This sixth installment continues a thesis I began two years ago, when the groundwork for the next major cycle was quietly being laid, yet invisible to most.

Since then, we’ve correctly anticipated the ETF approval, Trump’s pro-crypto presidency, the rate cut pivot, renewed crypto M&A, the stablecoin trade, and the Q1–Q2 narrative vacuum that shook out tourists before the real move began.

On April 9th, during our bi-weekly Frontier Forum, we flagged “Trump’s Liberation Day” as a critical inflection point—calling the market bottom at peak panic.

This isn’t about chest-thumping. It’s about context. This will likely be my only write-up for the next 3–6 months. And unlike the past few, this one carries urgency. I believe we’re entering the phase where positioning matters most—where the asymmetry is highest and attention is still misallocated.

Most will read this in hindsight, when the headlines have caught up. But if you’ve been waiting for a signal—this is it.

It’s time to be bullish.

Near-Term Catalysts - Signals in the Static

There are reasons I’m more bullish on blockchain technology today than perhaps at any point in 2022-24. But before diving into the longer-term, more philosophical drivers behind this cycle, we need to examine the source of immediate urgency behind this piece.

Digital asset investors have a tendency to misread inflection points. They’re cautious when the market has stabilized and is preparing to accelerate, yet euphoric when it’s already gone vertical. Today, we are in the former—consolidated, coiled, and underpriced.

Just look at the total crypto market cap excluding Bitcoin. After five years of chop, it's quietly grinding toward all-time highs. BTC, when priced in gold, is nearing a five-year peak. And while $120K may sound high to bystanders, that’s less than a 2x from 2021 levels. ETH is still down over 30% from its ATH. A recovery to the $3Ks is nothing to write home about. These are not “late-stage” prices—they’re forming the base for the next major leg up.

The winning Layer 1s will be trillion-dollar assets. Today, Ethereum sits just above $400B. Solana, the next in line, barely broke $100B. Meanwhile, Mira Murati just raised a $12B Seed Round—pre-product, pre-revenue. For once, AI is the bubble, not crypto.

So who and what will drive prices higher? Let’s dig in:

ICO 2.0 – Wall Street Style: The Rise of Treasury Companies

Michael Saylor’s “Bitcoin treasury company” playbook is gradually becoming a template.

Saylor’s pivot was born out of a dilemma: his business was stable, but stagnant, and tech giants were poaching his best talent. Sitting on $500M in idle cash as the Fed slashed rates to zero, he made a call—convert the entire balance sheet to Bitcoin. What followed was the most aggressive balance sheet expansion in corporate history: a $1B software company morphing into a $126B Bitcoin vault, now holding ~3% of BTC’s supply. (For context, his recent interview with Jordan Peterson is worth a listen if you want to understand Saylor’s life story and philosophy.)

In December, I wrote:

“MicroStrategy may one day trigger the next bear market, but first, it could become the largest company in the world… Saylor will be put on par with Musk, Zuckerberg, and Huang… I believe an unraveling is inevitable, but for now, he’s sitting on tens of billions in dry powder, likely enough to push Bitcoin past $100k and unlock the next $100 billion in firepower…at least a dozen publicly traded companies are likely to adopt Saylor’s model in the next 24 months. Momentum begets momentum.”

We’re living Act II of that thesis.

But I underestimated how quickly others would follow. We're not talking about a dozen copycats in two years—we're already there.

Since then, we’ve seen high-profile launches like:

• XXI, led by Jack Mallers

• ProCap, founded by Anthony Pompliano

• Bitcoin Standard Treasury, helmed by Adam Back

More importantly, the playbook is expanding beyond Bitcoin:

• BitMine, led by Tom Lee, is an ETH treasury vehicle

• SBET, run by ETH co-founder Joe Lubin, holds ~$1B in ETH—making it the largest ETH treasury company to date

And it's not stopping there. Expect vehicles for Solana, Hyperliquid, XRP, and others. Equity-wrapped token exposure is a regulatory arbitrage—giving Wall Street the volatility it craves while satisfying restrictive mandates.

Traditional tech firms are also continuing to adopt Bitcoin as a treasury asset. Figma, in its S-1, disclosed $70M in BTC holdings and plans to acquire $30M more. Tesla, too, holds over $1bn worth of BTC.

We’re in the fourth inning of the treasury company era. Momentum is building, but for now, it’s mostly been led by high-profile insiders and figureheads. Only a handful of forward-thinking tech firms have followed suit by adding BTC to their balance sheets.

That will change fast.

Within 12 months, I expect treasury wrappers to emerge for nearly every asset in the top 10–20, alongside thematic vehicles—DeFi, DePIN, you name it. Just as ETFs multiplied once the first Bitcoin fund broke through, this structure will be replicated across the board.

More importantly, the number of publicly traded companies holding Bitcoin will likely 10x—from ~100 today to over 1,000 within two years. In an environment where artificially low interest rates no longer offset dollar devaluation, Bitcoin will increasingly be seen as prudent diversification, not speculation.

And once these flows begin, they don't reverse easily.

These entities are built to buy and hold. Selling breaks the mandate. Which means flows will be one-directional—funded by convertible debt, ATM offerings, or internal capital—but rarely unwound.

Outflows only happen in three scenarios:

• The company defaults on its notes

• Shares trade below NAV, and management chooses to unwind (unlikely for the large players)

• Shareholder activism forces in-kind distributions or asset sales

Until then, these vehicles function as black holes—soaking up scarce assets, never letting them out. The longer it continues, the tighter the float becomes. At some point, that ends in a supply squeeze.

This might be one of the easiest times in history to be long crypto.

And yet, most investors are still dramatically underweight. Why? Because they think this is all just a reflexive Ponzi—treasury wrappers, MSTR mania, too much froth.

But the real story is much bigger than Bitcoin ETFs or treasury companies. It’s the quiet rewiring of the global financial system.

Tokenize Everything - The World Goes On-Chain

It’s easy to dismiss the treasury company meta as financial theater—Bitcoin-maxi cosplay with balance sheet leverage. But that cynicism misses the deeper truth: blockchain is finally being used for what it was built to do—upgrade the world’s financial infrastructure.

The real opportunity is tokenization. Not just of crypto-native assets—but of everything: cash, stocks, bonds, treasuries, real estate, art. All of it.

I’ve said this for years, but now the world’s most powerful asset managers are echoing the same thesis. BlackRock CEO Larry Fink put it plainly in his 2025 Chairman’s Letter:

Every stock, every bond, every fund—every asset—can be tokenized. If they are, it will revolutionize investing. Markets wouldn't need to close. Transactions that currently take days would clear in seconds. And billions of dollars currently immobilized by settlement delays could be reinvested immediately back into the economy, generating more growth.

Perhaps most importantly, tokenization makes investing much more democratic.

- Larry Fink, CEO of BlackRock in Annual Chairman Letter

And he’s not alone. SEC Commissioner Paul Atkins put it even more bluntly:

“If it can be tokenized, it will be tokenized.”

- SEC Chairman Paul Atkins

We’re not talking about a fringe use case. We’re talking about tens if not hundreds of trillions of dollars in value migrating on-chain. Every tokenized asset will generate on-chain activity—and that activity flows directly into protocol revenue:

• Each transaction = fees to the underlying blockchain

• Lending tokenized assets = revenue for protocols like Aave, Maple

• Trading tokenized assets = revenue for exchanges like Uniswap, Aero, Raydium

As tokenized assets flow through the system, value accrues at every stage—settlement, lending, trading.

Just step back. The stakes are bigger than you think.

• Bitcoin may 10x from here—reaching parity with gold

• The winning Layer 1s may 50–100x—reaching parity with the GDPs of nations.

• The top DeFi protocols? They may 250x—surpassing the likes of JPMorgan

Crypto’s addressable market just expanded by orders of magnitude. The narrative is no longer about whether blockchains have utility—it’s about how much value they can settle, store, and monetize. The shift becomes even more compelling as we move beyond wrapping legacy equities and begin seeing startups launch as tokenized entities from day one. Public digital asset markets would then quickly become the new venue for discovering emerging talent—with liquidity built in from inception.

A narrow set of assets powers this entire stack—and they now stand among the most asymmetric risk-reward opportunities in global public markets.

All Roads Lead to Devaluation – Rates, Debt, and Failed Austerity

Bitcoiners have long warned of dollar debasement and fiscal irresponsibility enabled by fiat-driven monetary policy. Now, the debt bubble they pointed to has finally entered mainstream discourse—yet there’s still no appetite to do much about it.

How do you solve a debt crisis? Step one: end the deficit. And how do you end the deficit?

A. Austerity: spend less
B. Raise revenues: tax more (through taxes or tariffs)
C. Default or restructure debt
D. Print money and monetize the debt (devalue the currency)

The Trump administration came in guns blazing, promising to confront the problem head-on. DOGE, under Elon Musk’s guidance, was meant to deliver $1 trillion in annual savings via austerity repackaged as “government efficiency.” Howard Lutnick was tasked with generating another $1 trillion annually via tariffs.

Fast forward six months: DOGE has saved just $190 billion (less than $90 billion itemized), and Elon has exited in a highly public, explosive fashion. If Elon can’t succeed with austerity—backed by a public mandate and political cover—then no one will. That takes the first lever off the table.

Meanwhile, the "Big Beautiful Bill" has added an estimated $2.4 trillion to the deficit over the next decade, while also extending tax cuts, further reducing revenue. Lever two looks equally untouchable under a Republican administration. (As a capitalist, I detest taxes as much as the next person—but when the nation is speeding toward a fiscal wall, this isn’t the time to cut revenue.) Tariffs have doubled under Trump, but still only brought in around $100 billion in seven months.

It's too little, too late.

We're not going to save our way out. We're not going to earn our way out—not unless the economy enters a sustained boom that radically expands the taxable base. And as the global reserve currency, default is unlikely. Trust in that status is worth more than suffering moderate inflation via debt monetization.

It doesn’t take a rocket scientist to see where this leads (no Elon pun intended): quantitative easing and dollar devaluation. Lowering interest rates would reduce the government’s annual interest expense—we’re already paying close to $1 trillion just to service the interest on the debt. Looser policy could also stimulate growth, broadening the taxable base without raising tax rates.

But in this environment, cutting rates won’t attract sufficient demand for Treasuries—especially with inflation expectations still elevated. To keep yields from spiking, the Fed would need to step in as a major buyer, effectively monetizing the debt. That dynamic puts downward pressure on real yields, stokes further inflation, and undermines confidence in long-duration U.S. debt. If sustained, it risks accelerating the erosion of dollar reserve status.

This is exactly the fault line between Fed Chair Jerome Powell and President Trump. Powell—who famously underestimated inflation as transitory in 2020—has since evolved into one of the few true statesmen in American public life. In a political landscape obsessed with optics and short-term wins, he’s governed with principle and long-term thinking, even in the face of likely dismissal. He remains committed to the Fed’s dual mandate, knowing full well that the consequences of monetary irresponsibility may not show up until after he’s gone. Yet he continues to do what is unpopular, but likely right.

Trump, by contrast, approaches the world like a founder: win today, dominate the moment, and deal with tomorrow once you’re holding better cards. He’s pushing for a full 300 basis point cut—down to 1%—a crisis-era move last seen during COVID, and one that has historically sent both markets and the economy into overdrive.

It might work. If so, it will go down as a defiant reset of American dominance. Or it might mark the beginning of the end, with the U.S. fast-tracking itself out of reserve currency status and exposing critical social and defense systems due to fiscal collapse.

Either way, the conclusion is the same: in 2–3 years, few rational actors will want to hold bonds or cash. The rotation into risk assets—especially the foundational infrastructure of the new financial era—is already underway.

In my view, 2025 is the year to be net short USD—particularly when so many assets outside the Magnificent 7 and Bitcoin are still trading below prior all-time highs.

The Machine Economy - Scarcity in the Age of Abundance

When I’m not wearing the hat of a hedge fund manager, I wear that of a venture capitalist. Over the past three years, I’ve backed more than 30 startups across AI, XR, and frontier tech. And every now and then, a belief begins as fringe—tinfoil even—but over time, it hardens into conviction. This is one of them.

Let’s run a thought experiment.

An entrepreneur starts with a team of five. With the right AI tools, that team gains the output of ten. Productivity doubles. The company begins to outcompete peers, expand margins, and grow. When it's time to build a marketing department, the founder instead deploys an AI agent with a clear mandate and KPI. The agent manages a human team, driving strategy and delegation. The humans execute, supported by additional AI tools.

As the structure scales, the founder introduces more agents—specialized ones for advertising, copywriting, outreach. Over time, the company operates with an increasingly autonomous hierarchy. Eventually, the founder asks the obvious question: why not install a CEO agent? Why not build a board of agents tasked with tuning its mandate?

Eventually, the founder steps away altogether—still the beneficiary, but no longer involved.

Meanwhile, the cost of goods and services globally has collapsed. Supply is abundant. Competition is brutal. Efficiency is the only moat—and it's being optimized into oblivion.

In that world of infinite, hyper-personalized, low-cost everything—what retains value?

You might say things. But we’re already engineering superior materials in labs. Lab-grown meat is real (for better or worse). Lab-grown diamonds are indistinguishable. You might say gold—but 2025 marks the first year asteroid mining became commercially viable. Scarcity is melting.

You might say energy. But fusion breakthroughs and microreactors suggest even that’s on its way to becoming abundant.

And so, paradoxically, in a world of boundless digital abundance, the most valuable asset may be the one with hard coded scarcity: Bitcoin. A finite denominator in a world where everything else is trending toward infinite. Most analysts get it backwards. They fixate on demand—who’s the next buyer—when the real story is supply. Bitcoin doesn’t need demand to grow in value. It needs time. Everything else inflates. Bitcoin doesn’t.

Absent a superintelligence that runs this experiment to its extreme—where all goods and services are delivered by a single entity, a dystopian outcome that could be checked by antitrust crackdowns or competition amongst ASI—we’re far more likely to see millions of autonomous, non-human agents participating in the global economy on our behalf. These agents will need to transact value, access leverage, exchange assets, and settle payments—instantly, securely, and without centralized gatekeepers.

The only infrastructure capable of supporting that at scale today is public blockchains.

As economic velocity increases, the largest beneficiaries won’t be the applications or interfaces—it will be the networks themselves. The base layers and rails that can handle agent-to-agent economic coordination in a globally secure, trustless way. In a world where businesses are run by agents, execution will be pushed to its limits. No traditional system—wrapped in bureaucracy and compliance—will be able to keep up. Banks defend themselves with paperwork. Blockchains defend themselves with code.

And code scales.

Blockchains are the only infrastructure built to meet the demands of an agent-driven economy.

Once that becomes clear, assets like Bitcoin—and leading Layer 1 blockchains like Ethereum, Solana, and Hyperliquid—alongside decade-tested DeFi protocols like Aave and Uniswap—start to look absurdly cheap.

You may not see it today. But I suspect you’ll come back to this write-up a few years from now and realize how early we were. None of this negates the volatility along the way. But I’ll repeat the same advice I have given myself over the years: stop chasing waves—study the tide. From what I can see, the flood is near.

In 2019, I thought I was late—that the real upside in crypto had already passed. In 2025, I realize everything until now was just the prelude to what’s coming.

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

For a live deep dive on stablecoins, join our bi-weekly Frontier Forum on Wednesday, March 12th, at 9 AM EST. » Register here «

The digital asset space is undergoing a structural shift. The cycle is broken. I foreshadowed this phase in June of 2024 in my 2024 Outlook, where I explored the fundamental shifts that could occur in a post-Gensler era. In particular, I wrote that:

“The most meaningful graduation from being speculative assets to investable assets for the wider digital asset space beyond Bitcoin’s digital gold thesis occurs the moment tokens can accrue value without being at odds with regulators. While part of the debate is whether or not digital assets are commodities or securities, the other meaningful debate is how crypto assets can be compliant in a way that does not go against the underlying technology.”

Despite Trump’s victory and sweeping regulatory changes, the market is having one of its worst stretches and appears to be charting a new course, away from its traditional four year cycle. We are at a unique juncture for the digital asset market, where all of the following appear true to me over the next twelve months:

1. Bitcoin has become the consensus trade, and Bitcoin dominance as a portion of the crypto ecosystem is likely nearing its all-time high for the remainder of history over the next 3–6 months.

2. Bitcoin will nevertheless continue to compound growth year over year.

3. The wider digital asset space will continue to undergo a period of crisis over the next six months.

4. The wider digital asset space will outperform Bitcoin in the decades thereafter.

The reason for this prediction is twofold.

Long Term: From Financial Nihilism to Utility

We are approaching the zenith of financial nihilism, exemplified by phenomena such as Trump coin, Milei's Libra, and the billions lost in memecoin ventures. As momentum has now firmly broken and most fundamentally unsound digital assets have declined by 90–99.9%, their return seems unlikely. Retail investors, as a result, are burned out. The speculative games have proven to be zero-sum and rigged, leaving the market fleeced and unwilling to participate any longer.

The next marginal buyer is Wall Street. Digital assets with strong fundamentals and revenues will be bid up by institutional buyers before any other digital asset is likely to draw institutional interest. It follows that retail, eager to make money, will flock toward whatever is appreciating, compounding the fundamental soundness premium further (as we see with the Mag 7 in equities).

The big innovation that the economy, government, and Wall Street are ready for is stablecoins—for those not familiar, fiat currency that has been moved onto the blockchain (tokenized dollars, euros, etc.). Already today, stablecoins have onboarded more than 1% of the entire M2 money supply and are growing at a breakneck pace —even in bear markets.. However, it will not end with mere transactions in USDT or USDC.

There will be increased demand for financial primitives like lending, borrowing, swapping, etc., of on-chain assets, driving material revenue toward leading DeFi protocols. Already today, stablecoins are the largest revenue contributors on the Ethereum blockchain, where Tether and Circle combined lead the list of fee sources. As the world continues its reliance on and use of stablecoins to save fees and time, the tokenization of most other financial assets follows closely.

Stripe, the world’s largest privately-held fintech company, raved about stablecoins in their 2024 annual letter, likening them to room-temperature superconductors for the financial services industry. They wrote:

“Stablecoins have four important properties relative to the status quo. They make money movement cheaper, they make money movement faster, they are decentralized and open-access (and thus globally available from day one), and they are programmable. Everything interesting follows from these characteristics.”

