Monthly Update || September 2022

Opening Remarks

Greetings from Ikigai Asset Management¹ headquarters. We welcome the opportunity to bring to you our forty-eighth 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…First things first, forty-eight of these in a row is an accomplishment I’m proud of. Couldn’t have done it without my team. I look at the two paragraphs above, which have remained nearly unchanged for four years, and it feels surreal we’ve been dedicated to that mission statement since October 1, 2018. We’re appreciative that you’ve taken this ride with us. There’s so much more to come.

Now. To that end, August brought a reversal of the bounce from July across nearly all asset prices as the short squeeze dynamics we discussed here last month abated, and Powell reaffirmed his hawkishness in an eight-minute speech at Jackson Hole. NASDAQ was -5%, BTC -14% and ETH -8% as the 10yr Treasury Yield marched in a straight line from 2.5% to 3.2% in August.

At time of writing, asset prices across the board look vulnerable and crypto is no exception, as the correlation remained stifling in August.

You might bet that with the upcoming Merge for Ethereum, at least ETH could decouple from the chokehold of the NASDAQ. But honestly I don’t love that bet. For as big of a narrative as the Merge is (I believe it’s the most significant catalyst in crypto history), if traditional markets are in turmoil, it would be my base case the positive price impact from the Merge would be delayed at best and cancelled at worst. Crypto-native capital has been decimated in the past four months. CeFi borrow/lending businesses have pulled back nearly every dollar of loans they could – a fraction of the leverage from that once-massive corner of the market remains in-place currently. The crypto-native capital that still remains is mostly long ETH, but I believe that aggregate capital base is insufficient to carry ETH price much higher in the near-term in the face of significant, multi-pronged macro risks. I believe there has never been more large pools of traditional capital ready, willing and able to buy ETH in size. But I do not believe much of that capital will be willing to step in and buy ETH leading into and after the Merge if the macro backdrop is as ominous as it currently appears to be.

There is significant risk in QT, which basically hasn’t even started yet-

Because the Fed raised almost a trillion dollars in the TGA earlier this year and has been working that off since April, to the tune of ~$400bn.

If the Fed grants large US banks a Supplemental Leverage Ratio exemption (as they’ve done before), the liquidity zapped from the market due to the large impending Treasury issuance through year-end may be manageable. If the exemption isn’t granted, it’s unclear how much QT asset prices can take and remain at current (vulnerable) levels. At Jackson Hole, Powell made it crystal clear he’s willing to inflict short term pain in order to control longer-term inflation expectations. That likely means tighter financial conditions and reversing the two months of loosening we’ve just seen.

That would likely not bode well for asset prices, crypto included. With Powell having his Volcker moment while Japan and China are easing and the EU is potentially on the verge of economic collapse (more on that in a moment), a stronger dollar feels pretty likely. The DXY chart looks like it could go test the dotcom highs, which would make sense in the context of the current macro environment.

That would likely be a challenging backdrop for the NASDAQ and as such a challenging environment for crypto, because “It’s All One Trade”.

That brings us to the EU natural gas crisis, which I believe is the most significant macro risk currently in the market but is admittedly difficult to get a good handle on. I won’t pretend to be an expert on this natural gas situation, but I can look at relevant prices-

The scales on those charts obscure the magnitude of the moves. German Baseload 1yr Forward have pulled back 42% in five days, but still up almost double in the last three months. This is demand destruction in its most severe form. How to interpret this price action with regards to the overall risk to Europe come winter is a subject of great debate. It is a dynamic and multifaceted situation. There are arguments that European gas storage is not so terrifying currently. Russia is now selling LNG to China which in turn is selling that LNG to Europe, bypassing sanctions. Coal-to-gas switching matters. Nord Stream utilization matters. Nuclear restarts matter. Incremental US LNG exports to Europe matter. There’s a bunch of other moving pieces. My overall read on the situation at the moment is that there’s a path where it’s painful but not systemically damaging to global financial markets. That’s probably the low conviction base case right now. But there are paths where it gets nasty into year-end. Demand destruction could be so severe that the EU economy collapses and there are global knock-on contagion effects. Should that start looking like the more likely outcome, it will show up in the Euro and show up in EU sovereign debt yields which are off their recent highs but still meaningfully elevated-

I would be remiss to not at least mention Taiwan. Hard to believe it was less than a month ago that Nancy Pelosi had the most watched plane tracker in history.  I don’t know what’s going to happen there. Massive wild card that is likely ok near-term but has a small chance of escalating into a very bad situation quickly. It’s worth paying close attention to.

