Monthly Update || October 2024

Opening Remarks

Greetings from Ikigai Asset Management¹. We welcome the opportunity to bring to you our seventy-third 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 has tremendous potential to make the world a better place and create trillions of dollars of value in the process.  

We believe we are obligated to be shepherds of this technology – to do our part to push crypto towards fulfilling its potential. We strive to be an objective, reasonable, well-intentioned voice of truth amongst a chorus of biased, fallacious, pernicious opportunists. It’s an honor that we take seriously.

To that end, September brought positive price action for assets across the board as the Fed began its easing cycle with a 50bps rate cut, and China announced sweeping easing measures across many areas of its economy and financial markets, totaling a half trillion dollars. But it wasn’t just the two largest economies in the world embarking on easing. Central banks across the globe cut more in aggregate in September than any month since peak Covid. Whoah.

How important is China’s series of easing announcements? This strongly bullish clip from David Tepper went viral and he’s one of the most successful investors of all time. It’s worth the watch. The below chart explains a lot of why Tepper would be so bullish – when the CCP does stuff like this, Chinese equities rip.

After struggling all year, China’s economy is finally going to get some much needed “Brrrrr”, courtesy of Beijing, and financial markets are responding strongly.

It is now just a fact that nearly every central bank is easing, and the largest of them all, the Fed, is easing at a time when the US economy appears to growing at approximately 3%.

It’s quite a bullish backdrop for risk assets. Gold, SPX, DJI and global equity indexes all made new ATHs in September. NASDAQ and Russell are only a few % off ATH. YTD the SPX has had its best first three quarters since 1997. Whoah.

SPX also has some very strong seasonality tailwinds-

Unfortunately, there is some amount of WW3 risk present at the moment, and there is constantly a looming potential for Ukraine or Israel to escalate, but the market seems to be ok with it at the moment. The market also appears relatively unconcerned about the uncertainty looming with the election next month – it seems like the general view is both candidates are going to spend a lot either way, and monetary policy is on its own separate dovish path with Jay at the helm. That’s something like a Goldilocks backdrop. What’s it mean for BTC? 

Well, BTC has a relationship to global liquidity that I’ve been talking about for years here, illustrated perfectly below-

BTC also just successfully put up rare positive performance for September (historically BTC’s worst month) - only the fourth positive September in BTC history. It’s a small sample size, but the historical outcome is noteworthy -

Now we’re in October, which is the second strongest month of the year for BTC, behind only November. Additionally, it’s also another small sample size but 100% of election years saw positive BTC price performance in October, November and December.

So we got all that going for us. Additionally if the halving cycles hold, showtime starts now –

Or if you want to frame the cycles based on cyclical lows instead of the halving, it also looks like showtime-

It all makes it pretty easy to be bullish BTC near-term. I’ve written at length here previously how consequential the elections should be for BTC and crypto, and how the price action will likely diverge significantly in a Trump vs Harris win. Maybe Trump is just going to win, and all the supportive macro and seasonality bullishness I mentioned above will just dovetail together with a Trump win. But perhaps it’s possible for BTC (and maybe even crypto?) to trade ok (aggressively bought dip?) in a Harris win. The backdrop just might be that sweet. 

September Highlights

• SEC Approves Options on IBIT, Still Waiting on CFTC and OCC

• BTC ETF Inflows Rebound, Totaling $1.3bn in September

• Trump and His Sons Officially Announce DeFi Platform “World Liberty Financial”, To Sell WLFI Token

• MSTR Purchases 18,300 BTC for $1.1bn at ~$60,408

• MSTR Purchases 7,420 BTC for $458mm at $61,750

• BlackRock Amends Custody Agreement with Coinbase, Now Requiring Processing Withdrawals to Public Address

• Harris Makes Single Supportive Statement for “AI and Digital Assets” at Fundraiser

• BNY Mellon First Bank to Receive SEC Exemption from SAB 121

• Friend.Tech Team Renounces Control of Project, No Longer Working on It

• Crypto Securities Exchange tZero Receives Second Crypto License from SEC and FINRA

• Telegram App Changes Terms of Service, No Longer Protecting Chats from Government Inquiry