Today, stablecoins are primarily used for international remittances and as one of the fastest ways for those living abroad to gain exposure to U.S. dollars. However, stablecoin activity remains largely limited due to regulatory constraints, which the current administration is re-writing as we speak.

The even bigger innovation the world is likely not quite ready for yet—but which will yield some of the most outsized returns—is the intersection of crypto and AI. As AI agents gain access to a fully digitally native financial suite, they will become truly autonomous participants in our economy. The first step to unlocking this milestone, however, is onboarding the majority of online commerce onto stablecoins.

Short-Term Challenges: The Regulatory Gap and Catalyst Vacuum

Despite all these promising forces, regulation takes time. Until laws are drafted, signed, and adopted, it is unlikely that we will see fintech hit the go-button and roll out stablecoins at every checkout, instantly bringing every American on-chain overnight.

We are, in a way, stuck in an awkward in-between spot, where the “Trump trade” is behind us, macro risk-off weighs heavily on the market, and yet the actual meaningful changes will take longer than a simple Executive Order signing. While the market is starved for near-term catalysts, flows remain lopsided toward sellers.

Michael Saylor—the man propping up the market with over $20bn worth of purchases since November—is slowly running out of ammo. MSTR’s premium to NAV is one of the lowest in the last 12 months. I highlighted this in my December write-up, when the premium was near 2.5x. Today, the premium is down to 1.5x, a material decline in just three months. (ELI5: Saylor has been issuing and selling MSTR shares to finance Bitcoin purchases. This generates “yield” as he puts it as long as he sells the shares at a premium—however, that premium is now nearly depleted.)

Without Saylor manning the gunships, the market relies on real fundamentals. Unfortunately, as I have pointed out for years, 95% of assets are massively overvalued or even vaporware. VCs and Founders alike know this. As a result, their tokens, which are vesting daily, are heading for the exit, adding material recurring sell pressure.

Unfortunately, the market is punishing the other 5%—the fundamentally sound digital assets with millions of users and earnings—just the same. This may seem counterintuitive:

How can a decentralized exchange or lending market in a high-growth industry decline to 2–4 PE ratios or even sometimes trade at book value?

The answer lies in the composition of market participants pre-Wall Street:

1. Retail traders—who trade purely based on sentiment. They will sell AAVE at a single-digit P/E ratio for the same reason they buy Fartcoin on the way up. They react emotionally to price movement, with no fundamental thesis.

2. Quant traders and funds—who trade based on historical correlations. Crypto follows cyclical, highly correlated patterns: few tokens appreciate in a bear market, and even overvalued projects continue rising in a bull market. If 95% of tokens experience net outflows and decline, statistical arbitrage strategies will short or sell the remaining 5%, expecting mean reversion due to historically high correlation.

3. Crypto VCs—who raised funds between 2017–2021 and are now 4–9 years into their vintage, pressured to deliver returns to LPs.

4. Crypto-native liquid funds—which are not seeing inflows. If anything, many are facing outflows, as Bitcoin ETFs have diverted much of the institutional demand.

What you are left with is an awkward vacuum. While BTC is near all-time highs, the average crypto asset is down 50–99%, including Ethereum and Solana.

The largest resignation in the industry’s history is unfolding.

People are giving up, announcing on X that they are selling everything and leaving. The market has been thankless and treacherous for anyone outside of Bitcoin.

Even I have questioned whether running a liquid fund makes sense in these conditions.

But to me, it is undeniable that stablecoins will be globally adopted in the next 2–3 years. As a result, the underlying infrastructure will experience exponential revenue growth.

This is an asymmetric opportunity for those patient over the next six months—one we have not seen in four years.

How am I positioning our liquid fund for this environment?

In mid-February, we materially de-risked our portfolio after the market broke long-term momentum structures.

From here forward, we will take a strategic liquid venture approach, searching for the most fundamentally sound projects that will benefit from:

1. Stablecoin proliferation

2. AI integration into finance

The entire DeFi industry has a combined market cap of just $75bn—half the size of Uber.

In fact, every single token outside the Top 10 has a cumulative market cap of just $250bn. Our belief is not only that this segment will evolve into a $10TN+ economy (40x growth), but even more so that the market has violently mispriced its assets. Currently, perhaps $200bn in value is tied up in vaporware, while only $50bn or so is allocated to projects that are truly defining the technology. As capital rotates, we expect this imbalance to correct, driving exponential upside for the assets with real fundamentals.

At this juncture, I believe the era of trading has passed, and the time to invest has come. The noise of sentiment has likely cost most active funds—ourselves included—more upside than it has helped prevent downside. Going forward, I will be spending less time looking at price and more time focusing on value. When those two meet or come close, I will be a buyer, regardless of daily volatility.

My belief is that the right portfolio construction—a blend of 20–40 assets, accumulated amidst the coming sell-off, with exposure to both public and private offerings—will materially outperform not only Bitcoin but most asset classes.

The Four Year Cycle is Broken

Why?

Because mature industries don’t rely on four-year hype cycles—growth is constant. No matter how grim the market outside of Bitcoin looks today, and though it may get worse first, we are nearing a point where stablecoins will be used daily by everyone, whether they realize it or not.

And then? Everything tokenizes.

The first mover to watch is Coinbase, which recently announced plans to launch a tokenized version of its stock. When this succeeds, it will set the precedent for a future where all financial assets can be traded 24/7, instantly, globally, and used as collateral.

The $100bn on-chain economy will become a $10TN+ industry.

Nobody said it would be easy. But getting the stablecoin and tokenization trade right will make all this volatility worth it.

To explore this coming era in more detail, check out my write-up from last June, where I analyzed what a post-Gensler landscape could look like.

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Never in my wildest dreams did I imagine the political landscape for digital assets would be as bullish as it is today. To be blunt: Bitcoin was expensive at $60k under Biden/Gensler. Today, Bitcoin is cheap at $95k.

It’s hard to overstate how positive the current set-up is, and I am no perma-bull. I’ve been cynical and bearish for much of the last two years, serving on the front lines of the crypto wars—experiencing everything from debanking to regulatory crackdowns, to the fraud at FTX. We’ve been through it all. Many will glance past digital assets today, only to buy in at the top in a year or two. Unless you’re already unfathomably wealthy, take 30 minutes to listen and pay attention to what happens next. Price asymmetries rarely exist in efficient markets. But in markets with complex regulations and sudden shifts, inefficiencies thrive. It’s critical to pay attention now, not in two years. If you haven't read my prior pieces, I highly recommend Part I and Part III of this series. Both serve as cold showers, unpacking the realities of the last four years. Their contrast will make today’s write-up resonate even more.

In this piece, I’ll uncover two core drivers for the price action over the next three years:

1. Mapping out the new political landscape.

2. Mapping out the new flows of buyers and sellers.

In my next piece, we’ll return to technology, exploring the latest breakthroughs in blockchain—from the first AI x Crypto experiments to early successes in Decentralized Science. But for now, this is the single most important thing you’ll read. If you miss the big picture, the nuance is a waste of time. If you get this right, it might just be the greatest 2-year trade of a lifetime.

It’s time to lock in.

A Game of Thrones: Toppling the Old Guard

The past four years in digital assets were defined by survival: banking crackdowns, lawsuits, and outright persecution by federal agencies. For many crypto entrepreneurs, this was the darkest period in the industry’s history.

But the war is won, and the tone has shifted drastically.

The previous administration sought to kill crypto because of its inability to control it, aligning itself with traditional banking interests. The new administration values crypto for its freedom and stands to profit from its success—whether for better or worse.

Here are the key political shifts:

Out: SEC Chair Gary Gensler

As I wrote six months ago, "If Trump wins, expect Gensler to be resigned at worst or in jail at best." One down, one to go. Gensler was one of the most corrupt SEC chairs in recent years, reprimanded by both the courts and Congress for his abuse of power. Removing him from the chessboard is the singular most significant move, likely unlocking meaningful guidance for crypto companies, clearing up what’s legal and what’s not, instead of continuing with regulation by enforcement.

In: Howard Lutnick - US Secretary of Commerce

Howard Lutnick is the CEO and Chairman of Cantor Fitzgerald, the financial services firm that holds ~$100 billion worth of treasury securities backing the world’s largest stablecoin, Tether. Shortly after his appointment, Cantor Fitzgerald invested in Tether, securing a 5% stake in the company. This is extremely bullish for several reasons.

1. Senators like Sherrod Brown and Elizabeth Warren have tried for years to kill stablecoins. Now, stablecoins are in the President’s ear.

2. Tether has been a source of FUD for nearly a decade, with rumors about it not being fully backed. I believe these concerns will finally be put to rest.

3. Howard is also extremely pro-Bitcoin, openly admitting in a recent interview that he personally owns hundreds of millions of dollars worth of BTC.

Read that again, and let it sink in.

Out: Senator Sherrod Brown

Senator Sherrod Brown, a three-time incumbent and former chair of the Senate Banking Committee, has long been one of crypto’s fiercest adversaries. He’s worked relentlessly to de-bank the crypto industry, cut off its access to traditional banking rails, and criminalize digital asset activity. Many of his statements can be found here.

During my seven years managing a digital asset fund, I had to switch banks four times, and saw three pro-crypto banks forced out of business under Brown’s rule. The crypto lobby mobilized to take him down, installing a pro-crypto Senator in his place. This was a pivotal race to end banking discrimination, often referred to as Operation Chokepoint 2.0. It also demonstrated the growing strength of the crypto lobby—step on our toes, and you might lose your job.

Speed Round - Crypto Advocates in the President’s Ear

• United States Secretary of Defense – Pete Hegseth

• United States Secretary of Health and Human Services – RFK Jr.
  RFK Jr. has publicly stated that he holds most of his net worth in Bitcoin.

• Department of Governmental Efficiency – Elon Musk
  The world’s greatest entrepreneur is perhaps as much a right-hand man to President Trump as JD Vance. Both Tesla and SpaceX hold approximately $1 billion in Bitcoin each.

• Secretary of the Treasury - Scott Bessent

  “Crypto is about freedom and the crypto economy is here to stay. Crypto is bringing in young people, people who have not participated in markets.”1

The rebels struck back and toppled the empire. The primary anti-crypto foes remaining in DC are Elizabeth Warren and Brad Sherman. Both are in their 70s and are unlikely to sustain their antagonistic rhetoric after this election cycle. Elizabeth Warren, in particular, who once ran her campaign on "building an anti-crypto army," has effectively ostracized herself from a significant portion of Democrats. Following the crushing defeat in November, many of them are likely to shift further toward the center rather than continue their drift to the far-left.

There will come a day when digital assets are likely used as a money-making scheme by some of those in power. It would be naive not to recognize that many of the names involved are driven by self-interest. Just as Pelosi insider-trades her way to billionaire status, I fully expect things to get dirty in DC, with government deals being handed to certain projects. It's inevitable, and will likely lead to new forms of inefficiency and friction—such as a technologically inferior protocol lobbying politicians, who then vote to put state activity on it, instead of adopting the better tech.

Politically, for now, crypto essentially operates under a regulatory Iron Dome. There are numerous bullish catalysts ahead, with few material bearish threats able to breach the ranks of pro-crypto leaders.

The music is playing. So we dance.

Follow the Money: Flows are Coming

The floodgates are open, so where is the flood going to come from? Here are a few key buyers to keep an eye on:

MicroStrategy - The King of Bitcoin

As of today, MicroStrategy has accumulated a staggering 402,100 Bitcoin—nearly 2% of all Bitcoin ever mined. The company, which was the first publicly traded firm to adopt the Bitcoin standard, has recently ramped up its mission to own more Bitcoin than anyone else. A remarkable 37.5% of its Bitcoin holdings were purchased since November. Founder and CEO Michael Saylor has devised a straightforward strategy: issue convertible debt and buy Bitcoin with it. Additionally, the company sells its own shares on the market whenever their premium is deemed too high and uses the proceeds to buy Bitcoin. MicroStrategy’s ongoing capital raises could be a major market-moving factor, as they’ve already raised $21 billion since November and plan to double that in the next three years. At present, MSTR trades at a 2.4x premium to its net asset value (NAV), leaving ample room for further share sales to acquire Bitcoin.

MicroStrategy may one day trigger the next bear market, but first, it could become the largest company in the world. If MSTR were a Shakespearean tragedy, Act I would be the rise (2020-2024), enduring countless storms. Act II will be the Saylor era, where he is put on par with Musk, Zuckerberg, and Huang. Currently worth $70 billion, MicroStrategy is among the largest publicly traded companies. During this act, we’re likely to see MSTR added to the S&P 500, which will further fuel Bitcoin's rise. When Saylor becomes one of the richest people alive and MicroStrategy the biggest company in the world, it will be worth tracking the MSTR premium to NAV to see when he runs out of ammunition, and how high we will have driven his cost basis and debt load by then. I believe an unraveling is inevitable, but for now, he’s sitting on tens of billions in dry powder, likely enough to push Bitcoin past $100k and unlock the next $100 billion in firepower. It’s like the Terra Luna trade in a way—except we’re still phenomenally early, and every short-seller will be punished before the trade unwinds (for context, Terra Luna was the biggest P/L trade of my career).

Part of the reason we’re so early is that at least a dozen publicly traded companies are likely to adopt Saylor’s model in the next 24 months. Momentum begets momentum, and talk of supply shortages will come sooner than expected.

Supply Shortages – Not Enough Bitcoin to Go Around

Back in 2019, I toured various colleges to give seminars on blockchain and Bitcoin. One of the simplest mental models to illustrate Bitcoin’s scarcity was the math of Bitcoin per millionaire. There are approximately 58 million millionaires globally, but only 21 million Bitcoin—likely fewer than 16 million when accounting for lost coins. This means there’s not even half a Bitcoin for each millionaire in the world. When adjusted for companies like MicroStrategy gobbling up 2%, the scarcity becomes even more pronounced.

There are two efficient ways to track supply shortages:

1. Issuance
   Since the halving in May, approximately 400-500 new Bitcoin are mined daily. At $100k per BTC, that’s only $40-50 million in new supply per day. In contrast, the average daily ETF inflow is $137 million according to Farside2. So for every 1 Bitcoin mined, roughly 3 Bitcoins are being snatched up by institutional investors.

   Where does the extra supply come from? OTC desks and directly from exchanges...

   

2. Exchange Balances
   Long-term Bitcoin holders tend not to keep their coins on exchanges but rather in custody (self or otherwise). The amount of Bitcoin on exchanges peaked in 2022 and has been on a 5-year decline since. Today, there are fewer Bitcoin on exchanges (despite issuance!) than at any point since 2019. As the tradable supply shrinks, supply squeezes will occur, leading to significant price movements, followed by phases of redistribution by profit-takers and new buyers.

Sovereigns Come Knocking

Donald Trump, RFK Jr., and Senator Cynthia Lummis have all promised something that remains widely under-reported: the birth of a national strategic Bitcoin reserve.

Yes, the United States plans to buy Bitcoin, and according to Lummis, quite a lot of it. In her BITCOIN Act, introduced in the US Senate, she proposes that the US purchase 5% of the Bitcoin supply—roughly 1 million BTC—over a span of several years.

The idea itself is a powerful narrative.

The implementation would trigger flows of historic proportions.

The ripple effects could lead to at least half of the world’s sovereign nations acquiring Bitcoin within a few days to five years of the US formally approving the strategy. I explored the game theory behind sovereigns contemplating Bitcoin adoption four years ago, and it remains a compelling thought experiment.

While sovereigns are lining up to buy Bitcoin, another massive injection of capital is coming from the aftermath of FTX’s collapse.

FTX - A $14BN+ Cash Injection

One of the industry's greatest collapses will soon provide it with renewed life. After years of forced selling by the bankruptcy courts, it’s expected that the FTX estate will return anywhere from $14-16 billion in cash to former users who lost assets due to the fraud committed by Sam Bankman-Fried. While the selling had pushed markets lower, the inverse will soon occur. Billions in cash flowing into the hands of crypto natives amidst a raging bull market will lead to one thing: more buying.

Institutional Buying Beyond Bitcoin

I expect 2025 to be the year when the first wave of Wall Street traders secure compliance approvals, regulatory green-lights, and infrastructure to expand beyond Bitcoin. Currently, traditional funds are predominantly focused on Bitcoin and ETH ETFs, but soon, they will likely begin buying and trading tokens across various themes—ranging from DeFi to DePin, and RWA. While $130 million per day in buying doesn’t move Bitcoin significantly, these buying patterns could materially reprice the broader crypto market. The charts suggest that this shift has already begun.

In bear markets, Bitcoin regains a significant share of market dominance. Typically in bull markets, it loses some of that dominance. As attention shifts again from Bitcoin to the broader ecosystem, we’re likely to see dominance drop to 25-40%, which suggests multi-trillion-dollar appreciation for alternative digital assets. This is the trade we are most focused on.

A Perfect Storm

The current set-up for digital assets could not be better. We’re as close as possible to a regulatory blank check, with interest rates being cut, the M2 money supply expanding after a two-year contraction, and historic amounts of capital flowing into digital assets through ETFs, MicroStrategy, sovereign nations, and more.

For now, the set-up is so simple that I expect the majority of tokens to rise—regardless of how little utility some tokens have (e.g., XRP is now worth a staggering $250 billion). This phase could last anywhere from a few more days to several months. In the latter half of the bull market, when alt season truly kicks in, we’ll likely see greater return dispersion. “Dino coins,” as we call them—tokens from previous cycles with little to no use case—will be more suppressed as teams and investors take profits (see the return profile of EOS, NEO and IOTA for reference). Meanwhile, new token launches will create fresh opportunities and blockchain use cases. Emerging projects, like Virtuals and Hyperliquid, are already showing promise—expect many more breakthroughs as this cycle matures.

Crypto can run on fumes, hope, and excitement for 3-6 months, but to complete a full cycle, the industry will need to rest on major technological breakthroughs that capture the attention of millions. The intersection of crypto and AI appears to be the first such opportunity—injecting new life into digital assets the way DeFi did in 2020.

The next 2020-2021 is on the horizon, but this time, we have reason to believe it will be materially bigger. The industry is likely to hit its first batch of products reaching mass adoption this cycle. There will be sell-offs along the way, but in our view, as long as the underlying assets remain sound, future sell-offs will be frequent but short-lived, representing attractive buying opportunities. In previous cycles, Bitcoin often experienced drawdowns of 30%, sometimes 7-12 times per cycle. If you don’t yet have a digital asset strategy, now is the time to formulate it.