So What?

There’s a pile of risk present at the moment. It’s hard not to be bearish in the coming months given the macro backdrop. The weight of QT, a global recession and a dollar wrecking ball could easily grind asset prices down through year-end. Or something more cataclysmic could happen suddenly and it could be a vicious down move followed by the Fed stepping in and putting in a bottom. There’s good reason to believe that the Fed “tightening until something breaks” is becoming increasingly more likely. That could mean asset prices may soon find a bottom, but it could be a seriously rocky road to get there. Or we could somehow thread a needle and avoid a half dozen distinct landmines and asset prices could head higher into year-end, crypto included. At the moment it’s hard to have that as your base case though.

Invest

Ikigai is currently fielding interest from new investors globally. We are open to international investors and qualified accredited U.S. investors (including self-directed IRAs).

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

Contact us to see if you qualify.

August Highlights

• US Treasury Sanctions Tornado Cash Smart Contract; USDC Blacklists Every Sanctioned ETH Address; Infura and Alchemy Block Access to Tornado Cash; Anonymous Tornado Cash Users Send Tornado Cash ETH to Many Famous Doxxed ETH Addresses; Developer of Tornado Cash Arrested

• Ethereum Core Devs Set September 15 Date for Merge

• Blackrock Partners with Coinbase to Provide Crypto Access on Aladdin Platform

• Blackrock Launches Private Trust for Direct Spot Bitcoin Access

• Poloniex Announces Trading Support for Impending ETHPoW Fork

• BitMEX Launches Derivatives for Impending ETHPoW Fork

• CoinFund Raises $300mm Fund

• Shima Capital Raises $200mm Fund

• Gabe Leydon Raises $200mm Led by Paradigm for New Blockchain Game

• Metaverse Avatar Platform Ready Player Me Raises $56mm Led by A16Z

• NFT Collective PROOF Raises $50mm Led by A16Z

• AAA Game Studio Gunzilla Games Raises $46mm Led by Republic Capital

• DeFi-focused L1 Injective Raises $40mm from Jump Crypto, BH Digital

• Blockchain Gaming Platform Xterio Raises $40mm Led by FunPlus, FTX Ventures

• Senators Introduce Bill Establishing CFTC Regime for Crypto Exchanges

• House Committee on Oversight and Reform Asks Five Crypto Exchanges for Info of Fraud Protection

• Crypto VC Dragonfly Acquires Crypto Fund MetaStable Capital

• FTX and Alameda Research Merge Venture Investing Operations

• Genesis CEO Mike Moro Steps Down, Genesis Cuts 20% of Headcount

• Sam Trabucco Steps Down as Co-CEO of Alameda Research

• Crypto Bridge Nomad Hacked for $190mm

• Robinhood Crypto Fined $30mm by NYDFS for AML/KYC Violations

• Michael Saylor Steps Down as CEO of MicroStrategy, Assumes Executive Chair

• Washington DC Attorney General Sues Michael Saylor and MicroStrategy for Tax Fraud

• Facebook Launches NFT Integrations with Coinbase Wallet, Dapper and Flow Blockchain

• Galaxy Digital Terminates Proposal to Acquire Custodian BitGo; BitGo Sues

• Voyager Customers Granted Access to $270mm in Bankruptcy Hearing

• India Regulatory Agency Freezes $8mm in Assets on Exchange WazirX

• Reddit Integrates with FTX to Allow Users to Pay Gas Fees Using Fiat

Source: TradingView. As of 8/31/22.

Some Simple Thoughts on X-To-Earn

We have a whole 3 ½ months under our belt with our new venture fund and we’ve been diving headfirst into the early-stage crypto/Web3 landscape. We’ve reviewed ~130 potential investments since our venture fund was announced, so the pace has been pretty decent. Admittedly, most of those are easy passes. Some are worth calls and additional diligence. We’ve even written a couple small checks! Mostly, we’ve been getting our feet underneath us in terms of starting to develop theses around how we want to deploy capital into the early-stage market. This isn’t exactly a new process to us – we spent a lot of time researching DeFi in late 2020/early 2021 and we spent a lot of timing researching gaming/P2E/Metaverse in late 2021/YTD 2022. Odette has written a pile of notes that pretty thoroughly canvasses those two sectors. Still, we’re wanting to be patient and learn as much as we can as quickly as possible and see what ideas we can build conviction around. We are sure of almost nothing at this point.