• SEC Charges DeFi Platform Rari Capital with Misleading Investors and Acting as Unregistered Brokers

• SEC Charges Exploited DeFi Platform Mango Markets for Offering Unregistered Securities

• SEC Settles Charges with TrueUSD for $670,000 for Improper Custody

• SEC Settles Charges with eToro, eToro to Cease Trading Nearly All Crypto Assets

• SEC Settles Charges with Galois Capital for $225,000 for Minor Rules Infractions

• SEC Delays Approval of ETH ETF Options

• Jump Launches Frankendancer on Solana Mainnet, Firedancer on Testnet

• Coinbase Launches Wrapped BTC cbBTC on Ethereum and Base

• Tron, Tether and TRM Labs Start Financial Crime Fighting Force

• DeFi Platform Penpie Exploited for $27mm

• Polygon Project Transitions MATIC Token to POL

• Grayscale to Launch XRP Trust

• Caroline Ellison Sentenced to Two Years in Prison for FTX Fraud

• Changpeng Zhao Released from Custody

SOURCE: TRADING VIEW. AS OF 9/30/24.

 The Transformative Potential of BTC ETF Options

ICYMI, the most significant event in crypto for the month of September was the SEC’s approval of IBIT options. However, the options haven’t started trading yet as they still need approval from the CFTC and the OCC, which aren’t forced to stick to a timeline like the SEC. There aren’t firm estimates for when trading of IBIT options will actually launch, but there is conjecture for around year-end. Presumably, options on other spot BTC ETFs would closely follow. 

It's not that there aren’t any options available on BTC currently – there are. But in various ways, they are inferior to IBIT options. Deribit is the market leader with ~80% market share in BTC options at ~$15bn open interest. But Deribit is a loosely regulated offshore crypto exchange with bad counterparty risk and inefficient capital requirements. CME offers regulated options on futures, but due to capital requirements they have seen limited adoptions, with ~$2bn open interest. There are also options on BITO, the CME futures ETF, but BITO is an inferior instrument due to decay from the futures roll. The assumption is that IBIT options will enjoy numerous large makers and thus the deepest liquidity. Presumably the capital requirements from prime brokers will also be the most efficient out of Deribit and CME – so there’s good reason to think they will be popular instruments and transformative for BTC market structure. How might BTC’s market structure transform?

First I want to point you to Josh Lim’s tweet thread and recent podcast on IBIT options. Both are worth your time. Josh is the former head options trader at Genesis and Galaxy, so he’s traded about as many BTC options as anyone.

One view is that IBIT options are going to open the door for a gamma squeeze on BTC. This view was enthusiastically unpacked by Jeff Park, Head of Alpha Strategies at Bitwise, in this very viral post-

Parts of Jeff’s post I agree with – I do agree that IBIT options will likely be transformative. Other parts I disagree with. I think a “negative vanna gamma squeeze” is unlikely (although not impossible) because Jeff mischaracterizes BTC’s scarcity. BTC has had cash collateralized perps for years, and these unequivocally reduce/remove BTC’s inherent scarcity. The same is true for cash- settled CME futures. I think Jeff also misjudges how the crypto derivatives market would dynamically respond to a gamma squeeze should one occur – I doubt we get a GME-style squeeze on a >$1tn asset.

My guess is that IBIT options will allow for significant amounts of new capital to enter into BTC (by way of the ETFs) that previously was unable or unwilling to do so. Boomers LOVE yield. And you can generate a lot of yield by selling IBIT calls against an IBIT long. Boomers HATE BTC’s big drawdowns – they’re terrified of them. Boomers will buy puts to protect downside. All kinds of structured products will be introduced in the coming years, offering many different payout profiles to fit various investors’ needs. My guess is it will all add up to higher BTC prices and lower realized volatility.

BTC’s realized volatility has already been trending lower for years-

My guess is IBIT options will serve to further that trend, while simultaneously pushing BTC’s price higher, just probably not GME-style.

Market Update – Liquid Crypto Asset Investing

SOURCE: COINMARKETCAP AND COINGECKO. AS OF 9/30/24. BCH INCLUDES SV.