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Past performance is not necessarily indicative of future results.

Crypto’s Six Year Rise out of Obscurity

6 years ago, Hartmann Digital Assets Fund had its initial close. We (or more properly ‘I’ at the time, as a twenty-three-year-old one-man show) came onto a very novel scene with perhaps no more than 100 crypto funds ever having been in existence. It was easy to know everybody and everything. There were only a handful of OTC desks like Circle and Cumberland, one or two custodians like Kingdom Trust, a singular bank willing to back the space (Silvergate), and virtually, and I mean this earnestly, zero actual products or users outside sending and receiving BTC. The industry was almost exclusively built on vision and ideals. This was an era before DeFi, DePin, Web3 Gaming, and everything that has been built in recent years. In fact, most of the ‘basic’ financial primitives that are taken for granted daily, like on-chain swaps, lending, and borrowing, were virtually non-existent—so much so that in that year all of global DeFi was banking approximately $300k. This number, for context, has since risen to north of $100bn.

2018 was also the year when BlackRock’s Larry Fink said that he can’t think of a single client on the globe that has asked for or wanted crypto exposure. Today, BlackRock’s Bitcoin ETF recorded the most successful ETF launch in history, hauling in $20 billion in under 5 months.

If we were to shrink down the entire trading history of Bitcoin and ETH into just 10 days, I’ve traded and witnessed around 5 for Bitcoin and 8 for ETH. Every candle and wick tells a story I fondly remember. Equally, being on the younger side of CIOs/GPs with a 6-year digital asset track record, this crypto journey already makes up 25% of my life in years or 64% of my adult life. Being in a nascent industry for this long, and as I like to say, growing up both in it and alongside it, has shaped my perspectives profoundly.

The industry has gone through many phases on this shared path to maturity. A fairly homogeneous ideal-driven community of libertarians has splintered into many subcultures—from the suit-wearing digital asset crowd pushing for institutional adoption, to the meme-coin casino millennial who lives on Twitter, and finally the original missionary crowd pushing ideals of privacy and decentralization while regularly being targeted by governmental agencies. The first has become my job, the second makes me question my job, and the third is why I get over the stench of the second and remember what brought me here in the first place.

The Regulatory Bottleneck is Heating Up… and is About to Burst

While the industry continues to build, particularly on the scaling front, innovation and adoption have been hamstrung amidst the regulatory battlefield in the US. It’s been nearly a full year since I published my letter on the regulatory bottleneck. While Ripple and Grayscale won their respective cases, and the Bitcoin ETF got approved as a result, as predicted, the regulatory war has not been won yet. The SEC has continued its crackdown on the industry’s most illustrious participants as recently as April with their Wells notice to Uniswap Labs, a US-based unicorn company that is used by millions and has not stolen a penny from anyone. Instead of going after the countless scams and frauds prevalent both in finance and crypto, they chose to go to war with pillars of the industry like Coinbase, Kraken, and Uniswap. It’s not a war for ‘investor protection’; it's a war against technology.

This war against technology has had real repercussions. A few challenges come to mind when thinking of how this current toxic regulatory environment has led to an erosion in fundamentals in the industry:

1. Unless a builder is willing to rot in jail for their mission, many are steering clear of crypto. Running a startup is hard enough; the last thing you need is the Feds threatening your liberties.

2. Regulatory pressure is unevenly skewed towards legitimate products. In other words, you are likely safe from the SEC if you straight up scam someone with a pump-and-dump meme coin, but God forbid you build a new technology that may actually change the financial industry. As a result, we are seeing more worthless crap being launched than truly valuable tokens that try to capture and return value to their holders.

3. DeFi has not really grown in 3 years. While we hit a mind-blowing $100bn in assets being banked on decentralized rails (down from $180bn in 2021), growing materially past this mark will require institutional capital, which is not going on-chain until there’s regulatory clarity.

The Digital Asset trade did not require regulatory support to climb from the innovators to the early adopters. However, the next leg of the Digital Asset trade, to go from Early Adopters to Early Majority, very much needs either regulatory support or a collapse of the old system.

Remove the time horizon, and there is only one correct trade to take: being long on decentralization and shorting the fiat system, institutional inertia, and any nation suffocating at the hands of bureaucracy.

Running a liquid fund, however, time horizons matter. The AI industry, for example, while today evidently shattering records in adoption speed, suffered through two multi-year winters in the '70s and '90s1. The last few months, as Bitcoin struggled to defend its all-time high, I’ve spent a tremendous amount of time thinking about whether or not the industry would win this regulatory war in the West or be shelved until a more friendly (or as the media likes to call it—radical) administration takes over.

But then, things started changing in the last three weeks… As former (and currently polling future) President Donald Trump publicly threw his support behind the digital asset industry2, we started seeing a sudden tone change in DC:

1. The Ethereum ETF, against all expectations, got streamlined for a rushed approval by the SEC.3

2. Congressional Disapproval for the SEC's harshly restrictive crypto custody rules under SAB 121 passed with votes from countless formerly crypto-hostile Democrats.456

3. The Financial Innovation and Technology Act, vastly welcomed by the digital asset community for providing more regulatory clarity and limiting the SEC's jurisdiction over the asset class, passed the House of Representatives and made its way to the Senate. 78

4. Noticing the sudden influx of support for the Trump campaign from the digital asset community, the Biden campaign suddenly began their own outreach to the community according to The Block. Biden lost all favors with the community days later, though, when he vetoed Congress’s repeal of SAB 121.

Ending the Gensler Crusades

To get a better look at the situation, two weeks ago, I found myself in the same room as most of the industry’s policy and/or leadership teams at the annual CoinCenter Gala in Austin, Texas. The energy was rather elated, with speakers acknowledging that “we are finally starting to win” in light of the recent victories in DC. House Majority Whip Tom Emmer greeted the audience, too, with a warning to SEC Chairman Gary Gensler: “Hear my voice, Gary - Your days are numbered.” As I was sitting there, I asked myself: “Is it really the time?” 

The presidential election may just be the hammer that shatters the regulatory bottleneck. If Trump wins, expect Gensler to be resigned at worst or in jail at best. Beyond the autocratic abuse of power in his role as SEC chairman (which is now more frequently pointed out by courts), Gensler also used to serve as Hillary Clinton’s campaign CFO, which brands him as a foe to the Trump administration.

If Biden wants to win, canning Gensler may be his most straightforward path to winning the crypto vote and distancing himself from the radical left, particularly Elizabeth Warren, who has made it her mission to "build an Anti-Crypto army”. This dissent from Warren, who has served as the de-facto voice of the Democratic party on all things crypto, was visible in the vote on FIT 21, where even former Speaker of the House Nancy Pelosi voted in favor alongside Republicans.

I now place the odds of an end to the Gensler Era in the next 6 months at 70-80%. The day that happens, I expect the global digital asset market cap to appreciate by 30%+… or in other words, around a trillion.

Should the dice fall on the remaining 20-30% (or my estimate just be completely off), and we get another four years of Biden and another 2 years of Gensler before his term elapses, I would place my bets on a continual erosion of what Capo Gensler likes to call ‘crypto asset securities.’ The good guys will lose, and the only winners will be law firms collecting checks from crypto firms and US taxpayers as they go head to head for another four years.

Two camps of assets, however, remain mostly sheltered from this crackdown: officially deemed crypto commodities like Bitcoin and meme-coins that do not even attempt to generate value and are born as literal parodies yet evolve into being proxy trades on the cultural Zeitgeist. These two asset camps will continue to grow due to a mix of fiscal irresponsibility of central banks and financial nihilism of Gen Z and millennials. A treatise on exploring these markets is in the works too but will have to wait for another time.

A New Era in Digital Assets

The most meaningful graduation from being speculative assets to investable assets for the wider digital asset space beyond Bitcoin’s digital gold thesis occurs the moment tokens can accrue value without being at odds with regulators. While part of the debate is whether or not digital assets are commodities or securities, the other meaningful debate is how crypto assets can be compliant in a way that does not go against the underlying technology. For example, requiring KYC of each and every holder is a non-starter when the underlying principle is privacy and permissionlessness.

In the event of regulatory clarity, the digital asset market will likely transform in ways that unlock the greatest bull market yet. A few predictions stand out:

1. A shift from narratives to product market fit

   Since there is currently no path for crypto assets to compliantly accrue value, most crypto asset issuers do not even bother creating products that capture value. Ironically, the ability to capture value is a great litmus test in determining whether or not a product itself is genuinely demanded enough for consumers to part with their hard-earned money. Instead, crypto founders have often built things that consumers care so little for, they had to pay their users in tokens to use them. So a few things happen. The quality of building goes up, and...

2. Projects will have more clear metrics to measure success by

   Currently, many digital asset valuations appear to be free-floating numbers set purely based on sentiment and comps. While most markets certainly aren’t efficient, as even equities often trade far detached from their earnings, the equity market does do a fair job in raising the cream to the top. As such, the tokens with the most material product market fit and earnings are likely to start dominating both conversations and portfolios more frequently. This in turn leads to...

3. Easier funding environment for digital assets

   Funding in digital assets is most heavily skewed towards the private markets, while the ability to raise post token launch tends to turn into a roll of the dice for founders based on what market regime they find themselves in. This has caused a cyclical rise and fall nature of ‘alts,’ where each new cycle brings with it a cohort of new projects that raise fantastic rounds while private, and often run out of money or fail to properly capitalize the next bear market, sometimes even if they actually built a fine product. Then the private markets rotate to the next cohort. There is a fair amount of duplicate costs and value being discarded through this rotation. As such, stronger fundamentals will enable protocols to raise funding more easily while at the same time enabling...

4. A thriving M&A market

   Throughout 2022-23, we witnessed numerous DeFi projects fall by the wayside that could have been prime acquisition targets for better-funded DeFi projects. For example, a well-funded Uniswap or fairly well-capitalized AAVE may expand its offering and become a DeFi super app by acquiring some of the many well-functioning but under-capitalized players in the on-chain perps and options markets, or break more materially into real-world assets by facilitating a token swap with one of the leading real-world-asset (RWA) protocols that are trading at perhaps 1% the market cap of Uniswap. The maturation of crypto assets individually and of the market as a whole is likely to open the doors for truly savvy dealmakers and operators to build value in ways we have not properly seen executed before in Digital Assets and materially accelerate product development and innovation, which in turn leads us closer to adoption. For example, some Layer 1 blockchains are likely to utilize M&A to acquire highly desired products and turn them into public goods. This would reduce costs for users, while at the same time increasing usage and gas spend on the chain itself, driving value for the network token (the fat protocol thesis sends its regards). 9

Having traded catalysts and fundamentals in digital assets since the day they essentially arrived in the industry, this is perhaps the most promising era of this market that is yet to come. Such structural changes would also likely see the largest inflows in capital into the market as institutional allocators can apply similar models in finding true value as they have for a century in other asset classes.

At Hartmann Capital, our core digital asset thesis is that ‘Most Assets will be Tokenized’ in the coming decade. And while this was a contrarian take, Larry Fink and even Jamie Dimon (who can’t stand Bitcoin), are fond proponents of tokenization. While most of these leaders are focusing on the asset that could be wrapped in a token and the opportunities and savings it would unlock, we want to focus on and own a stake in the infrastructure that powers this whole process and could capture the fees of what will likely, in the endgame, be the market of all markets—from financial, to physical assets, to IP, and personal data.

Lighting the Fuse

The timing of the US presidential election, and thereby the regulatory fate of the digital asset space, happens to coincide with the looming central bank pivot. While the ECB took the first move in cutting interest rates, the Fed has yet to make its first cut, now projecting that it will cut rates once in 2024, with rates dropping to ~4% in 2025 per their June Economic Projections.

While the Fed has successfully reduced its balance sheet by approximately $1.7 trillion since the tightening started, M2 money supply remains near its all-time high.

By now, $6.44 trillion of this money supply are sitting in money market funds, earning a passive ~5% annualized. As rates get cut, not only are risk assets more attractive as access to capital becomes easier, but equally will the risk-free alternative become less attractive. When 2-3 trillion of sidelined cash re-enter markets, we are likely to see digital asset prices rise materially, both acutely during the early innings of easing, and throughout the entirety of the lower interest rate environment.

Conclusion

Rate cuts are on the horizon regardless of the political outcome. As such, money will flow. Where that money flows to is largely dependent on whether there will be changes to SEC leadership or mandate, or alternatively a loss of jurisdiction over digital assets through courts and Congress. The outcome remains binary, though, where under the current regime Bitcoin and memes thrive, while under a more constructive regulatory framework, the true innovations in digital assets can begin to serve trillions of dollars in financial value and capture hundreds of billions in value in exchange.

The trade remains two-fold—hold tight till the pivot & pick the right regime. Regardless of the outcome, either bucket can serve as a tradeable universe for the next four years with tremendous upside.

At the end, I’ll leave you with an excerpt from digital asset pioneer Erik Voorhees’ keynote speech at the annual CoinCenter Gala on the promise of crypto and why the battle for digital sovereignty must be won in America—a country founded upon the principles this industry most closely reflects.

9

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Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

It’s been just over two weeks since I shared with you the importance of Breaking the Regulatory Bottleneck, and as predicted, the cracks are starting to show. In just 17 days, the following events unfolded:

1. Ripple Labs notches landmark win in SEC case over XRP cryptocurrency

2. CBOE exchange to partner with Coinbase on bitcoin market surveillance in ETF push

3. US SEC accepts six spot bitcoin ETF proposals for review

Whether the regulatory bottleneck breaks is simply a question of time, as addressed in Part I of this series. Representative Ritchie Torres put it bluntly in a letter to the Commission, inquiring “if the SEC intends to come to terms with the folly of the Commission’s crusade against crypto assets in light of the latest decision by Judge Analisa Torres of the Southern District of New York.”

There's strong evidence that little will hold us back soon. Still, the question remains: What will move us forward?

For there to be a bull market, we need to see meaningful growth from cycle to cycle.

For there to be a bull market, we need to solve major friction points in adoption.

For there to be a bull market, we need to solve real-world problems that see real-world traction.

Today, we will examine the first two prerequisites by investigating the evolution of blockchain technology over the past four years, and determining whether significant friction points have been addressed.

From the Gilded Age to the Progressive Era

The 'digital world', or web3, refers to the part of the internet that operates and is governed through blockchains. We believe that this digital world is sovereign, not subject to the jurisdiction of any earthly country. The first nodes are already floating in space. While our homes won't accompany us aboard the next Starship, our digital assets will. And in Virtual Reality, digital assets reign supreme. The digital world, truly, is more akin to a sovereign digital super-nation that exists everywhere and nowhere simultaneously.

The historical similarities between the origin story of the United States and that of the digital world are striking. For instance, Bitcoin's whitepaper is celebrated among its followers like the Declaration of Independence, with Bitcoiners commemorating its publication and the block-size wars remind us of the feud between the Federalists and Anti-Federalists.1

The past cycle has been reminiscent of the United States from 1870-1900. In 1870, the United States was a young nation with an inflation-adjusted GDP of just around $200bn. After surviving its civil war and enduring reconstruction, it entered a period of rapid economic expansion known as the Gilded Age. Much like digital assets in 2020-2021, the Gilded Age saw rapid wealth expansion, technological innovation, lack of regulation, and a rise in speculation. Many innovations and speculations were infrastructure-centered, such as the burgeoning railroad industry, where speculation significantly outstripped demand. This mirrors the speculation in digital assets, largely placed on the underlying infrastructure of the digital world. As excesses grew too ostentatious, the Gilded Age ended with the Panic of 1893. The Philadelphia and Reading Railroad Company, one of the US's largest, declared bankruptcy following overzealous expansion and speculative financing. In a historical twist on Terra/Luna, the country also faced some of the biggest bank failures, as the value of silver had declined, causing people to run on the bank, swapping their bimetallic standard US dollars for gold, causing the price of silver to crater even further. The Panic of 1893 led to an economic depression, second only to the Great Depression that occurred forty years later.

After the 1890s Panic and Depression subsided, the Progressive Era began. Much like current times in the digital asset world, the Progressive Era focused on penalizing the corruption of the Gilded Age, reforming the country socially and politically, and further expanding infrastructure to level the playing field. While the Gilded Age was rife with ostentation and lawlessness, the Progressive Era faced prohibition yet saw a return to structure. Although the Progressive Era was a time of hard-earned change and progress, it set the stage for the Roaring Twenties that followed.

As we find ourselves in our own ‘Progressive Era’, following the Gilded Age of ‘20-’21 and the Panic of ‘22, what have been some of the core improvements that had previously been neglected?

If you were to ask the average person, or the media, about their issues with blockchain technology and crypto during any of the last cycles, their response would likely include one or more of the following:

Let's delve into how these three core concerns have been addressed and/or improved over the last 18 months.

Scaling the Digital World

Cost and speed are two primary factors that determine whether a business will integrate public blockchains into their tech stack. This could include e-commerce related tools, credit via DeFi, or NFT loyalty programs.

During the last bull market, around 2019-2020, nearly all Web3 user activity took place on Ethereum. At that time, even Ethereum had only a minimal number of applications in production. But when the market heated up, as in 2021, the cost per transaction would skyrocket to more than $200 for a simple swap and over $1000 for more complex transactions. Ethereum became unusable for all but whales and funds moving significant volume over the chain.

However, between January 2021 and today, blockchains have evolved from being a one-way street to multi-planetary systems. Let me explain…

If Blockchains Were Cities - Scaling Explained (ELI5)

During a recent call with an LP discussing some of our positions, it became clear that my talk about Layer 0's, 1's, and 2's, interchain security, and bridges was met with glazed eyes. Whether due to my expertise or just being a Level 99 nerd, we often mistakenly assume that everyone understands the jargon and its nuances.

Now, imagine for a moment that blockchains were cities. Where you live and work dictates many things:

• What opportunities are available around you?

• How high are rent, taxes, and the overall cost of living?

• How much traffic do we have to deal with?

• How safe is our environment, both structurally and culturally?

One person might choose to live in Manhattan, where opportunities are limitless, costs are high, traffic is heavy, and due to its economic activity, safety is a dichotomy between high crime and the world's largest police force.

Another person might opt to live in a small town, where basic needs are met, but entertainment and business options are limited. Here, costs are affordable, traffic is a foreign concept, and while a small group of armed men could potentially topple the local government, the town generally remains peaceful due to the lack of anything worth stealing.