Bear markets are where regime changes are conceived. We are in one of those times now. It could be a mistake to deploy capital while thinking an old regime will persist when in actuality it ends up changing. One of the aspects we are hopeful to see innovation on is value accrual. By and large, we have found the value accrual mechanisms in-place for early-stage tokens to be insufficient in convincing us these projects can maintain adoption beyond a temporary pump-and-dump. Because let’s face it, aren’t adoption and price basically the same thing?

That’s an interesting topic in itself. Are adoption and price the same thing in crypto? Does one lead the other? I’ve written about this plenty over the years and it’s a fascinating topic. My long-held view is that crypto prices are highly reflexive, in that higher prices beget higher prices and lower prices beget lower prices. Crypto acts more like that than any other asset class on Earth. This is because Network Effect drives such a significant portion of the total value of the asset. More than anything else, even social media platforms. So when price goes up, people update their assumptions on activity and vice versa, creating a virtuous/vicious cycle, depending on the direction. The topic is worthy of an entire post but suffice it to say I believe this is a strong driving force in crypto and I don’t think that’s going to change any time soon.

Back to value accrual. It’s a cloudy concept in crypto. What makes any of this stuff worth anything? Why is Bitcoin worth anything? What is an appropriate expectation for value accrual in the context of a monetary tightening cycle, with “Don’t Fight The Fed” and “It’s All One Trade” so dominant in today’s asset prices? The NASDAQ just went down 34% in straight line. Is that sufficient value accrual? In turn, BTC just went down 74% in a straight line. Is that sufficient value accrual? These are tough questions with dynamic factors. It’s a moving target.

Specifically on X-To-Earn, we’ve been discussing value accrual a lot internally. Again, we’re sure of almost nothing here. But it’s been helpful to me to think about three different buckets: 1) Traditional Metaverse (“TM”); 2) Metaverse w/ Exogenous Value Creation (“Mw/EVC”); and 3) X-To-Earn (“X2E”). Note that I use Metaverse in the broadest definition here, encompassing: gaming, P2E, guilds, gamefi, in-game asset NFTs, some types of DAOs, etc.

Traditional Metaverse: TM is a virtual world whose value is entirely created in that world. Which is to say there is no exogenous value created that can be monetized in the “outside” world. These projects often have virtual land sales. There are hopes that there will be high “traffic” on these virtual plots one day, or that the land will receive additional future benefits of various sorts. Often there will be in-game “action” assets as well, that can do various things like breeding and competing. The current P2E landscape falls in the TM bucket. With the current slate of existing projects in their current form, we have doubts about TM’s ability to accrue value on a multicycle basis. There needs to be innovation on why the token should be held versus holding cash or ETH or BTC. In the closed-off TM, we worry about the inherently high level of Ponzinomics as percentage of total value. This is the problem with yield farming in DeFi or Axie Infinity in P2E. So we’re looking to see what is coming down the pipe from new projects. We’re hopeful we can help here in the coming years.

Metaverse w/ Exogenous Value Creation: Mw/EVC’s are a category we’re not sure even exists right now. But it’s a concept I keep coming back to. What if a Metaverse (or game) produced something that the real world thought was valuable? The easiest example I can come up with is reCAPTCHA. You know, where you click on the buses before you can get into a website. reCAPTCHA trains machine learning. That’s what it’s been doing since it started in 2009. What if you wrapped a game or a Metaverse around something like a reCAPTCHA? So the game or Metaverse serves as a sort of front end for creating a dataset. And then what if that dataset had external value and holding a token would be sufficiently representative of that value created? That’s Mw/EVC and we think it’s interesting. Admittedly it’s a pretty far-out-there idea. It might be years before the world is ready for the tech and the tech is ready for the world. But for some reason the idea keeps sticking with me. So we’re still thinking there.

