where initial inflows aren’t disappointing and price rips higher, regardless of its level. Many analysts have provided estimates of initial ETF inflows and how price might respond. This one from Alex Thorn is reasonable. A lot of this boils down to the question “how much capital is begging to get into BTC right now that is unwilling or unable to do so by any other avenue?” It’s a tough question to answer. At current prices, I think you have a good amount of cushion for however that might play out initially, assuming ETF approvals are around the corner.

Another factor to consider for spot BTC ETFs is what happens with the GBTC conversion. There were several significant updates to this situation in October. The SEC did not appeal the Grayscale ruling. Grayscale filed an S-3 and did not file a 19b-4. Also, Grayscale’s parent company DCG was charged with civil fraud by NYAG. This is a good thread on how narrow the path is for the SEC to deny GBTC’s conversion. So it still seems like conversion is likely going to happen and there’s a good chance it will happen alongside multiple spot BTC ETF approvals.

If for some reason GBTC conversion is delayed while others are approved, this is even more bullish for BTC price. GBTC holds 622k Bitcoin. That’s a staggering amount of Bitcoin. Once GBTC converts to an ETF, those Bitcoin can be sold onto the open market as shares in GBTC are redeemed. This is how ETFs work and how they are different from the current Trust structure of GBTC. ETFs have daily share creations and redemptions where they buy and sell the requisite amount of the underlying assets. This brings up the question of how much net selling of BTC would GBTC end up doing once it converts, as investors redeem shares. It’s hard to say. I think it’s easy to imagine a good amount of GBTC holders that just don’t want to deal with Grayscale anymore (incredible headache over last 18 months) and prefer BlackRock as an ETF counterparty vs Grayscale. GBTC holders’ tax basis would also be a material consideration.

Assuming GBTC conversion and multiple spot ETFs are all approved and start trading at the same time, there has the potential to be some wonky short-term price action. Perhaps market makers have enough balance sheet capacity to warehouse the BTC and dollars required to simultaneously redeem GBTC and create a bunch of new BTC ETF shares, but there’s potential for real volatility as that initial wave gets worked through.

Below is the other BTC chart I’ve posted the last two months. Note that price is now currently ~25% higher than the levels shown here.

Source: TradingView. As of 8/29/23.

The green path above is basically the path that has almost played out so far, although we don’t have an actual approval yet. The red path continues to be possible but quite unlikely. Yellow path is still in play, although I would shift that entire line up ~25% to reflect recent price action. As long as ETF expectations continue to be “very likely and in March at the latest”, I would guess price doesn’t pull back much in the interim, with the big caveat being something happening with Binance. Which brings us to the white path, which I also believe is still in play.

Below is a letter Senator Cynthia Lummis and Congressman French Hill sent to the Attorney General on October 26th.

I would consider this a significant ratcheting up of the pressure on Binance. Lummis sits on the Senate Banking Committee. She is also the most outspoken proponent of Bitcoin in the Senate. She is very plugged in to all things crypto in Washington. So the timing of this letter is quite interesting. My kneejerk reaction is the letter is more of a function of the terrorism financing concerns than anything ETF related. But there is a chance Lummis got wind of the SEC being reticent to approve spot BTC ETFs with Binance (and Tether) continuing to have such a large influence on BTC prices. In any case, Binance is not out of the woods yet at all. Right now, it appears we will get spot BTC ETFs before we get a resolution to the Binance situation, but the order in which those occur is still up in the air.

One notable recent shift in BTC market structure is the increasing dominance of CME BTC futures vs other venues. At the risk of stating the obvious, the average market participant buying and selling CME BTC futures is QUITE different than the average market participant buying and selling Perps on Binance. The below chart shows the % of total BTC Open Interest that is on CME over time-

Source: Will Clemente and Glassnode. As of 10/31/23.

The very recent spike up shown above from 17% to 23% is likely institutional capital frontrunning the ETF hype. But there is an overall uptrend that has been occurring all year. The table below shows CME on the verge of passing Binance for the largest Open Interest-

Source: CoinGlass. As of 11/1/23.

This is a noteworthy trend and has the potential to significantly alter price discovery for Bitcoin. Should we see spot BTC ETFs approved, that price discovery will concentrate even more around institutional capital. BTC will likely never trade the same.

Aggregate Alt Market Cap was +11% in October, significantly lagging BTC, which makes sense from a fundamentals perspective. BTC was up so much in October because of ETFs, and ETFs are a Bitcoin-centric catalyst (at least initially).

Aggregate Alt Market Cap is currently at about the mid-point of its 18-month range (blue box)-