Now, imagine Ethereum as Manhattan. Ethereum is the most popular and longest-running Turing-complete Blockchain.

What opportunities are available?

53% of all stablecoins settle on Ethereum…

… and 58% of all DeFi liquidity is stored on Ethereum…

… and 60-90% of all NFT volume is on Ethereum too.

When viewed through the lens of potential activity, Ethereum, much like Manhattan with its extensive offerings, is the most desirable place for digital identities and assets.

However, when people around the world start flocking to "Manhattan," rent rises and congestion increases. Ethereum experienced the same phenomenon during the 2017 and 2021 bull cycles, with gas fees increasing from mere pennies to hundreds of dollars. An interesting statistic: in 1900, Manhattan's population was around 1.85 million (~2.5% of the US population). Today, it's about 1.7 million (~0.5% of the US population). Like Manhattan, Ethereum has scalability constraints. While Manhattan could not increase its population despite its high-rise buildings, it massively expanded its economy. By 2019, New York City's Gross City Product (GCP) of $884 billion exceeded the entire GDP of the United States in 1900 ($500 billion, adjusted for inflation).

Ethereum, much like Manhattan, must scale its economy despite technical constraints, maximizing the economic value of its transactions while accommodating as many people as possible. Meanwhile, it must direct lower-value transactions elsewhere.

Let's investigate how this concept has transformed into reality over the past 24 months.

Ethereum's initial scalability vision, sharding, was akin to implementing multiple lanes of flying cars to alleviate traffic congestion. However, like flying cars, sharding got scrapped in favor of more efficient and simpler solutions that could be quickly brought to market.

The industry's first successful scaling strategy was going multi-chain. This meant that Ethereum was no longer the only game in town, and assets could be moved using bridges to Ethereum competitors (hereinafter referred to as Layer 1 Blockchains or L1s) such as Solana and Avalanche. In the Manhattan metaphor, these bridges to other L1s are akin to airports, connecting us to other places with different languages (coding languages: Ethereum - Solidity, Solana - Rust, Sui - Move), governance, and token standards.

The first significant Layer 1 breakout success was Binance Chain in January 2021, followed closely by the emergence of Polygon (formerly Matic) as the first successful ‘side-chain’ to achieve mainstream success, banking nearly $10bn in decentralized finance, and onboarding house-hold names like Reddit, Disney, and Starbucks. These side-chains, unlike L1s, tend to be more interoperable, as they use the same Virtual Machine (EVM), share the same token standards, and are programmed in the same language: Solidity. If Manhattan/Ethereum ever gets too expensive for you, you can always cross the bridge and go to Brooklyn/Polygon. Or if you really want to save some money, you might as well take a plane to a less developed/less regulated island nation, i.e. Binance Smart Chain or Tron. But hey, you get what you pay for.

In late 2021, a new scalability solution went into production: Rollups (or Layer 2's/L2s). Rollups offer the benefits of the underlying Layer 1 while temporarily sacrificing a bit of security. To keep the technical simple, instead of recording every single transaction independently on the only ~15 transactions per second Ethereum, you transact on the Layer 2, which later settles with other transactions in batches on Ethereum (to keep our now extended analogy running… it’s like saving travel cost by cramming with strangers into a subway). Today, after the successful rise of Arbitrum ($ARB) and Optimism ($OP), L2s have enabled Ethereum to scale about 4.3x its original capacity. Other L2s like IMX ($IMX) offer alternative trade-offs, enabling as many as 9,000 transactions per second, targeted especially at gaming projects.

With increased scalability comes the benefit of cost distribution. Trading on the Layer 2 Optimism today could result in savings of about 98.2% in fees compared to trading directly on Ethereum. Here is a breakdown of fee costs for different sidechains and Layer 2s.

This expansion is remarkable, but the Ethereum Foundation has set more ambitious goals on its roadmap.

Aside from Ethereum, other projects also work on scalability, albeit with less traction. One of these is the Cosmos Ecosystem ($ATOM), a Layer 0 that application specific blockchains can connect to, providing core infrastructure such as interchain security and communication, yet leaving individuals zones autonomous. While its ecosystem is less mature than Ethereum's, it stands out as one of the most ambitious designs for decentralization, and has attracted unique teams such as Akash for computing, Secret for privacy, and Osmo for DeFi.

Crypto Goes Green

Despite the widespread misinformation regarding the environmental impact of digital assets, the reality can be simplified enough that a 5-year-old could comprehend it.

Within digital assets, there are primarily two forms of consensus/governance: Proof of Work (PoW), often referred to as mining, where more computation equals more voting power, and Proof of Stake (PoS), where more token ownership equals more voting power. In 2022, Ethereum finally retired its PoW mechanism and fully shifted to PoS. As a result it was able to reduce it’s energy consumption by 99.95%.

Remarkably, all the significant advancements we've discussed in this article:

• Layer 1 blockchains such as Ethereum, Solana, or Avalanche

• Sidechains like Polygon, Gnosis, or Metis

• Layer 2 solutions like Optimism, Arbitrum or IMX

• Layer 0 technologies like Cosmos or Polkadot

None of these, absolutely none, rely on proof of work. "Crypto Mining" is an archaic relic reserved for the Bitcoin devotees. While the concept of digital currency based on Austrian-economic principles is intriguing, it doesn't cover any of the web3 components that will actually be used by billions of people, such as Decentralized Finance, Stablecoins, DAOs, NFTs, Gaming, the Metaverse, Web infrastructure, and more. Virtually all of web3 is settled on proof-of-stake blockchains, resulting in a carbon footprint comparable to any other web service in use today.

Streamlining User Experience - Account Abstraction

The adoption of digital assets has been somewhat hindered by a user experience crafted with early adopters in mind. An individual familiar with the crypto world might claim it's simple, but even a tech-savvy person might spend a couple of perplexing hours attempting to grasp it, potentially making costly mistakes in the process.

A typical scenario for many newcomers involves trying to purchase an NFT on a new blockchain. First, you deposit your funds onto Coinbase, quickly transferring them to your wallet. As you attempt to buy the NFT, you realize it's listed on a different blockchain. Now, you must bridge your funds over. You find a bridge that you hope is trustworthy. However, you suddenly realize you need ETH for gas fees. Returning to Coinbase, you purchase some ETH and send it to your wallet. The bridging of your funds requires 3-4 separate transactions over the span of 60 minutes, including numerous time-consuming approvals, each of which incurs gas fees. Once the money arrives, you discover that you need the local blockchain asset for trading, prompting you to find a local decentralized exchange to swap your USDC for the local network token. Ideally, you would already possess a small amount of this token, otherwise, you must repeat the process from step one to bridge some over for gas fees. Finally, you're ready to buy your NFT. You locate the platform, approve a few transactions, and at last, the NFT is yours. (I trust you found that as exhausting to read as I did to write.)

For a seasoned crypto enthusiast, the process could take approximately an hour, largely slowed down by confirmation times. It might seem easy to someone like me, who has conducted thousands of on-chain transactions, but for anyone new, there are innumerable hurdles and risks for costly mistakes:

1. Send to the wrong address

2. Forget to write down your seed-phrase

3. Use a questionable bridge

4. Be unsure what transactions to approve and which not to trust

5. Incur unnecessary gas fees

Fortunately, the future looks promising. User-friendly smart contract wallets are on the horizon.

Traditionally, wallets require you to sign every transaction, an often cumbersome process. However, the industry has been tirelessly working towards a concept known as “account abstraction” to simplify the user experience significantly.

The Ethereum foundation lists a number of remarkable benefits that stem from account abstraction:

“Smart contract wallets unlock many benefits for the user, including:

• define your own flexible security rules

• recover your account if you lose the keys

• share your account security across trusted devices or individuals

• pay someone else's gas, or have someone else pay yours

• batch transactions together (e.g. approve and execute a swap in one go)

• more opportunities for dapps and wallet developers to innovate on user experiences”

The first of many upgrades to Ethereum to enable account abstraction has been implemented via EIP-4337, which allows users to bundle several actions along with signatures. This feature facilitates batched transactions, reducing the need to sign multiple separate transactions for slightly more complex operations.

Other chains and Layer2s are also in the race towards a more efficient user experience. For instance, Arbitrum recently passed its second Improvement Proposal, which supports this exact initiative.

Countless wallets are emerging that are hundred times more user friendly than anything we have seen as recent as a year ago. Some examples include Unipass, Sequence, or Ambire (mentioned as examples, not endorsements).

Vitalik Buterin, co-founder of Ethereum, recently delivered a keynote on account abstraction at the Ethereum Community Conference (EthCC) in Paris. If you want to nerd out for an extra hour, this video is for you. If you don’t, suffice to say, that account abstraction is a game-changing solution to a significant technical bottleneck in digital assets.

Conclusion - Paving the Roads of a New Digital World

The primary objective of digital assets and decentralization is to reconstruct the digital landscape on the basis of self-sovereignty – a monumental and ambitious goal. While it's easy to cast judgment and harbor doubts in light of the boom-and-bust cycles, the underlying technological advancements and expansions in network capacity are irrefutable. From reducing costs and increasing scalability, to adopting environmentally friendly practices and enhancing user experiences, blockchain technology is enduring the necessary growing pains to welcome its first billion users. The most dynamic period, our Roaring Twenties, are yet to come.

Up next…

Having addressed regulation and examined infrastructure transformations, we will delve into the application layer in our next piece. We'll explore which niches within the digital asset universe are showing early indicators of achieving a product-market fit.

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Disclaimers:

This is not an offering. This is not financial advice. This is not legal advice. Always do your own research. Hartmann Capital and/or affiliates may hold positions, long or short in the assets discussed.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Introduction - “This time is [not] different”

Though emotions have been fraught, given the unique challenges of the past year (such as the FTX scandal inciting regulatory backlash), the broader market structure remains consistent with both traditional and previous digital asset cycles. Crypto Twitter, a popular hub for industry insiders, closely mirrors the well-known 'Psychology of a Market Cycle' chart. Anecdotally (we will soon shift from anecdotes to data), many market players, myself included, seem to be mentally rebounding from the eighteen-month downturn and preparing for the next cycle.

As with the last cycle, the new one is initially led by Bitcoin. Below, you can see the total market cap of all tokens, excluding BTC and ETH (TOTAL3), retesting its post-FTX lows. This is similar to how TOTAL3 retested its December 2018 lows in the summer of 2019.

The progression is logical. As a bear market persists, liquidity decreases, teams sell portions of their tokens to sustain their burn-rate, and VCs liquidate their stakes to return assets to LPs. Consequently, most tokens outside BTC/ETH experience larger draw-downs. This triggers a 'flight to quality', as outlined in our Q3/4 'war rooms', where allocators consolidate their portfolios into Bitcoin and Ethereum. This creates upward pressure on these two leading assets and downward pressure on the rest.

However, the crowded trade is rarely the right one. In 2019, Bitcoin maximalism emerged and gained traction due to this price dynamic. Participants desired to distance themselves from the underperforming ICOs and commit to Bitcoin, which had outperformed all other assets in the downturn. But what happened next? The tide turned.

Over the next year and a half, Bitcoin was among the weakest performers in the space. Meanwhile, the real opportunities lay in the multitude of new technologies one could only get exposure to via token investments: DeFi, Stablecoins, NFTs, the Metaverse, decentralized Web Infrastructure, and more.

Price charts alone, however, don't provide the whole picture. Four questions need to be addressed to draw meaningful conclusions about both the investability of the space and the potential dynamics of the new cycle:

1. Will regulatory pressures stop the bull market in its tracks? [Part I]

2. Has infrastructure improved from trough to trough? [Part II]

3. What core opportunities have Digital Assets successfully tackled? [Part II]

4. Is the bottom really in? [Part III]

Breaking the Regulatory Bottleneck

It's not often that a regulatory body is either in court with or investigating half an entire tech industry. While we should question the motives over the long term, I'll leave the detective work to those with more time. Instead, as an asset allocator, the focus should be on potential resolution scenarios and their timelines.

Interestingly, a resolution wouldn't just alleviate issues for those currently under scrutiny, but it would likely also provide the regulatory clarity that this industry craves. Such clarity would accelerate both capital formation and innovation, as investors are hesitant to allocate funds at a time when many crypto startups and companies are using half their burn rate solely for legal retainers. Furthermore, young developers should not live in fear of legal consequences for simply trying to innovate.

Three likely paths could lead to resolution of the ongoing 'Salem Witch Trials' in DC:

1. Major Court Cases

2. Presidential Election

3. International Rebalance of Power

Let's delve into each in more detail:

Major Court Cases

There are three pivotal lawsuits I'm monitoring closely, each with significant implications for the entire digital asset industry. These cases could clarify several key issues:

SEC v. Coinbase

Summary of Complaint:

The SEC alleges that Coinbase, the largest crypto asset trading platform in the U.S., has been operating as an unregistered broker, exchange, and clearing agency. This is based on Coinbase's platform merging these three roles, traditionally separated in securities markets, without registering with the SEC for any of the three functions.

The SEC further asserts that Coinbase has been providing these services for crypto asset securities, thus bringing their operations within the scope of securities laws. As such, Coinbase, according to the SEC, has defied regulatory structures and evaded disclosure requirements set for the protection of national securities markets and investors.

Moreover, Coinbase is accused of knowingly making available for trading crypto assets that have the characteristics of securities, thus prioritizing its profits over compliance with the law and the interests of its investors.

Additionally, since 2019, Coinbase has offered a staking program that the SEC deems as investment contracts, and hence securities. However, the SEC argues that Coinbase has never registered this staking program, violating the Securities Act of 1933.1

Regulatory Clarity to be Achieved

The outcome of this court case is likely to provide clarity on several vital issues, enabling the industry to progress and attract new participants:

1. Are digital assets considered securities, and if so, which ones and why?

2. How should digital asset exchanges be structured? Does the traditional securities exchange model of brokers, national securities exchanges, and clearing agencies apply to the digital asset space, which fundamentally differs due to on-chain issuance and custody?

3. Do staking and stablecoin yield products constitute an investment contract, thereby falling under SEC jurisdiction?

How the Dice are Falling

On June 28th Coinbase filed its official answer to the SECs complaint2:

As the largest U.S. digital asset exchange, Coinbase is contesting the SEC’s accusation that it has failed since 2019 to register as a national securities exchange, broker, and clearing agency. In 2021, the SEC had allowed Coinbase to publicly sell its shares after intensive review and dialogue, without implying the need for registration. The SEC now claims that 12 out of 240+ tokens traded on Coinbase are "securities", a claim not made in 2021. Coinbase asserts the SEC's new position is legally untenable, violates due process, and disrupts the constitutional separation of powers.

Coinbase emphasizes that it has always cooperated with U.S. regulators and complied with all applicable laws, welcoming regulation. However, the SEC's recent actions are seen as an expansion of its own authority to regulate digital assets, done arbitrarily without congressional mandate. Coinbase states none of the assets that the SEC identified are securities. It also mentions the ongoing congressional debate about the best approach to regulating digital assets.

Coinbase argues that the SEC's new interpretation of "investment contract" requires formal rulemaking rather than punitive enforcement actions. The company asserts that the SEC's claims are both imprudent and unlawful.

Furthermore, Coinbase disclosed its 11 defenses (Page 173 & 174). While many were anticipated, such as 'no authority to regulate' or 'no securities trade on Coinbase’s spot exchange', there are some particularly intriguing and compelling defenses. The 10th defense claims, "The Complaint is barred by Plaintiff’s unclean hands". Without additional details, it's intriguing to speculate whether the Coinbase legal team possesses a 'smoking gun' that indicates corruption within the agency.

However, it's the third defense that could potentially resolve the issue of US regulation. This is Defense 3, 'The Major Questions Doctrine', which originated from a recent US Supreme Court Case in 2022 between West Virgina and the EPA.3

The major questions doctrine, holds that in “extraordinary” cases involving matters of great “economic and political significance,” federal agencies must be able to point to specific Congressional authorization for their actions.

Shifting decision making on these key issues away from the SEC and towards Congress would be a major win for the industry. It's no secret that the SEC has faced intense scrutiny from the US Congress, as members from both parties grow increasingly concerned that Chair Gensler's actions are driving businesses overseas. This concern has even led to the introduction of the SEC Stabilization Act4 which seeks to remove Chair Gensler and fundamentally restructure SEC governance.

Grayscale v. SEC

Summary:

Grayscale Investments has challenged the SEC's decision to approve futures-based Bitcoin ETFs but disapprove its application for a spot-based Bitcoin ETF, claiming unequal treatment of two related products. The SEC, however, maintains that the lack of robust surveillance in unregulated spot markets where Grayscale’s proposed product would operate prevents it from ensuring protection against fraud and manipulation as effectively as in futures markets (on the CME). The SEC argues its differential treatment of the products is reasonable and in line with Exchange Act requirements.5

The judges on the D.C. Circuit panel appeared skeptical of the SEC's claim that they had sufficient grounds to approve futures-based bitcoin ETFs while denying spot-based ETFs because they would be harder to oversee. They questioned the SEC's claim about the correlation between the bitcoin spot and futures markets and seemed concerned about potential consequences of revoking Grayscale's decision.6

Why it matters:

The Grayscale case is incredibly important for two reasons.

1. It could enable the launch of the long awaited spot Bitcoin ETF, which historically has dramatically improved capital infusion into assets like Gold.

2. The Grayscale Trusts are currently trading at 30-50% discounts to NAV due to a lacking redemption mechanism. ETF conversion would enable markets to close the mispricing.

How the Dice are Falling

Rumors suggest that Grayscale is likely to win this case, and this view isn't merely anecdotal; it's shared by many on the street, as recent ETF filings suggest.

In just a month, two of the world's three largest asset managers and a renowned tech investment firm have filed for a Spot Bitcoin ETF. This synchronicity shouldn't be mistaken for mere coincidence; it's another sign that the SEC's case against Grayscale may be weakening. The contention was never truly against Grayscale itself, but against the integrity of Bitcoin spot markets themselves, which the judges are raising their brows at.

As for BlackRock's ETF? In its entire history, BlackRock has only had one ETF filing denied, while 575 were approved.7 With a contentious election year looming, it's unlikely that incumbents would want to mar this near-perfect record, especially considering BlackRock's status as one of the largest political donors in the US.