X-To-Earn: X2E has the highest portion of its value accrual attributable to real-world aspects out of these three categories. Stepn incentivized 3mm monthly active users to go walk. Helium incentivized 939,650 hotspots. Bitcoin incentivized 220 Exahash/second. Yeah I said it. Bitcoin is X2E. The OG X2E. Stepn has so far failed in value accrual. As has Helium. Bitcoin has done a pretty good job of accruing value, although at the moment you could at least attempt to poke holes in that statement. To the extent BTC has accrued value, it has been for providing the decentralized store-of-value use case. The world has decided that’s really worth something. The world is less sure what it’s worth to have a bunch of people walking, but what if Stepn partnered with an insurance company and you got to pay lower premiums if you were provably getting your steps in? What if Helium finds product-market-fit in 5G? At its core, X2E is just the reimagination of human coordination. Humans have been using tools and structures to coordinate for as long as we’ve been around. Now we have this new thing called a token and this new thing called a blockchain – what new ways of useful human coordination can we come up with? If structured correctly, we believe an X2E token can accrue significant value and unlock human coordination in exciting new ways. We need innovation on this front. Ikigai wants to fund this innovation. Over time, we think we can be helpful on token structures.

Overall, we are thinking long-term here. Over the course of this decade and into the next, we’re hopeful to see significant innovation in the above-mentioned categories. A decade from now, I would expect these categories to be as unimaginable as Uber was in 1999. We’re excited to be a part of it. We’re diving in headfirst and will be writing more about early-stage crypto/Web3 in the quarters to come. Hopefully we can all figure out some of this stuff together.

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

Source: CoinMarketCap. As of 8/31/22. BCH includes SV. Aggregate DeFi from Coingecko.

Dolla dolla bills y’all! The dollar has risen to levels not seen since 2002 all the way to a peak 109.8 this month as Powell remained hawkish for his Jackson Hole speech. This is causing risk assets to tumble from their recent relief rally with BTC currently sitting at $19,600. BTC and ETH are trading with close correlation to tech stocks, although ETH is definitely acting meaningfully more bid than BTC right now. While all of this is happening, BTC is entering its 11th month of downtrend, generating a first-ever monthly TD9 Sequential buy. The macro environment is clearly dictating a seemingly heavy Bitcoin, but I also see a possibility that although we may not have bottomed, the bears have limited time left to reach their lower targets of $10k. The question then becomes, is $10k the new $100k, just in reverse? Sentiment certainly feels that way, lets dive in.

Key Points

• Strength in dollar shows no signs of slowing down

• BTC broke down from a rising wedge pattern earlier this month

• TD Sequential 9 buy setup on the monthly for the first time in BTC history

• Profit and loss by return bands show historic losses among HODLers

• Puell Multiple indicator flashing a buy signal

• Still sitting below the 200 weekly MA and sitting at previous ATH support

• Typical Bitcoin bear markets typically retrace around 80% and we’re sitting at 73%

• Liquidity is mostly shown to be below us for now

BTC broke down from a textbook rising wedge pattern after a pretty disappointing rally. We are now nearing the demand or wedge target zone, and we could see some kind of short-term bounce in the coming days.

We also came back up, retested the 200 weekly MA, and have rejected off of it. This is not the first time this has occurred. In fact, it’s pretty normal that we oscillate around the 200 weekly MA at market bottoms. But the market is tricky, there’s always that cast of doubt that creeps into the mind of a trader - “what if this time is different”. And to be fair this bear market is different - we are now in a completely new type of macro environment than what we are used to. I believe the key to navigating this is to try and focus on the technical indicators and data as much as possible without getting too caught up in the macro whirlwind that we’re experiencing in order to keep a level head and systematic approach. One other technical indicator I would like to present is the TD Sequential, this month will give us a monthly TD9 buy setup. The last time we even came close to seeing this was back in May 2015 and that wasn’t even a perfected 9 setup.

Last month we spoke about Capriole’s hash ribbon indicator. This month we are seeing a pretty strong confirmation that the capitulation from miners has now come to an end. Historically these periods have been synonymous with accumulation phases.

Above is a view of all aggregate on-chain losses. We can see the magnitude of the realized capital losses in the current environment in red. The only other time we have seen anything larger than current losses was the 2018 capitulation.

I’d like to add a caveat here since so far this post has been rather bullish. There is still some chance we are not out of the woods. BTC bear markets typically make 80% corrections and we’re currently only sitting at 73%. There are some data points suggesting that there is still a lot of liquidity below us that should be cleared out.