BTC was +7% in September in only its fourth positive September ever and now stands at +50% YTD, outperforming the very large majority of Alts by a wide margin, including ETH which was +4% in Sept and +14% YTD.

Last month we talked about the high-volume capitulatory puke in early August around the Yen carry trade unwind. We talked about how that had the potential to be high timeframe bottoming event. Fast forward a month, and it is now looking quite likely that early August was a major bottom. Shown below, September price action brought a high timeframe trend change-

When I glance at the YTD performance for BTC vs macro assets (table at the beginning of this letter), BTC is about in-line. +50% vs SPX +21%, Gold +27% and DXY -1%. But zooming in specifically on Q3, BTC traded pretty crappy. BTC was +1% in Q3 vs SPX/Gold/DXY +6%/+13%/-5%. You give me those macro stats, and I would have expected BTC to be up 20% or more. What were the drivers of BTC’s Q3 relative underperformance?

The first thing I’d point out is that BTC got overheated in Q4-23 and Q1-24. Shown below via weekly RSI-

The good news there is, as you can see, we have now had a nice reset.

I think the primary reason BTC dragged in Q3 relative to macro was the supply overhang. GBTC redeemed $1.6bn in Q3, albeit less than the $3.7bn in Q2 and the $14.8bn in Q1, but still a significant offset to the other ETF inflows, which totaled $5.9bn in Q3 vs $6.1bn in Q2 and $26.9bn in Q1.

In addition to GBTC, the US government has been selling seized Silk Road BTC this year, including $593mm in August. They have a lot left to sell, so it is noteworthy that Trump has pledged not to sell this BTC if he wins.

Probably the most impactful supply overhang was the German government hammering 50,000 BTC in less than a month, including 40k in a single week in early July.

All things considering, the market actually ate that 50k pretty well, only down ~20% peak to trough and bouncing aggressively-

It’s worth contemplating who bought all that BTC – what “type” of buyer. You could imagine a meaningful amount of that demand coming from opportunistic “special situations” type of buyers rather than long-term HODLers. Those special situations buyers would likely be taking profit on those buys, which could be dampening BTC price action in the weeks and months that followed.

Lastly, Mt Gox distributions were likely a supply overhang and may continue to be so. This one we don’t know exactly how much selling has occurred. We do know that the Mt Gox estate transferred nearly 100,000 BTC out of its custody wallets to major exchanges the back half of July-

Those BTC were distributed to Gox creditors, but then we don’t what happened next, once the BTC was in creditors hands. I think its safe to say that: 1) some amount of that was sold immediately; 2) some is continuing to be sold today; 3) some will be sold at a later date and price; and 4) some will never be sold or not anytime soon. I don’t have a sense of how much goes in each of those four buckets, but I do think Mt Gox has been somewhat of an overhang. My guess is going forward, it will have little/no impact on price action (i.e., if you were going to aggressively sell, that probably already happened).

This will be the last time I show the chart below, first shown here September 1, 2023 –

I don’t have a strong view on where BTC will be trading a month from now, immediately prior to the election. Polls and Polymarket have the race as essentially a toss-up. I have no edge or unique insights there. You could estimate “fair value” if you assume a given price for a Trump win vs a Harris win. I’m not highly convicted of that, but I could assume a Trump win would get you low $80’s by Thanksgiving and a Harris win would get you a sweep of the lows by Thanksgiving. That would look like this-   

If the election is a toss-up and my price predictions were accurate, fair value would be $65.3k, right around were we just topped out at the end of Sept. So that’s kind of interesting.

Lastly on BTC I’ll highlight some on-chain valuation metrics. NUPL had a decent reset from overbought levels earlier this year-

Reserve Risk has also reset after being mildly overheated-

MVRV had a nice reset-

When looking at BTC price compared to five different valuation metrics, we should have smooth sailing up to ~$100k-

Overall, on-chain metrics, while far from perfect, provide some value in understanding BTC’s current price relative to its history… and it looks bullish.  