SEC v. Ripple Labs

Summary

The SEC's lawsuit against Ripple Labs is arguably the most significant case addressing whether digital assets are securities. Thus, selling them via public methods, such as an Initial Coin Offering (ICO) or modern launchpads, may constitute the unregistered offer and sale of securities. The Commission also criticizes the lack of disclosures and the near $1.4 billion in sales by the founders and the entity.8

How the Dice are Falling

After two years and seven court orders, the SEC was finally compelled to reveal internal documents that challenge the credibility of the infamous Hinman speech. This speech has been touted by the Commission as one of its only pieces of 'Regulatory Clarity'. However, it appears that Hinman, serving as the Director of the Division of Corporation Finance at the time, was warned by several staff comments that his interpretation and statements were exceeding the scope of the Howey test. In other words, he was more liberally labeling things as securities than was appropriate. For a complete breakdown of the Hinman emails, refer to the tweet below by Ripple Labs' Chief Legal Officer, Stuart Alderoty.

The verdict for this case is now expected to arrive in late July 2023. This decision could become a landmark for the entire industry, potentially affecting other cases, such as SEC v. Coinbase.

Major Court Cases - Conclusion

Cases like SEC v. Coinbase and SEC v. Ripple Labs could be among the most pivotal and industry-defining legal battles we've witnessed. Outcomes for these cases are expected within the next 1 to 24 months. The longer these cases persist, the greater the chance that a change in leadership at the SEC could result in a dismissal or settlement. In the case of Grayscale v. SEC, the recent surge in ETF filings suggests a resolution may be nearer than anticipated.

Once founders are able to launch tokens without fear for their freedom and livelihoods, we can expect the next wave of innovation. Indeed, countless teams have developed entirely new startups and are eagerly waiting on the sidelines. Based on the advice of their lawyers and VCs, they're ready to launch their tokens as soon as they get the green light from regulators.

Presidential Election

Although Gensler's term as a commissioner doesn't end until 2026, it's well-known that the tone of the commission is set by each administration. After all, it's the President who appoints both the commissioners and the chair to lead the SEC.

So, what are the stances of various contenders on digital assets? For a moment, let's view this through the lens of a 'Single Issue Voter'.

Democrats

Lead - Joe Biden:

• Whatever-is-popular stance (Pro-Crypto9 , Cautious-Crypto10 , Anti-Crypto Propaganda11)

2nd - Robert Kennedy:

• Hardcore Pro-Crypto (Keynote at Bitcoin2023, Interview)

Republicans

Lead - Donald Trump:

• Recent Convert (From throwing harsh words to launching several NFT collections on polygon.)

2nd - Ron DeSantis:

• Hardcore Pro-Crypto & Anti-CBDC (On his campaign launch event promised to protect crypto)

Follow the Money

It's also insightful to consider who the major donors are and where their interests are vested.

The Block reports:

“Soros Fund Management CEO Dawn Fitzpatrick is bullish on crypto, even with the recent headwinds including the U.S. Securities and Exchange Commission suing trading platforms Binance and Coinbase amid a prolonged downturn.

“Crypto is here to stay,” she said during a Bloomberg investment summit. “What’s happened is clearly a setback. But right now I actually think it’s a huge opportunity for the incumbent financial firms to actually take the lead.””12

Soros, having placed substantial bets on crypto throughout the bear market, is unlikely to back the obliteration of the asset class. Similarly, Ken Griffin, a heavy-weight Republican donor and founder of Citadel, recently supported the launch of EDX, a new digital asset exchange backed by Citadel, Schwab, and Fidelity.

Presidential Election - Conclusion

From the perspective of a single issue voter, all current candidates appear more favorable than Biden. This implies that the current situation can only improve. Interestingly, even as an incumbent, Biden struggles to maintain a lead against Trump, despite the latter's indictment.

However, a victory for either DeSantis or Kennedy could instigate an immediate reversal in the US stance on digital assets. With such a shift, the next cycle could genuinely find the support needed to drive mass adoption.

International Re-balance of Power

Assuming the worst-case scenario: the SEC claims resounding victories across all its legal battles, Biden wins the election, and the Sith take over the galaxy. In reality, the United States' significance in the digital asset space diminishes with each passing day, rendering its decisions increasingly less impactful.

During my recent trips to Asia and Europe, what seemed like a life-or-death situation in the States was often met with a shrug overseas. It's true that the United States, as an economic superpower, would be a valuable ally for any industry. However, the same could be said for China. Countries such as China and India have previously banned digital assets, and yet, the industry still flourished.

We've seen a significant shift recently in the international balance of power concerning the leadership in the digital asset space. Some of the biggest names in the industry have begun their transition overseas. Here are a few announcements from the month of June alone.

In essence, if US regulatory leadership can't find a way to carry out their responsibilities without stifling innovation, the industry will simply relocate overseas.

Conclusion - Breaking the Regulatory Bottleneck

Digital assets will succeed with or without the United States. Either we secure victory in the courts, we triumph in the elections, or we relocate our operations elsewhere. For months, I grappled with the potential outcomes and the complexities that some of the proposed bills could introduce, ranging from outlawing DeFi to unattainable requirements for qualified custodians.

Nonetheless, the truth is apparent when looking at California's situation. Its anti-business policies and the resulting migration trends serve as a fitting benchmark for what could happen to the United States if it persists in adopting anti-crypto regulations.

Up next…

Now that we've dismissed the fear of regulation annihilating the industry, I will delve into the next two critical questions in Part II of my thesis on the Fifth Crypto Cycle:

1. Has infrastructure improved from trough to trough? [Part II]

2. What core opportunities have Digital Assets successfully tackled? [Part II]

If this article was forwarded to you, ensure you subscribe so you can receive the next installment directly in your inbox.

Disclaimers:

This is not an offering. This is not financial advice. This is not legal advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

What ensued was one of the most accelerated bull markets in recent history across asset classes. And the only thing that could slow it in its tracks was the very thing that first ignited it. The Fed. As the pendulum swung aggressively towards easing, it now swung equally forcefully back with the fastest rate hikes in 35 years.

Yet when zoomed out, it all does not look that odd. Since 2020, the S&P has appreciated to the tune of 18%., not far off from its annual average compounded return of 10.7%. But if you zoom in, you’ll be hard-pressed to miss the rollercoaster the market has been through - from shaving off 35% during Black Thursday 2020 to regaining 118% the following 24 months, only to once again give back over 20%. 

The rollercoaster the market has experienced naturally leads to heightened emotions, and we currently find ourselves deep in the valley of despair. If you listen to the news, you’d think it’s the end of crypto, the end of tech, heck the end of growth investments altogether. “Experts” on TV call for the top in globalization and predict that global progress and productivity are going to decline, and things will never be the way they were. I wish I was kidding.

In today’s writeup, I want to unpack why I believe the very premises of most macro analyses today are off and fail to take into account the increase of global productivity due to AI, the decreased reliance on commodities and physical goods due to the rise of the metaverse, and the decrease in inefficiencies and middle-men due to blockchain technology.

Today we will leave the doom headlines behind us and take a data-driven approach to the future. So grab a coffee and buckle up. The future may just be brighter than you think.

Paradigm Shift 1:

“High Inflation with Strong Labor-Market” will become “Deflation with Rising Unemployment” 

We will look back at this time with awe. A 50-year low in unemployment, the same year that AI finally became so smart it may just kill google. 

We’re at the dawn of the digital age.

Coding is taught in schools and becoming commoditized. 

Virtual worlds are no longer sci-fi but the latest land grab amongst tech giants.

AI is no longer just a semi-philosophical topic for late-night musings, but an easily accessible technology for millions of builders. 

Crypto is no longer a fringe technology but is used by everyone from JP Morgan, to Paypal, to Meta. 

Most of these technologies will provide deflationary pressures while making countless industries and careers obsolete. 

Technology can impact deflation in a few ways:

1. Improved efficiency: Technology can improve the efficiency of production processes, which can lead to lower costs and potentially lower prices for goods and services. This can contribute to deflationary pressures.

2. Increased productivity: Technology can increase the productivity of workers, which can also lead to lower costs and potentially lower prices for goods and services. This can also contribute to deflationary pressures.

3. Increased competition: Technology can make it easier for new firms to enter markets, which can increase competition and lead to lower prices for goods and services. This can also contribute to deflationary pressures.

4. Reduced demand for labor: If technology leads to significant job losses, this could reduce the overall demand for labor and lead to downward pressure on wages. This, in turn, could reduce the cost of production and potentially lead to lower prices for goods and services.

It's worth noting that the impact of technology on deflation will depend on a variety of factors, including the specific industries in which it is being implemented and the overall state of the economy.

Oh, by the way… that italicized part was written by AI…

Inflation will be a worry of the past in short order with interest rates this high and technology progressing at its breakneck pace.

Paradigm Shift 2:

“Rising Commodity Prices & Forced Austerity” will become “Digital Abundance & Rising Quality of Life across Socio-Economic Strata”

A common theme amongst financial commentators is that they always expect more of “the current thing”. Markets boom. They assume they will keep booming. Crypto exchanges fail. They assume more will fail. Commodities rally. They prognosticate commodities must keep rallying till we trade our firstborn for oil.

In a recent interview I listened to by macro investor, Felix Zulauf, he cites that commodities will rise again in prices in late 2023 and 2024, due to scarcity in production (e.g. Russia withholding oil from the West). While I have countless issues with these claims, such as the US’s vast shale oil reserve that certainly would be tapped long before US Oil gets to the $200 mark he predicts, there is a much bigger paradigm shift I want to hone in on when it comes to commodity pricing.

The world is going digital, and the cost of physical goods simply matters less.

How much gas does your car consume going to a zoom meeting? Zero.

How much kerosene do you consume traveling in VR? Zero.

How much fabric do you use for digital fashion? Zero.

How much lumber & steel goes into the construction of your digital home? Zero.

Alas, while I understand we are not living in Ready Player One just yet, the reality is that we are on the road of efficiency rather than austerity. From hyperefficient ghost kitchens and food delivery to remote work and virtual schools, the average family can have a better life with less.

It’s worth noting that the two biggest categories in the CPI are housing and transportation - yet both housing and transportation become more variable in a digital-first world.

In an age where most work is remote, classes are virtual, grocery stores offer free delivery, and Amazon exists, owning a car is for leisure unless your job requires it. Equally, given the same dynamics, it is no longer necessary to live downtown. Urban sprawl will keep sprawling, as people just need to live ‘close enough’ to the action a city provides. Match that with ever-improving transportation (from the Boring Company to supersonic travel) and you may just be fine living 1-2 hours outside the city when the tunnel can take you at 150mph.

The pandemic accelerated this trend already tremendously. Even today, traffic is down 22% from pre-pandemic levels due to the rise of remote work.

Physical work will soon be fully automated, and nearly all intellectual work can be done remotely.

While it might sound utopian that in the metaverse everyone can be rich, it’s worth noting how the standard of living has risen across the board over the last centuries thanks to technology. In most western countries, even the lowest socio-economic classes have access to better health care, technology, and information than US presidents had as little as thirty years ago in the pre-internet era. The best way to highlight human progress may just be life expectancy as it’s a cumulative result of progress in medicine, agriculture, infrastructure, and more. The economy is clearly not a zero-sum game.

In the Metaverse, you can have world-class experiences for a fraction of the “real-world” cost.

Instead of a single $300 college textbook, students can buy a VR headset and unlock learning environments that put the most expensive private schools to shame in VictoryXR.

Instead of a $600 Coachella ticket, those seeking entertainment can buy two quest headsets and have access to music festivals and digital experiences in Redpill VR that make Coachella look low production value. Individual experiences will likely cost you less than parking at a real-world venue.

Instead of spending hundreds of dollars on apparel (Apparel making up about 3% of CPI), people can spend pennies or dollars on building out a digital closet on DressX that they can wear on zoom, social media, on their avatars, and more. Before you think it sounds silly, more people are likely to see you on zoom or on social media than see you in the flesh already today.

We are not quite there yet, but we are maybe 2-3 years away from where the digital unequivocally matters more than the physical, which will throw the average macroeconomist into a tailspin because this was an angle they did not consider.

When you can work from anywhere and can access infinite worlds from within a $300 headset, real estate too will have some long-held assumptions challenged.

Paradigm Shift 3:

“Web3/The Metaverse/AI will take longer than we think” will become “There is an Ever-Shortening Window of Opportunity to have a Stake in the New World”

It’s easy to let silly appearances distract you - Bored Apes, Dogecoin, the clunkiness of a VR headset. The reality is we are at a unique junction as a species that cannot be stressed enough:

• Crypto - Coinbase has surpassed over 100mm KYC’d users and the Ethereum blockchain is processing more transactions a day during market capitulation and depression than it did nearly the entirety of the 2017 mania despite the rise of multi-chain and layer 2s.

• Metaverse - The number of VR headsets is growing exponentially and so is VR content revenue.

• Space - The cost of transporting goods to space is on a logarithmic decline. Today the cost of transporting things to space costs 1% of what it cost in the 80s. By 2050, it will be 1% of what it costs today.

• AI - Natural Language Processing (NLP) has exploded logarithmically in how many parameters it can use.

Technology is not growing linearly. Most of these trends are growing exponentially if not even logarithmically. Sitting out an active logarithmic trend and hoping for a better entry is equal to collecting shells during the ebb when one sees a tsunami on the horizon.

At the risk of sounding young and naive - I am not worried about near-term market fluctuations and interest rates being 3%, 5%, or 7%. We will be a globally connected, space-faring, digital-first species that over time will merge more and more with AI. Investing in anything but that is short-sighted.

Similar to the discovery of America, these opportunities only arise every so often. It’s not every Millenium that our civilization creates alternate digital realities. It’s not every Millenium that our civilization finds a way to create a global immutable ledger for truth and currency. It’s not every Millenium that our civilization creates ‘life’ smarter than itself. It’s not every Millenium that our civilization finds ways to become multi-planetary.

2022 has been ridden by economic woes that naturally make people lose their vision enabling them to look no further than the next three months. The un-levered investor would be well advised to take a pause and think long-term. Where are we? And where are we going?

The only thing that is future-proof is the future itself. In a high-interest rate environment, you will find fewer tech companies operating like theme parks, that is for sure. But progress does not stop here, nor does it slow. Visa is getting into crypto payments on Ethereum. Paypal integrates with Metamask. Former Activision President becomes Yuga Labs CEO. That was all just this week in crypto while the market was too caught up reading about FTX.

It’s an odd time to be bearish on the future, and perhaps the greatest and perhaps final decades to back builders as technology accelerates toward the singularity.

2022 was not without its challenges, but Hartmann Capital will keep paving the way as an emerging frontier tech investment firm. In Q3, our crypto fund was the #1 performing crypto hedge fund in the world (per Galaxy & CFR), and our metaverse venture fund has quickly made itself a name finding its place amongst the most desired XR cap tables. In 2023, we will continue to expand our offering, to keep funding and supporting founders building toward a thriving future. This outlook may give you a taste of where we are looking. I thank those, on whose behalf I get to steward capital for the last five years and look forward to connecting with those who aim to join our mission next year.

As our mantra goes, the future belongs to those who invest in it.

Best,

Felix Hartmann, Managing Partner

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

To Investors and Colleagues,

I am always fascinated by how repetitive this market is without a fault. Overnight critics in a bear market turn into overnight supporters in a bull market. It can seem overwhelming trying to navigate the sentiment of this market as an outsider, as mainstream media seems to change their tune faster than Floridian clouds decide whether it’s time for sunshine or rain (…we’ve been getting daily 5 minute flash rains at the new Miami office, for those not familiar with Floridian climatology).

In the 80’s Reagan used to get the moniker of being the ‘Teflon President’ because no bad news would stick to him. Bitcoin in many ways has a similar characteristic. When market sentiment is bullish, no bad news can shake Bitcoin off its path. To quote my market update from May 2019

“Against all expectations Bitcoin continued what seemed like an already over-extended rally to $5,200, thrashing through its major resistance at $6,000 only to ascend to $7,000, $8,000, and even peak above $9,000 for a few minutes. What is most impressive is that it did so at a time when all our worst nightmares came true: A US Congressman threatened to ban Bitcoin, the biggest crypto exchange got hacked for deca-millions, and the leading stable coin got found out to not be backed fully by USD.“

However the same counts in reverse when sentiment turns bearish. No matter how good the news are, the market does not seem to care as it is looking for reasons to be bearish. Look no further than the avalanche of good news happening in the last few weeks which we reported on in our last two weeklies (1 & 2).

While it’s impossible for us to always perfectly nail when the macro sentiment shifts, I wanted to use this month’s market update not only to explore one of the most powerful metaphors that dispels half of the worries and concerns fueling the bearish sentiment out there, but also highlights one of the thought experiments that fuels my personal multi-year conviction why digital assets will succeed, even during the darkest times like November 2018 and March 2020.

Let’s go back in time to one of the most famous experiments in Game Theory… the Prisoner’s Dilemma.

I hope you enjoy,

Felix Hartmann, Managing Partner

Game Theory 101: The Prisoner’s Dilemma

To understand the ‘Crypto Opposition’s Dilemma’, which we will explore shortly, let’s explore one of the most classical experiments in Game Theory. The infamous ‘Prisoner’s Dilemma’.

The setup is following:

You and an acquaintance are down on your luck and decide to rob a gas station. You end up getting caught in the act, however all they can prove at that point is that you trespassed.

In order to nail you for your attempted robbery, they put you and your accomplice in two separate rooms and interrogate you.

Both you and your accomplice are offered a deal:

If you both confess, you walk away with 6 years in Jail. However if your accomplice confesses and you lie, you will go to jail for 10 years (nearly twice as long!) while he walks free.

Only if you both lie and don’t confess will you walk away with just 1 year each for trespassing.

What do you do? Think for a second.

While your first instinct might be “Duh! I’d lie! It’s the best outcome for everyone!”, you must remember that you cannot coordinate with your accomplice and cannot force or convince him of your strategy. You are either at the whim of his decision, or you optimize for what’s your best outcome.

And human nature, and thereby game theory, looks to play for the best outcome for oneself. You want to minimize your time in jail and while you can’t guarantee he will keep quiet, your outcome possibilities of 6 or 0 years if you confess is strictly dominant to the outcomes of 10 or 1 years if you don’t confess. So you confess.

Why does any of this matter? What if I told you that this basic premise of coordination failure is the source of nearly all lesser than ideal outcomes for us as individuals? Let’s explore…

The Banker’s Dilemma

Hundreds of banks get caught committing all sorts of ills against their customers, from extortionary interest rates on credit, to a laundry list of account and transfer fees, to limited banking hours, and miserable service. Out of rebellion rises a competing financial system, let’s call it, hmm… DeFi?