The indicator above takes aggregate open interest across all exchanges and extrapolates from the moment the open interest was created to estimate possible liquidation zones of leverages traders. Although this indicator is nuanced and should only be used with confluence with other indicators, it helps to give perspective. We can see by the shaded yellow/green that a final move down towards $18-19k seems fairly likely at some point. Large market participants like to see prices hit these zones in order to unlock liquidity so they can enter institutional-sized positions with ease. This practice is not new and has been present in Forex market structures for quite some time.

To summarize: there are plenty of positive technical signs that we can go by, but I think it’s going to take a lot of time for confidence to return to the market. Perhaps it may even require a Fed pivot, although I don’t think it has to. I say that because the market may have priced in the worst-case scenario already, and we are now entering a long and choppy accumulation phase like the one shown below.

Looking at the current structure, it would appear the liquidity zone mentioned above could serve as a “spring” in the future. For now, I will stick to my previous months’ analysis and assume that $15k or around that zone could be the bottom of this move. When it comes, we will be ready.

Closing Remarks

August brought the unwelcomed continuation of macro’s stranglehold on the crypto market. We’re living and dying with macro right now and unfortunately, I don’t think even the Merge is strong enough to decouple us in September. There’s a near-term path to thread the needle where the jobs number comes in light September 2nd and CPI comes in light September 13th and we get 50bps from the FOMC September 21st instead of 75. Perhaps that would be a supportive enough backdrop in macro for ETH to run into and after the Merge. But that would require a host of other macro risks to remain at bay and I’m not so sure it makes sense to have that as my base case.

I can’t get the below chart out of my head.

What if it was never about “the tech” and “adoption”, but it was always just about the printer going BRRR (or not)? Back to my earlier comments about value accrual, if Fed tightening has caused 2022 to be the worst year for financial markets in 50 years, what is an appropriate expectation for value accrual in crypto with that backdrop? If BTC went down 74% in a straight line, surely most Alts would be reasonably expected to fare worse, right? And if adoption is so closely intertwined with price, what does that say about the outlook for this asset class?

I think it says we can build the things while the Fed is tightening that will gain mass adoption when the Fed inevitably begins loosening again. Let’s be honest, this space still has a LOT of kinks to work out. UI still sucks. Way too much Ponzinomics. Not compelling value accrual mechanisms. Constant hacks. Underdeveloped use cases. Solutions looking for problems. We have PLENTY to work on while the Fed gets inflation under control. Retail got burned at the top of the most recent cycle just like retail gets burned at the top of every cycle. That’s certainly not great, but they will be back when the printer goes BRRR again and we better have some cool stuff to show them.

I’m pretty highly convicted the asset class will continue to be worth more in the future than it was in the past, and we can argue about the pace. I’m pretty highly convicted the technology will continue to gain adoption, and we can argue about the pace. Whether the technology ends up making the world a better place I’m less highly convicted on. That one could go either way.

The degree to which the world decides decentralization matters is still up in the air. How that plays out is partially a function of how egregiously damaging centralized alternatives are – whether that be big tech or the guys in charge of fiat money. It’s also partially a function of how credible and functional the decentralized alternatives are. “Decentralization Theater” might not cut it and we have plenty of that going on in crypto at the moment. 13+ years on into this magic internet money thing and the world is still deciding what do you need decentralization for and how decentralized is decentralized enough. The failures of centralized power and control act as a forcing function. But that’s only half the battle. If there’s not a compelling decentralized alternative, folks may just not care enough to switch.

Crypto/Web3 are undoubtedly being co-opted by the status quo in an attempt to quell the technology’s potential to disrupt said status quo. The signs of that type of activity are obvious if you’re looking for them. Look no further than Mark Zuckerberg’s recent appearance on Rogan. It’s def worth the watch. He’s setting Facebook on a course to compete directly with the types of projects we talked about earlier in this update. The crypto ecosystem can stand on its soapbox and yell to the world why decentralization matters, but that will only get us so far. The world needs to more acutely feel the negative effects from centralized power at various levels of society and then they’ll start looking around for alternatives. Very quickly they’ll arrive at crypto’s doorstep. And when they get there it’s up to us to have built decentralized alternatives that are good enough to actually compete against centralized counterparts. We’re not there yet but it sure is a fight worth fighting.

“If you do not enter the tiger’s cave, you won’t catch its cub.”

– 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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