ETH continued to underperform BTC in September for the sixth month out of the last seven (save the ETH ETF month). ETH was -2$% in Q3 vs BTC +1% and has underperformed BTC by 36% YTD. The narrative and general vibe around ETH is absolutely atrocious – the worst I’ve ever seen it since I’ve been in crypto. The ETH community is in shambles and a Trump win is the only identifiable positive catalyst on the horizon. ETH has been hated and oversold for months and keeps getting more hated and more oversold as the next month passes. Brutal. Historically, you want to be buying that kind of sentiment with both hands – but things change in crypto and perhaps things have changed with ETH and its relative market cap is in inexorable long-term decline vs BTC. But over the next month, it’s a Trump trade.   

Looking at Alts broadly, they have mostly underperformed BTC by a lot YTD, although there is quite a broad dispersion of performance across Alts-

The average YTD performance of the Alts above is -27% vs BTC +46% - crazy underperformance. This is healthy, given how little Alts have to show for themselves in terms of narrative, use cases and traction. Below is a chart I’ve been showing for months, Adjusted Alt Dominance, aka Alt Szn. 

Previously I had noted the similarities of the yellow channels and contemplated what might happen if the pattern continued to repeat itself (green line). Well that is now firmly off the table. We got no summer 2024 Alt pump vs BTC and ETH. Even in a Trump win, I would not expect this to increase meaningfully in the near-term – perhaps a bit. Because BTC and ETH will likely go up approximately as much as Alts broadly in a Trump win. In a Harris win, you certainly could get something like the green line – a big dump in Alt market cap relative to BTC and ETH. 

A repeat of the breathtaking run in Alts in early 2021 (purple box) is very unlikely in the near-term in my view. There simply isn’t anywhere near the inflows into Alts required for that sort of move, even more so relative to the size of the token unlocks (a problem we’ve discussed here previously). A Trump win should drive a meaningful pop in Alts but I would be warry of how long that pop may last unless something really changes with Alts. Otherwise, we’ll likely keep playing stupid games and winning stupid prizes – ridiculously overvalued infrastructure and nihilistic memes. Sigh.   

Closing Remarks

I took the “Pervasive Quiet Quitting” piece from last month’s letter and turned it into a tweet thread that got pretty good traction. I had a bunch of podcasts reach out to have discussions about it – Luke Martin here, The Block here and Coinage here. I got a lot of feedback on it and the theme of that feedback overall was strong agreement (with varying levels of reluctance). So as it turns out, I didn’t make up or misread the Quiet Quitting – it is in fact pervasive in crypto at the moment. 

As I mentioned at the beginning of this letter, I am entertaining the idea that the macro might be so supportive in the coming months that BTC/crypto can trade pretty well regardless of who wins the election. It is still pretty safe to say that a Trump win will be meaningfully more positive than Harris, but perhaps Harris won’t be as damaging as I’ve thought in prior months. I don’t know how to weight the likelihood where Harris wins and BTC/crypto trade ok, but I can at least imagine how/why that would happen. But there is certainly a path where Harris wins and the Pervasive Quiet Quitting hits another gear, and we get something more like an exodus. 

A Trump win will almost certainly reinvigorate the space in a significant way. The vibes have been pretty off all year for crypto considering BTC is +50% YTD, so a big pickup in excitement from a Trump win would be coming off of pretty low levels. That excitement will carry sentiment well into next year as we get to see exactly how supportive a Trump administration is for crypto and over what timeframe are they getting things done. The firing of Gary Gensler alone will likely warrant a parade.   

Through that period, there will likely remain an undercurrent of crypto needing to “put up or shut up”. Stablecoins have product-market-fit and Bitcoin has product-market-fit and all the rest of it is a ton of question marks at best, at least at valuations anywhere near here. This attitude of “put up or shut up” is healthy for the crypto ecosystem, even if it doesn’t generate positive returns for Alts. We need more of this attitude, not less.

I write these pieces like “Pervasive Quiet Quitting” (and a bunch of others over the last ~2 years) to be a call to action. Crypto NEEDS to change – the current structure of this ecosystem is unlikely to be sufficient to deliver on the technology’s potential to change the world. We need change in order to put up, or we’re at risk of shutting up.

"One who smiles rather than rages is always the stronger.""

-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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