Of course the banks would make the most money if they would all coalesce and ban this ‘evil’ DeFi together.

But alas there are hundreds of banks all over the world and coordination is just downright impossible, especially since whichever bank chooses to comply with the new DeFi system is likely going to steal countless customers from those trying to ban it as it is now able to offer cheaper, faster, and better services.

In this example you merely take the game theoretical matrix from above and replace ‘confess’ with ‘adopt’ and replace ‘don’t confess’ with ‘ban’.

But wait… what if this isn’t even theory?

When I started Hartmann Capital in early 2018, every major bank from J.P. Morgan to Wells Fargo would kick every single crypto company such as ourselves to the curb.

“See the banks won’t allow it” every middle of the bell-curve semi-intellectual would proclaim.

Fortunately that is not how the world works. Because for every bank that has a lot to lose, there is a bank that stands a lot to gain from adopting this new asset class. And that is exactly what Silvergate Bank did.

Back in 2018 when we became a customer of Silvergate Bank, Silvergate was a small privately owned bank that was just 30 years old. Small banks historically don’t make it, and the big ones merely become bigger. Well, Silvergate decided that if everyone will turn away crypto firms, they will simply bank ALL OF THEM. And that’s essentially what happened. You were hard pressed to find a crypto company in 2018 that did not have a Silvergate bank account.

And while J.P. Morgan was busy proclaiming that Bitcoin is a fraud, Silvergate was busy collecting major customers like Coinbase (who still uses Silvergate today). As a result J.P. Morgan is now a laughing stock in the digital asset space that no one would bank with even if they paid us, meanwhile Silvergate has since gone public and saw its stock skyrocket to a $3bn market cap with deeply rooted loyalties in the digital asset space.

Silvergate was merely one of the first adopters in a big way that made obstruction (think ‘don’t confess’) too expensive to continue for major banks like J.P. Morgan and co. A new wave of banks, especially in the neo-bank sector is looking to tap into the powers of DeFi to offer better services to its customers.

Look no further than Metropolitan Commercial Bank’s neo-bank product ‘Current’ which just partnered with Compound Finance, a leading DeFi protocol to offer its customer a 4% APY savings account. Go take a lap ‘Marcus’ by Goldman with your lousy .5% APY.

The Sovereign Nation’s Dilemma

You got time for one more? Ah, the question I’ve been asked perhaps as much as “What’s your name”…

“But what if the government bans Bitcoin?”

There’s 191 states with undisputed sovereignty in the world. As we figured out by now in order for a ban to work every nation needs to ban Bitcoin, in order not to invoke the game theoretical positive incentives for those that adopt early, and negative incentives for those that ban at first and either adopt late or fail to adopt.

Again, middle of the bell-curve intellect will have you think that it is naive to believe the government won’t ban Bitcoin. But believing in global coordination is the ultimate naivety.

Here is a list of things 191 nations cannot agree on:

• Banning Landmines

• Banning Chemical Weapons

• Banning Slavery

• The use of nuclear energy

• The legality of Cannabis and other drugs (some places its legal, others you lose your head)

• …

And you think they are going to come together and ban Bitcoin? That’s rich.

Especially when the first dissidents such as El Salvador have emerged and made Bitcoin legal tender.

So emerges the Sovereign Nation’s Dilemma…

A nation that bans digital assets and technologies like Bitcoin and DeFi, while others embrace it risks:

• Financial loss as other nations acquire these assets driving prices up while the banning nation and its people will be left empty-handed.

• Talent loss as some of the brightest minds will leave the banning nation to take their talents to a country that is embracing the technology. We saw this for decades with Silicon Valley globally, and post-Covid even domestically with Miami.

• Production (GDP) loss as the next ‘FAANG’ sized crypto networks or even deca to hecta billion unicorns like Coinbase will find a home and pay taxes elsewhere.

Don’t get me wrong, a ban by the US or China will always provide a short term blow to prices. But long term it’s a non-event. The digital asset space does not need any one country. But every country needs the digital asset space. Disagreeing with that statement is equal to saying that “my country will be just fine without the internet”.

Those that adopt will flourish, and those that attempt to ban, will just like in the prisoner’s dilemma, rot in prison for the next ten years as the rest of the world takes a lap on them in technological progress.

Would they prefer to coordinate and get away with a ‘lesser sentence’? Of course, but not only is coordination game-theoretically nearly impossible due to human nature, but more so we are already past the point of coordination with dissidents in banking like Silvergate and nation-states like El Salvador.

Final Thoughts:

It’s often not as simple as it seems. While at first questioning the powers of the state seems like naivety, the true naivety is believing in the ability of human coordination through inefficient political bodies. Part of the reason why crypto-economic systems are so effective and paradigm shifting is that they are able to accomplish global coordination between strangers that have never and will never meet by properly utilizing crypto economic incentive structures to create functioning and flourishing digital economies.

The questions addressed in this letter are likely the most common questions I have received repeatedly in the last 5 years educating about the digital asset space. If some of these thought experiments did not click the first time I recommend going back and re-reading. Because when it clicks it becomes so obvious why a lot of the innovations in this space are long term inevitable, and why every major correction, as we saw in May and June are historic opportunities to take advantage of major market mispricings.

Recent Write-ups:

• Strategy Series - The Catalyst Driven Value Trade

• Strategy Series - Activist Crypto Investing

• Complementary Strategies - Yield Enhancement

TIMESTAMP 07/05 2021:

DJI - $34,786

S&P - $4,352

BTC - $34,700

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Here we go again. Bitcoin is officially dead. In fact the media has already proclaimed so 23 times this year alone. Bitcoin has now died 416 times in the last 10 years according to mainstream media, and you can read every single one on Bitcoin Obituaries. If bitcoin is dead, it has to be a zombie, because somehow it keeps getting back up.

Humor aside, the digital asset space went through its annual crash last month, and while many newcomers were shocked, this was nothing new for the space. In November 2018 and March of 2020 for instance Bitcoin experienced two 50% thirty day corrections. This is not to mention the half dozen 30-40% corrections that Bitcoin sprinkles throughout its average bull run.

In today’s market update I will be dissecting four key health metrics of the digital asset space to determine whether this is a mere pullback amidst a bull run or the beginning of a bear market. We will review the following:

• Fundamentals

• Technicals

• Sentiment

• Market Structure

It’s times like these where it’s more important than ever to follow data driven decision making and not fall victim to emotions. Volatile markets can bring forth vast irrationality, both on the way up and on the way down. However navigating through the market’s irrationality is what can allow immense opportunities.

I hope you enjoy this update,

Felix Hartmann, Managing Partner

Digital Asset Market Health Check

1. Fundamentals

A: Bitcoin - SOV

In order to understand whether or not bitcoin continues to function strongly as a store of value, we have to study the holding patterns of its users. Continued holding of long term owners suggested a further cemented belief in the assets nature as a store of value. Sudden selling would suggest a shift in this narrative.

On-chain UTXO analysis proves that there have never been more Bitcoins held for a period of 3 years or longer. The selling that we have experienced did not come from early investors, or aged coins, rather, selling happened from coins purchased in the last three months, pointing at a speculator driven sell-off.

From an institutional appeal as a reserve asset, while Elon Musk received much heat for initially criticizing Bitcoin, Tesla continues to hold Bitcoin on its balance sheet.

Michael Saylor the CEO of MicroStrategy equally confirms the stance of sticking to Bitcoin as a reserve asset:

And Square soundly joined them:

So not only did all the major public companies holding Bitcoin re-affirm their support for the asset publicly after the crash, but we also saw new supporters join, likely after using the drop to build a position.

Notable new entrants into Bitcoin include no other than Ray Dalio, who stated “Personally, I’d rather have bitcoin than a bond” and acknowledged owning the digital currency, and the legendary activist investor Carl Icahn says he is getting involved in digital assets in a big way with over $1bn to be invested. And finally Goldman came out saying that it’s time to take Bitcoin seriously.

It stands to reason that while there was a lot of speculation, some of which we will address in our analysis of market structure, the fundamentals of Bitcoin have not changed. If anything, they have only gotten stronger.

B: DeFi - Value Accruing Tokens

This section can be kept brief as I will refer to our market update from last month. In it I highlighted how many projects in decentralized finance had ridiculously undervalued valuations with PE ratios in the 20’s. After this crash the valuations have become even more ridiculous with some in the single digits and some in the 10’s. These hyper-growth assets are currently trading at multiples you’d find a utility company trading at.

Beyond the earnings and multiples, we once again saw DeFi survive a stress test of epic proportions. I genuinely doubt most commercial banks could survive a single day crash where every piece of collateral on their books gets wiped in half or even cut down by 80%. Well that’s exactly what every major decentralized lender from Maker to Aave to Compound went through over the last two weeks. And not only did they stay solvent, they made a killing doing so. Maker for example earned an additional $9.3mm just from liquidation penalties and as a result burned roughly 34bps of its entire supply just in May.

DeFi is alive and thriving, and neither earnings nor capabilities point towards these assets being overvalued at where they currently stand.

2. Technicals

Sometimes it’s important to recognize that most market participants in crypto are not yet as educated on fundamentals as we are, and merely trade momentum. This means that fundamentals can be ignored in either direction for extended periods of time. While technical analysis is no dark magic, it does give us historical context particularly when we focus on larger time frames.

One of my favorite tools in particular for knowing where in a trend we are, is the RSI (Relative Strength Index). The RSI tells us when a trend is either overbought or oversold. Historically the daily RSI rarely goes into oversold territory, and the few times that it has in the last 5 years were some of the best times to accumulate as the bottom was either short lived, in, or almost there.

But lets say you want to play devils advocate and say this is the beginning of a bear-market. Even then, now is the time to be long. Every single top saw a 70-200% recoil after the initial breakdown. Short sellers will be caught with their pants down and liquidated, while many that chose not to buy the dip come back buying higher in a frenzy. The real test will be whether or not old highs are met with strength or weakness. That is the moment where paying attention is important.

3. Sentiment

As the old saying goes, “Buy when there's blood in the streets even if the blood is your own”. The market flipped from euphoria to panic with the blink of an eye. Both emotional states are misguided.

As the Crypto Fear & Greed Index shows, we went from peak greed to peak fear. The last time the market was this fearful was at the lows of the lows of the pandemic crash of March 2020. Nearly every point of extreme fear has historically been an incredible buying opportunity. Not only that, but these wipeouts allow the market to re-calibrate and grow sustainably based on honest and real expectations. Opportunists looking for a quick buck leave, while the builders set up camp and continue to provide value to the industry with a long term mindset.

Zoom out. Nothing has changed.

4. Market Structure

Market structure is easily the most important facet to look at in order to understand the recent sell off.

On exchanges we saw billions of dollars wiped away by leverage liquidations. May 19th alone saw around $8bn in forced selling as borrowers had no choice but to close their levered long position in order to stay solvent on their futures contracts or margin balances.

On-chain we saw 7 of the 10 largest single day liquidations happen in May alone.

It’s glaringly obvious that the market was over-leveraged going into this correction and much of the selling that occurred was not intentional selling, as much as forced selling by parties that had borrowed too much. This ultimately led to a cascading effect dragging prices to lows not seen in months.

Massive liquidations often lead to capitulation wicks where all leverage wipes out, and funding rates are reset. We saw exactly this happen with many digital assets bouncing 50-80% off their capitulation lows, with funding rates either in the negative due to over-levered short sellers or at regular rates suggesting a fully flushed out futures market.

Final Thoughts:

The market can always stay irrational longer than you can stay solvent, but as long as you stick to spot investments there is no deadline to your solvency. That in itself is a massive advantage and source of alpha the few more veteran crypto funds like ours with over 3 years under our belt navigating these markets had to learn the hard way. Downside volatility is a necessary evil that comes with the beauty of upside volatility, and it will continue to express itself radically fast as long as the crypto market offers highly levered products such as 100-1 leveraged futures contracts.

While the short term will be determined by market participants, fundamentals, technicals, sentiment as well as market structure suggest to us that we are at or near the bottom of this short to medium term correction. Blood was spilled, and it’s time to buy.

In the News:

May 20th: English - The Pomp Podcast

May 21st: German - Der Digitale Minimalist Podcast

May 30th: German - Cash Magazine: «2025 wird der Kryptomarkt mehr wert sein als der Nasdaq»

TIMESTAMP 06/01 2021:

DJI - $34,570

S&P - $4,202

BTC - $36,300

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

To Investors and Colleagues,

As the Digital Asset markets keep accelerating, crypto asset managers like myself often have to pause and scratch our heads at the unbelievable dichotomy between what the masses and media view as the digital asset space, and what really is happening in the trenches.

If you tuned on the news, or for that matter ‘Saturday Night Live’, you’d believe the future of Digital Assets are meme-coins named after dogs, from Doge (worth $66bn) to Shiba Inu (worth $15bn).

Claiming that these projects which openly started as jokes, represent the Digital Asset space, is like claiming that the mac ‘n’ cheese you heated up in the microwave is the future of fine dining.

In today’s market update we are going to dive deep into a select number of projects that we are backing in order to highlight the vast differences between what is perceived as the trend in Digital Assets, and what funds and institutional allocators are actually looking at. These of course are neither buying recommendations, nor is this financial advice, as we may change our stance at any time. It is rather meant to give you an insight into the modern day analyses of crypto assets.

You’ll find that while the projects highlighted by the media are nothing but ‘greater fool’ plays that are boiling in bubble territory, many of the projects in the decentralized finance space are so undervalued that even Ben Graham or Warren Buffet would like them.

Let’s dive into it,

Felix Hartmann, Managing Partner

Fun-damentals v. Fundamentals

The crypto space as covered by main-stream media or as we like to call it the ‘meme-token’ space could not be more different from the Decentralized Finance (DeFi) space.

Neither Bitcoin, Ripple, nor Dogecoin accrue value for their users. They all serve as potential currencies. Currencies traditionally are not great investments unless there is a demand for said currency that outpaces its inflation.

Dogecoin for example has a current annual inflation rate of 3.85%, so you might as well hold dollars.

XRP on the other hand has Ripple labs and its founders control more than 50% of its entire $120 billion supply. I wouldn’t trust a currency who claims to be decentralized yet is more centrally controlled than quite a lot of fiat money.

And here is where Bitcoin shines, Bitcoin has a fixed supply schedule making it a strong store of value beyond being a pure currency. Additionally Bitcoin ownership is more fairly distributed than the likes of XRP with 50% sitting in the hands of over 16,000 wallets rather than 1 centralized entity (not to mention that many of these 16,000 wallets likely represent exchanges and lost early wallets spreading 50% ownership likely to the hundreds of thousands).

But that’s where the conversation also stops. Beyond fixed supply economics leading to supply sinks due to holding behaviors, these type of assets have little fundamental value that is permanent or can lead to asset appreciation beyond the hopes of continued buying by market participants.

Decentralized Finance protocols have stood out from the rest of the market for being value accruing assets. Many of them have revenues, profits, and treasuries that enable us to fairly value them similarly to equities. Here are four Decentralized Finance networks that make it evident that we are neither in a bubble nor anywhere close to being overvalued:

MAKER DAO ($MKR) - The De-Central Bank

MakerDAO is not a new kid on the block(chain). Quite the opposite, since March 2015, the Maker team has relentlessly worked on creating the first successful decentral bank and decentralized stablecoin. While the past 6 years presented the team with countless trials and tribulations, the 2020 global liquidity crisis being the latest major challenge to the protocol, Maker has successfully found product market fit and is scaling at unbelievable speeds.

At the heart of it, Maker enables anyone to borrow money in the form of DAI, the protocol’s stablecoin, in exchange for providing collateral. Maker then charges an interest rate, the proceeds of which are used to buy and burn the MKR token.

A few noteworthy achievements:

• Since December 2017 DAI/SAI has successfully traded continuously at a close to 1-1 peg against USD, without being dollar backed.

• Since launch there was only one major instance where CDPs were under-collateralized in the wake of the 2020 liquidity crisis. The decentral bank resolved the issue via decentralized governance by issuing new MKR tokens.

• Maker has now issued close to $5 billion worth of its own decentralized stablecoin.

• Maker now earns over $200 million a year in profits

Despite rising a cool 713% this year, Maker continues to be undervalued as its fundamentals have risen even faster. With a P/E ratio of 19.99, you will be hard pressed to find a hyper-growth tech stock with orders of magnitude of growth left trading at such a low multiple.

One fun fact for the road: In 2020 Deutsche Bank made 624mm Euros in profit with 1.3 trillion Euros in assets with close to 85,000 employees. MakerDAO is on track to surpass Deutsche Bank in profits this year, already now making roughly 30% of Deutsche’s profits with just $14 billion in assets and just a little over 100 team members.

Code is eating finance. Step aside dinosaurs.

NEXUS MUTUAL ($NXM)- Decentralized Insurance

What happens when all the sudden $155 billion are being banked in smart contracts?

People smarter than the original developers try to find ways to exploit those smart contracts and run off with the money. Goodbye bank robberies, hello smart contract exploits.

Every month some project gets attacked for millions of dollars. Quite naturally this comes at the cost of trust. How can anyone ever feel comfortable enough to put their life savings into code that may or may not be vulnerable to attacks?

Enter smart contract insurance.

Nexus Mutual is the biggest decentralized insurance provider, currently focusing on both smart contract exploits and bugs, as well as centralized exchange hacks.

Who would use such a niche product?

Currently there are over $1.1 billion in on-chain funds insured via Nexus Mutual.

Nexus has thus far collected over $40 million in insurance premiums.

The way it works is that NXM token holders stake their NXM against projects they deem safe. In exchange customers pay these stakers their premium. In the event of an exploit, stakers would have their NXM slashed and the insured would receive ETH as a reimbursement from the capital pool.

While NXM sports around a 25 P/E ratio based on the past 12 months premium collected, it’s worth noting that half of NXMs premiums were collected in the last 45 days alone. Yes the last 45 days were as profitable as the 11 months preceding it.

NXM is also unique for the fact that it uses a bonding curve with a locking mechanism to ensure a minimum capital pool balance. Currently NXM valued at $1bn in market cap, is backed by $620mm worth of ETH, making it one of the few projects with a tangible book value.

Like MakerDAO, as long as Nexus keeps collecting insurance premiums, and ether maintains some value, it has both upward price pressure due to earnings and a price floor due to book value.

BANCOR ($BNT) & SUSHI SWAP ($SUSHI) - Decentralized Exchanges

After watching Coinbase IPO near $100bn, I don’t think I have to explain the value or demand of a crypto exchange. However what if I told you there are entirely decentralized exchanges that allow you to trade any crypto asset in existence for any other crypto asset, without underlying any jurisdiction or depending on third party custody. Enter decentralized exchanges.

Ever since last year decentralized exchanges have experienced massive growth in the decentralized exchange space, to the degree that a few decentralized exchanges have surpassed Coinbase in daily volumes at times.

While not all decentralized exchanges successfully capture value for token holders, two stand out lately.

Users of Bancor did just shy of $40mm worth of trading volume on the decentralized exchange in October of 2020. Mere 5 months later, Bancor surpasses $3bn in trading volume in the month of April.

5% of the trading fees of Bancor are used to permanently reduce the supply of BNT. This new structure was introduced in the beginning of April and has already locked up $1mm of BNTs supply forever. Annualized this is close to $12mm, which would cause an annual deflation of around 1%, not taking further growth into account.

Sushiswap another popular decentralized exchange does as much as $1bn in trading volume a day, surpassing the likes of Kraken on some days. Sushi distributes .05% of all trading volume to Sushi token holders who stake the token. In April for example, Sushi did $11.5bn in trading volume, leading to $5.765mm in profit for Sushi token holders that were staking their tokens (only 31% of all holders, multiplying earnings for those staking by about 3x). Annualized we are looking at $70mm in earnings, which at a $4bn market cap leads to a 57 PE ratio. Considering that just 31% of sushi token holders are staking their tokens, this means that the adjusted PE ratio is 17.7.

Final Thoughts:

A few things should become vastly evident:

• DeFi is incredibly real, with earth shattering profits and growth

• DeFi is very very very far from being in a bubble

• Several DeFi protocols are quite literally a steal with PE ratios half of that of the S&P 500 (which is deemed a conservative investment)

• DeFi presents the rare opportunity of being allocated to both value and growth at the same time

• You are likely under-allocated DeFi and real digital assets (and hopefully not exposed to the popularized trash that is Doge, Shiba, Safemoon, XRP, ADA and so forth)

The Digital Asset market has matured a lot over the last 12 months, and it is time we start looking at individual sectors therein, rather than continuing the outdated trends of bundling them all up under misnomers like ‘crypto currencies’ or ‘alt coins’. DeFi presents a generational opportunity, only comparable to Bitcoin itself, and we are still unbelievably early. Single commercial banks hold over 100x the assets that the biggest DeFi protocols holds, so we have not even scratched the surface of what’s possible. And instead of fancy skyscrapers and million dollar bonuses, the value accrued by DeFi goes right back to the token holders.

In the News:

May 20th: English - The Pomp Podcast

May 11th: German - Block52 Podcast

May 7th German - FAZ (Frankfurter Allgemeine Zeitung): Krypto-Welle beherrscht die Blockchain

April 22nd: English - Java with Josh Podcast

TIMESTAMP 05/15 2021:

DJI - $34,382

S&P - $4,173

BTC - $48,000

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Digital assets have had a banner year in the last 12 months. Not only did the emerging asset class recover swiftly from the liquidity crisis a year ago, but more importantly we saw a major shift from a narrative driven market around ‘promise’ and ‘potential’ to a market that’s slowly driven by hard fundamental factors such as total value locked, price to sales, and book-value. We are no longer just seeing Bitcoin dominate the headlines for being the world’s most desirable store of value, but are now also starting to see the DeFi and NFT space gain their first mainstream mentions.

We’re among the first firms to take a quantitative fundamentals first approach and believe it will eventually become the standard in valuing this emerging asset class, as it has been the standard in equities for decades.

In today’s market update I’ll be sharing with you why I believe this is a super cycle rather than yet another 4 year cycle, how the landscape has drastically changed over the last few years, and what headwinds and black swans we are paying attention to.

Sincerely,

Felix Hartmann, Managing Partner

What if it’s 2003? Exploring the Super Cycle

I’ve spent more time than I’d like to admit studying the past cycles of crypto assets. They work like clockwork. But one has to wonder why that is.

For 12 years we had near perfect 4 year cycles resulting from the following chain of events:

It all starts with curious innovators building cool tech.

They ship.

A paradigm shift occurs (2010: Non-sovereign internet money, 2014: Silk Road and adoption, 2017: ICOs & Smart Contracts, 2020: DeFi & NFTs).

Investors enter the market.

Price goes up.

Speculators enter the market.

Price goes parabolic.

Hype enters the market.

Price becomes grossly overvalued.

Fundamentals cannot keep up with price appreciation, investors take profits.

Price corrects.

Speculators panic sell.

Long leverage liquidates creating lower lows.

Team funding dries up, speed of innovation slows, and some devs quit.

Investors get disillusioned and sell.

A long valley of death forms on the chart while innovators continue to build.

Finally they ship their next release… and we start all over again.

How can we end this cycle of hype and disillusionment?

The key is to keep shipping new releases at a fast pace and not give disillusionment a chance to slip in.

And that’s exactly what we have been observing over the last 12 month.

Every single day a new feature, V2, or main-net goes live. Every single day there is new genuine reason to be excited about the digital asset space, and every single day there is more and more hard fundamental value backing up the seemingly lofty valuation numbers.

The question I started asking myself and my team is: What if it’s 2003?

After the dot-com bubble burst and tech experienced a long bear market similar to the digital asset bear market of 2018-2020, dot-com has been in one continuous bull market super cycle.

Just like digital assets currently developing at a break neck pace, so did the tech giants over the past 2 decades. And while tech experienced occasional 30-50% deleveraging and corrections, anyone with a long enough time horizon made life changing money.

While we stay conscious of some of the headwinds that could invite such a 30-50% pull back (explored in part 3), we firmly believe that anyone with a > 5-year time horizon should take an honest assessment of their digital asset allocation. It is most likely too small if we consider the perspective that digital assets are an evolution of most traditional asset classes. In fact I am willing to wager 1 BTC that the digital asset space will be larger than the Nasdaq by 2025.

Playing a super-cycle requires a handful of different mindsets:

• Betting on teams that build to last

• Not getting caught up in the hype of the day but doubling down on sound theses

• Putting traction and value driven analysis before promise and potential

• Ensuring teams have the drive, desire, and the financial resources to last a decade

Trading a super-cycle on the other hand requires mainly one thing:

• Managing risk above all else as we will be given countless thematic rallies to trade.

Now that we know what a super cycle could look and feel like, let’s explore who will be some of the players partaking in it.

Digital Asset Thematic Sectors

The biggest misnomer this industry has not seemed to be able to shake off is the term ‘Crypto Currency’. What started as an innocent summary until no later than 2014, has become a fairly ignorant classification as perhaps less than 5% of all digital assets are meant to be a form of currency or money.

So before we get into what thematic sectors we are exploring, let’s quickly redefine what asset classes exist within Digital Assets.

Crypto Monies: From digital gold like Bitcoin to the dozens of algorithmic stable-coins we have a few serious players aiming to take a bite out of both gold’s market cap as well as M2. Arguably the two players are approaching it in opposite ways. Bitcoin is a store of value first and foremost and a medium of exchange second. Most algorithmic stable-coins are media of exchange first and foremost and stores of value second depending on their rebasing mechanism.

Crypto Commodities: While BTC is purely money, ETH is closer to being a crypto commodity. In fact that’s how the team framed it when they first ICO’d and the CFTC agrees. Ethereum in a way functions like oil in the real world. You pay a ‘gas fee’ (yes that is what it is actually called) anytime you do a transaction on the Ethereum blockchain. And with a future proposed upgrade titled EIP-1559, some of those gas fees will actually be burned and destroyed (similarly to how oil is used up). Many base layer protocols that offer smart contract infrastructure for Layer 2 protocols and dApps use a crypto commodity model.

Non-Fungible Tokens: All the craze in 2021, NFTs have been around for several years and represent all unique values on the blockchain, whether that is art, collectibles, or even digital plots of land within virtual worlds.

Pass-Through Tokens: As most projects are fully decentralized and have no central entity behind them, many projects have started passing governance rights as well as earnings of a network on to token holders. This is the sub-category of digital assets we focus on in particular. These tokens, giving you ownership of a network are incredibly powerful as they have real value and growth as part of their token structure.

Within the pass-through token landscape there are countless thematic sectors we are paying close attention to as we find they will be the focus in the next few years. In each scenario, we find that owning the infrastructure will be the most valuable asset:

DeFi - Decentralized Finance: DeFi provides the infrastructure that enables every single financial service to be offered as freely and borderless as Bitcoin. Already today you can swap, lend, borrow, insure, and even utilize advanced financial products like perps, options, tranches, and more all without a middleman via the countless decentralized finance products that now bank over $43 billion in assets.

dWeb - Decentralized Internet Infrastructure: What good is DeFi if it’s all built on AWS? dWeb is an emerging sector we are paying close attention to that aims to decentralize the entire internet infrastructure, from connectivity, to DNS, VPNs, browsers, storage, hosting, encoding and more. The idea is to own unstoppable infrastructure that enables decentralized technologies to become immortal like Bitcoin.

The Metaverse - the Decentralized Social Fabric of the Internet: The Metaverse while sounding quite abstract is incredibly interesting. Whether its gaming, virtual realities, digital identity or NFT platforms, the Metaverse encompasses the digital world from the angel that it is a reality of its own. When you realize that virtual realities will eventually be of the economic size of nation states, it’s a no-brainer to own the infrastructure that enables the Metaverse.

DAOs - Decentralized Autonomous Organizations: DAOs are like global, borderless, and decentralized LLC/corporations. In a globalizing world, I’d be happy to bet that by 2030 there will be more DAOs than LLCs. And that by 2024 the average startup will launch as a DAO (either instead of or as well as through an LLC). So much of the trust issues like share ownership and company bank accounts can be solved via tokenization and multi-sig wallets. We are paying close attention to the protocols that will enable this transformation and usher in the age of DAOs.

Privacy Infrastructure: If you ever used DeFi, the first thing you will realize is how awesome it is, the second thing you may notice may be the high gas fees on Ethereum, but the third thing that most are not paying attention to just yet, is how transparent they are. On-chain analytics make you publicly auditable. That’s great for a publicly traded company, but you wouldn’t want your bank statements to be on google updating real time. We are exploring both natively private blockchains as well as tools that can bring privacy to existing chains.

With these 5 themes in mind, we see an avalanche of investing opportunities awaiting us in the coming years.

Risks, Headwinds, and Black Swans

As the famous saying goes, “The most dangerous words in finance are ‘this time is different’”

While I am excited for the future and think that abundance is in store for the digital asset space, it’s always important to pause, reflect, and ask oneself what the blindspots may be.

While there are a few, that I will briefly address, I genuinely do not see the risk of nation state bans. This is a thought experiment I’ve gone through several times, and 10/10 times it ends with the loser being not the digital asset space, but the nation attempting to ban it. Nobody has ever successfully banned digital assets, many have tried. And the ones that do try to ban digital assets only fall further behind in relevance and economic power as tech talent leaves their country for a more forward looking home. Innovate or die.

In terms of genuine risk we are actively monitoring, here is what we are paying attention to:

• Rising interest rates and overall tightening fiscal policy leading to a risk-off market environment. The Fed’s tone has started to shift, but there seems to be no intention of the current administration to do anything but provide more stimulus.

• New widespread financial regulations. In the aftermath of Archegos meltdown, Melvin Capital fiasco, and the entire GME saga is likely going to lead to some form of overhaul in the financial sector that is still unclear. While a risk, this is also an opportunity, as over-regulation of equities is only going to make digital assets more interesting.

• Negative Skew Tail Risk. Whenever there is a crowded trade that is guaranteed, something is bound to go wrong. The famous Grayscale arbitrage is one of them. The short version is following: Institutions had the ability to buy GBTC at NAV and then market sell on brokerages after a lockup where it was trading at a significant premium. This premium existed for years and everyone assumed it would always be there. What followed is several crypto institutions doing this trade synthetically via leading lending platforms, utilized leverage to play this ‘guaranteed’ trade. GBTC is now not trading at a premium but rather a double digit discount. This situation could still end poorly for a few firms in the space and we are actively monitoring the ripple effects, whether that is a lender filing for bankruptcy or a major fund failing, being forced to unwind a massive book of positions with limited liquidity. Either way we are monitoring the situation actively given the fact that Grayscale makes up over 3 percent of Bitcoins market cap.

Final Thoughts:

While the market has been on an incredible rise, and individual sub-sectors such as digital monies and the Metaverse could use some cooling off, we find that the space has likely entered a super cycle in which money will rotate within, while new allocators are joining the space daily. All risks currently assessed may lead to short term pain at most, but the market as a whole continues to be healthy and growing. Teams are working overtime to ship new product in what has become an incredibly competitive space, and capital is flowing into the markets like never before from smart and institutional money.

TIMESTAMP 03/30 2021:

DJI - $33,066

S&P - $3,949

BTC - $58,658

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

To Investors and Colleagues,

2020 was a historic year. In all the worst of ways societally and politically, and in all the best of ways financially for anyone who was long assets and short currency.

2021 is off to yet another curious start, appearing to be the sequel that no one asked for. But like 2020, this year too is likely to offer incredible financial opportunities if identified correctly.

The balancing act of 2021 will be correctly assessing true levels of monetary devaluation. What started as year long warning cries from crypto natives and gold bugs about currency debasement has become the macro theme of 2020/1. It stands to reason that when a theme has become mainstream investment philosophy, it’s important to assess whether markets are accurately pricing in fears of debasement or are overstating them.

On one hand we saw the M2 Money Supply grow a staggering 25% in a single year validating the worst fears. On the other hand we saw companies like Tesla approach the $1 trillion mark, now standing at a frothy PE ratio of ~1,700. While I’m a big fan of Musk (in fact I bought my first TSLA shares 8 years ago at the post-split price of ~$28), these numbers should make even the greatest supporter raise an eyebrow.

Over the long term, we are likely to continue seeing the strongest store of values (Bitcoin & gold) and the most future oriented productive assets (DeFi & tech stocks) act like monetary black holes, sucking in liquidity, rising further and further as all the wealth in the world seeks a place to be parked in a time when bonds and cash are dead.

Along the road there will be shakeouts, motivated by over-leveraging (very likely), slowing or termination of monetary easing (unlikely in the near term), or regulatory intervention (whether on the digital asset front or on the taxation/capital gains front).

We find that the soundest returns will come from combining value driven investing with hyper growth assets. Such a description may be considered a unicorn, but that’s exactly what the Decentralized Finance space offers. Revenue generating decentralized networks with reasonable market caps, that are likely to unseat the largest incumbent financial institutions.

In this month’s market update we share with you the road ahead in 2021, and how the entrance of new players is likely going to affect the digital asset market in the near term.

I hope you have a happy and healthy start to 2021.

Sincerely,

Felix Hartmann, Managing Partner

The 2021 Digital Asset Roadmap

Maneuvering the Dollar Trade

Images say more than a thousand words they say. Look no further than the performance of the Dollar Index (green) versus Bitcoin (orange).

It’s no longer a secret that the historic monetary easing by the Federal Reserve has sent the strength of the US dollar spiraling down in value for the 11th month now.

The thesis has become so easy, that average retail investors are using OTM call options as their daily strategy under the presumption that ‘stocks only go up’. And if enough people subscribe to this thesis, stocks do indeed only go up! Short sellers have been taught their lesson, sitting bloodied on the sidelines, while longs are starting to deploy more and more leverage due to what appears to be a fool-proof trade. In fact as of September 43% of retail investors have stated the use of leverage, a number that has surely only climbed since.

The irony is that long term, it is indeed very likely a fool-proof trade. However the catch-22 is that the very belief of it being fool-proof makes it no longer fool-proof. As leverage overextends we are likely to see enormous shakeouts and leverage blow ups from time to time which can instill short term fear phases.

The key is to do the opposite. Avoid leverage at times when the market appears to know no way but up, and deploy size during short lived periods of fear, knowing that the macro theme of USD devaluation is not going away anytime soon. It seems obvious, yet I dare you to survey just 10 retail investors and 10 institutional investors and you are likely to find little to no dry powder. The exuberant see no challenge to their folly, and the cautious are trying to make up for missing out on the fastest recovery we’ve ever seen. Ultimately both the apes and the laggards will get punished.

The road ahead in a democrat run United States has monetary easing written all over it. The blind spot few are paying attention to however is short term over-leveraging. We expect a long term down trend for the USD, but counting out a reversion to the mean in the interim is the same as using the most dangerous words in finance: ‘this time is different’.

The (digital) Gold Rush

As the dollar embarked on its roadtrip down the highway to hell, investors across the world were scavenging for places to park their money. While Bitcoin was an unlikely thesis we accurately predicted this early in 2020, “The first big players are accumulating, not tomorrow but today. And their foresight will likely pay off, and when it does, all the vanilla equity funds out there will copy the legends and follow suit. No one wants to be first. But also no one wants to be last.”

We’re seeing this mentality now play out in full force. No one wanted to be first for the last 3 years during the bear market, and now all the sudden, asset manager, CEO’s, and wealth managers are scrambling to get allocations just to avoid being last.

While the force of this ‘rush’ may subside from time to time, just as we saw gold leveling off despite historic levels of inflation, the cat’s out of the bag in terms of global awareness when it comes to digital gold (Bitcoin). While many avoided even touching Bitcoin after the ICO bubble burst, you now have nearly every asset manager in the world at least studying up on it, from Dalio to Marks.

This avalanche of awareness has shifted Bitcoin out of the innovator stage and into the early adopter stage.

Globally there are estimated to be 100 million Bitcoin owners based on on-chain wallets. Off-chain we see that major exchanges like Coinbase have about 35 million users. So no matter how you slice it, domestically or globally, we are either just starting to enter the early adopter phase or halfway in it.

This is great news, as it shows that we are still extremely early, both by global standards (7.8 billion), G20 (4.6 billion), or even just NATO countries (1 billion).

So while present day parabolas and out of the blue fervor may raise an eyebrow and eventually break with typical corrections around 40%, the long term could not be more bullish. Today’s correction range of $20-24k/BTC was yesterday’s overheated selling zone. The truth is most people (7.7 billion to be exact) are still not allocated to Bitcoin, and will one day need and want to be.

In other words, we haven’t even gotten started.

Finance 2.0

Remember when China built a massive 1,000 bed hospital in eight days? If you can spare a minute here’s a video:

We are currently witnessing the cypherpunks pulling off the same feat on a global scale for the entire financial system.

Since the summer of 2020, Decentralized Finance has witnessed a Cambrian Explosion that appears to know no slowing. And rightly so. While we started as investors in DeFi in early 2019, we have since become super users of Decentralized Finance ourselves.

Decentralized Finance does to finance what Bitcoin did to money.

We’ve seen the sector grow from finance primitives such as exchanges, to now complex products like options, debt tranches, insurances, and more. In the span of perhaps no more than 12 months we saw nearly every single financial product get recreated on-chain in a decentralized and interoperable way.

We continue to believe that DeFi will be the biggest sector in the near term, and will be the ‘Zero to One’ innovation of the decade, continuing the trail that Bitcoin blazed in the last decade.

The Great: DeFi has orders of magnitude of growth still ahead of itself. 100x+ unicorns will be possible in this space.

The Challenging: DeFi moves at warp speed, with new innovations and projects launching daily, keeping a team of full-timers busy 16 hours a day (good thing we’re hiring ;) ).

New Territories

With the rise of Bitcoin, Ethereum and DeFi, and the recent increase in governmental and big tech authoritarianism, it stands to reason that push back may eventually be targeted at this asset class.

As a result, we are exploring more technologies that make this sector even more anti-fragile than it already is.

You cannot ban something that is immortal. While the backend of both BTC and ETH are already unstoppable, we are exploring more sectors within decentralization that will enable every part of the Web 3.0 experience to be fully decentralized.

This means that every piece of the user interface needs to be fully distributed to create an unbannable and unregulatable internet that will not bend its knee to anyone or anything. A free internet. This is the journey that Bitcoin started and that Ethereum long term seeks to secure with the countless Web 3 infrastructure protocols built on top of it.

Final Thoughts:

While its certainly wise to be hedged for a short term mean reversion of the US Dollar, there is no doubt that Decentralized Finance and Web 3.0 infrastructure will be the most potent investment of the coming decade. The early adopters are buying and the early majority is studying. The next wave will be the biggest, and most are under allocated. While many will try to time the markets, the best way ahead is to continue building your digital asset position for the long term as we are still in the early stages of what is going to be multi-decade trend.

TIMESTAMP 01/18/2021:

DJI - $30,814

S&P - $3,768

BTC - $36,400

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Eight months ago, the average pundit snickered, rejoicing in ‘finally’ being right and calling for Bitcoin’s ultimate demise.

Fast forward to today, those same pundits are calling it the next world reserve currency.

In the grand scheme of things we are still very early, but it would be amiss to fail to recognize the recent over-heating of the market and over-eagerness of participants.

After sifting through on-chain and off-chain data, we arrived at our current outlook:

Cautious Optimism.

It would be foolish to short or go flat when the market is still vastly undervalued. But this is certainly a time when it’s important to be completely de-levered and prepare downside protection for what may be our next 20-40% pull back (which regularly happens in digital asset bull markets).

In this month’s update, we’ll highlight both the reasons that continue to strengthen Digital Assets 1Y+ bull case, and the data that is motivating us to protect downside more than usually during the next 90 days.

It is possible to be exceedingly bullish on the macro, and yet stay rational. So in the event that the market does indeed pull back 20-40%, it goes without saying that this will be a time to be an aggressive buyer.

Sincerely,

Felix Hartmann, Managing Partner

Macro Bullish

The Macro case for Bitcoin and the digital asset industry could not be any more bullish:

Institutions continue to accumulate Bitcoin: $5.3bn Guggenheim Fund files for approval to invest up to 10% of assets into Bitcoin - Nov 29th, 2020

Wall Street Titans keep joining the ranks: Legendary hedge fund manager Stan Druckenmiller acknowledges that he’s invested in Bitcoin and says it may perform better than Gold if the Gold bet plays out. - Nov 10th, 2020

The first ‘Bitcoiner’ Senator is elected: Cynthia Lummis won the race for US Senator in the state of Wyoming, and is an outspoken Bitcoin advocate that aims to ensure that Congress understands that Bitcoin is a great store of value. Lummis was previously treasurer of the state of Wyoming for 8 years. - Nov 3rd, 2020

Retail Demand is Back: While PayPal had previously announced that select crypto assets would be added to their platform in the future, it was quickly flooded by demand, making them cancel their waitlist and increasing limits much earlier than anticipated. - Nov 12th, 2020

The Bank Bitcoin Bandwagon: From proclaiming fraud to calling it the next big thing, banks like JP Morgan and Citi have completely flipped the script and are now projecting lofty price targets that make my price targets (often called out for being outlandish) look conservative. At this rate the banks may have a future in politics given how fast and radically they change their outlooks. - Nov 18 & 19, 2020

When taking all these incredibly bullish developments together in a single month, no wonder markets rallied as they did. But as the saying goes, be greedy when they are fearful, and be fearful when they are greedy…

Micro Cautious

After reviewing the macro factors, we are using the word cautious instead of bearish, because using the word bearish in the current setup would be to miss the forest for the trees. That being said we have identified a few red flags that indicate it may be time for a pull back:

Relative Strength is Overbought

The weekly RSI on Bitcoin is currently sitting at 84, which is deeply overbought. Historically the only times it ever reached this level, have coincided with a medium term top, after which Bitcoin went on to correct 20-40%.

RSI, particularly in longer timeframes tends to be very reliable, with the caveat that high RSI also means high momentum, which may cause one to sit out a highly profitable week or two if one exits too soon.

On-Chain UTXO Analysis

Since the blockchain is transparent we can track at what price coins were last moved. This gives us an idea of how much profit the average holder currently has. Using on-chain UTXO analysis, we find that the average Bitcoin holder is currently over 50% in profit. This is the territory where the average holder starts thinking about taking profits or rebalancing, which leads to slowed buying and more sell-side.

Gold Narrative Falls Flat

A lot of people are buying Bitcoin because they believe it falls in line with the gold narrative, in which gold should do exceedingly well in a time of currency devaluation. The people buying for those reasons include both Paul Tudor Jones and Stan Druckenmiller.

In this case Bitcoin isn’t the problem, but gold is. With gold falling back to May/June levels despite an ever increasing Fed balance sheet, one must ask two questions:

1. Is the gold bet off the table, and if so, will it lead to fewer investors making the Bitcoin side bet?

2. If the gold bet is still on the table, some may temporarily opt for gold over Bitcoin as it is currently being sold off rather than lingering at historically high RSI levels. Don’t let the short term deceive you though, as Bitcoin is still 30-40 times cheaper than gold by market cap.

A lot of Bitcoiners see gold as an adversary. Instead we see gold as the analogue companion to Bitcoin. Strong gold communicates that the dollar is broken, weak gold on the other hand raises questions on the macro sentiment of dollar strength.

Sentiment Analysis

The Crypto Fear & Greed Index is an algorithmic index that combines a number of factors such as volatility, social media mentions, google trends and more. Currently the Crypto Fear and Greed Index is sitting at Extreme Greed.

Over long time frames, this index has done exceedingly well at marking market tops, as can be seen in the June/July 2019 market top. Similar to the RSI however, assets can stay in ‘extreme greed’ for prolonged periods of time.

Rumors of last Minute Regulation

The flash correction last week came on the heels of rumors of last minute regulation by outgoing treasury secretary Steve Mnuchin.

Four things need to be said:

1. Forcing KYC on all wallets would be a massive hurdle for innovation. It could certainly lead to headwinds price wise in the short term.

2. However it would hurt the industry less than the country enforcing it, as the country can wish their crypto entrepreneurs goodbye as they move their domicile to another country.

3. It’s impossibly hard to enforce.

4. Mnuchin will be out of office in 50 days.

Dumb Money has Returned

A lot of us in the industry were flustered last week as we watched the worst projects rise from the dead only to post record shattering returns. From the dumb to the defunct, highly centralized tokens with literally no means to accrue value posted triple digit returns.

The common theme?

Nearly all the performers tended to be projects that once upon a time in 2017 were considered hot. It stands to reason that we just experienced the re-emergence of the 2017 retail cohort. These are the guys who bought the top, then went on to miss 3 years worth of buying opportunities, only to fomo back into defunct tokens after Bitcoin hit $19,000 again.

If I have learned anything about retail traders it’s the following:

1. Don’t stand in front of a steam roller - Shorting is a quick way to investing hell.

2. Quick to buy is quick to sell - Don’t expect current buyers to be holders.

3. If they are clogging up the highway, install toll booths on the exit ramps - front run their next play instead of chasing their current play.

Shields up and Two Steps ahead

The way forward in such a unique scenario where the market has enormous tailwinds, but is also starting to overheat, is to:

1. Keep your shield up - Pull backs can come fast

2. Stay two Steps ahead - Where do the Bitcoin profits flow to next?

Our focus will continue to go into identifying undervalued projects with live products, real cash-flows, and value accrual mechanisms.

The outcome is binary:

1. The crowds leave -> market pulls back, presenting a buying opportunity

2. The crowds keep coming and are forced to disperse -> capital will flow into high quality digital assets beyond Bitcoin and Ethereum, causing price impact 1-2 orders of magnitude higher than the large caps.

Final Thoughts:

There is truly only one path for digital assets, and that is forward. However certain that path may be, it will continue to be volatile. While some despise this volatility, it can also be a great opportunity for those that prepare and are ready to invest when the opportunity presents itself.

TIMESTAMP 11/30 2020:

DJI - $29,638

S&P - $3,621

BTC - $19,650

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

The world’s a madhouse and the markets are its heartbeat.

2020 has been an equally exciting and confusing year for most asset managers.

While the ‘Dollar Trade’ and DeFi have been our leading narratives this year, which successfully guided us through these murky waters with triple digit returns, we are seeing a thematic change for the first time in several months.

In this month’s market update we want to explore the data that is making us believe that bitcoin may finally be decoupling from traditional assets, why it matters, and what impact this will have on the fledgling reserve asset and the rest of the digital asset space.

The year may seem close to the finish line, but in both crypto and 2020 terms, the next 60 days may feel like years, so stay vigilant and stay safe,

Sincerely,

Felix Hartmann, Managing Partner

Leaving the Pack

The past quarter we have seen Bitcoin leave the pack of global macro assets and begin charting its own path. Look no further than its price action since October.

Furthermore we have seen historically elevated correlation levels return to sub 0.4 both against the S&P500 and gold.

Over the last 10 years bitcoin has proven to be an uncorrelated asset with a net correlation level near 0, which it may soon reclaim after the March liquidity crisis brought all macro assets near a correlation of 1.

What is causing this sudden decoupling? It’s an influx of new demand, with not enough supply to go around.

Exploding Demand

One of the easiest and most transparent ways to measure institutional demand is to measure the growth of the leading custodians and ETP providers.

Here is the weekly inflow growth of Grayscale’s Bitcoin Trust (OTC: GBTC):

Equally Canada’s first publicly traded Bitcoin Fund (TSX:QBTC), run by 3iQ, sits at a staggering $127,631,479.55 USD less than 7 months after launch.

Additionally we have seen firms such as MicroStrategy (Nasdaq:MSTR) acquire $425mm worth of BTC September 15th 2020, Square (NYSE:SQ) acquire $50mm worth of BTC on October 8th 2020, and Stone Ridge Asset Management acquire $115mm worth of BTC on October 13th 2020.

Since Q3, every other week a major firm announces their completed 8-9 figure purchase of bitcoin as part of their reserve. The current decoupling and aggressive resistance to any sort of pullback indicates that many more firms are currently building positions. However, we are unlikely to find out who is buying until they are done doing so. As the crypto saying goes, “Fill before you shill.”

The more of these firms publicize their bitcoin positions, the more boardrooms will have their votes tilted in favor of innovation and away from tradition. The discussions are already happening and every piece of social proof only tips the scales further.

This is only the beginning of a very long cycle of institutional bitcoin acquisitions as part of treasuries and reserves. From hedge funds, to endowment funds, to central banks and sovereign wealth funds, the ocean of future buyers is deep, and we are merely seeing the tip of the iceberg.

And before you say, “Central Banks won’t do that, they’ll make their own.”

Surely they will make their own.

In fact they already are.

But just like the Fed’s ability to make paper dollars does not detract from the value of gold, neither will some centralized, inflationary, non-sovereign central bank digital currency offer any of the traits that make bitcoin desirable.

And if China failed to effectively ban bitcoin in 2017, good luck to any less draconian and less powerful nation on banning bitcoin.

Shrinking Supply

At the current time, around 65% of all bitcoin have not been moved in over a year. These are long term holders/investors that have proven not to be short term speculators and may hold on to their allocation for an indefinite time. In fact around 17% of all bitcoin have not moved in over 7 years! These may even be lost at this stage, and may indeed never re-enter circulation.

What’s left are the 35% of all bitcoin in circulation or around 6.5mm BTC that have moved in the last year. And moving does not mean selling. In fact it could be as simple as a security pre-caution to change wallets, or perhaps new choice in custody provider. Part of these 6.5mm BTC that have moved within the past year are the 38,250 BTC that MicroStrategy bought and the 4,709 BTC that Square just bought.

Once a board makes such a paradigm shifting decision to allocate 1% of capital to bitcoin, they are likely not going to go back on that decision for the next few years. So with every single institutional purchase, another bite is taken out of the already small pool of available BTC.

The smaller the available pool, the more parabolic the growth.

Until the day comes that bitcoin has a market cap large enough, where re-balancing makes sense.

We may have just experienced the kick-off to our long set cycle target of $200k per bitcoin, and for nostalgias sake, here’s an old projection from August 2019 we made based on quantitative cycle analysis. And I’m happy to say, we are exactly where we should be.

What does this mean for other Digital Assets?

A lot of pundits are arguing that this institutional flow of capital will only benefit bitcoin, causing a decoupling from the rest of the digital asset space.

They are partly right. Many institutions are currently only looking at bitcoin. One baby step at a time.

What they fail to realize is that other than the few recent purchases by institutions, 95%+ of all bitcoin is currently sitting in the hands of crypto natives. This growth in the value of bitcoin will cause a massive wealth effect amongst the crowd that believes in the future of decentralization.

While rallies in digital asset sectors may be off-set, as they usually are in bull markets, we will see a constant cycling of BTC profits into other decentralized projects in fast growing spaces such as decentralized finance, decentralized gaming, decentralized storage, decentralized governance and more.

Unlike many asset managers that throw darts at anything with the name blockchain in it, we are in the trenches and try out the projects we invest in. We’ve set up decentralized funds on Melon Protocol, created decentralized options contracts on Auctus, joined decentralized autonomous organizations (DAOs) on Aragon, made election bets on Polymarket, provided liquidity to decentralized automated market maker pools on Balancer, created non fungible tokens out of our own art on Rarible, explored decentralized virtual worlds on Crypto Voxels, and so much more.

It’s easy to blindly dismiss an emerging technology sector when one has been scarred by the empty promises of a bubble like 2017. But nothing is more convincing than USING the live products available today and realizing: “Wow. This is so much faster, easier, and better than the legacy world. This is the way.”

While bitcoin will be a great north star to measure growth by, we firmly believe that the growth of opportunities in the digital asset space far exceed the growth of bitcoin on an absolute return basis. Meanwhile they will take significantly more diligence to identify and steward.

Final Thoughts:

We’ve crossed the Rubicon. The decisions and events that were set in motion over the past twelve months are germinating and are quickly becoming the catalysts that are bringing forth the next cycle in front of our eyes. The bear market has taught us patience. But equally we should not be surprised if this cycle, like all the last, will take the world by storm.

In the News and in the Trenches:

• “Asset manager explains why Ethereum’s transaction fees won’t kill ETH” - CryptoSlate

• Felix Hartmann elected onto the Melon Council and passed MIP7

• Felix Hartmann drafted Auctus Project’s first token model via AIP1

TIMESTAMP 11/04 2020:

DJI - $27,847

S&P - $3,443

BTC - $14,350

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Crypto bull markets appear like the easiest game when observed from birds eye, yet they are one of the hardest beasts to tame when looked at up close.

On a monthly chart the 2016-2017 bull market is a picture perfect exponential slope. However when zoomed into the 3-day chart, one spots eight 30-40% market corrections within that time span on Bitcoin alone, the blue chip of the digital asset industry. Small cap digital assets often drop 50-60%, as they did in September.

These corrections may appear scary, but are a natural side-product of exponential growth. In fact, generally, they present ideal buying opportunities.

As explored in our last market update titled ‘The Calm before the Storm’, we are still in the first inning of this digital asset bull cycle.

While 2017 was a year of promises and white-paper dreams, 2020 has been a year of shipping product and delivering upon these promises from long ago.

The ICO mania surely came with its fair share of delusion and fraud, but it has also allowed countless teams to build for the last 3 years. Today the industry is reaping the fruits of those thankless bear market years focused on building.

In today’s market update we’ll address why the digital asset market is stronger than ever despite its September correction.

The world is in for a rollercoaster, socially, politically, and economically. We hope that our analysis can give you some guidance in order to be well prepared and protected.

Sincerely,

Felix Hartmann, Managing Partner

1. Anti-fragility:

As the world rides through the storm that is 2020, we have to ask ourselves whether our ship is made of wood or steel. With the election still looming ahead, and a non-peaceful transition of power from either side now looking to be more than just a tail-risk, the markets may be tested once more.

Instead of philosophizing, let’s explore how digital assets dealt with outlier stressors this year:

1. A global pandemic and financial liquidity crisis: March 6-12th 2020

Bitcoin: -59% / 61 Days to full recovery

Ether: -65% / 85 Days to full recovery

2. A top 10 crypto exchange hacked for ~250 million USD: September 26th, 2020 (the third largest hack in history, more than half the size of the Mt. Gox hack which brought the industry to its knees in 2014)

Bitcoin: Price unaffected

Ether: Price unaffected

3. CFTC/DOJ indictment against a top 5 crypto futures exchange: October 1st, 2020

Bitcoin: -4.3% / TBD

Ether: -6.3% / TBD

Nearly everything that can be feared has happened. A hack, a governmental crack down, a global black swan crisis. In each of those cases, prices took a hit, occasionally a hard one, but ultimately bounced back.

Digital assets have proven to be anti-fragile. Professor and author Nassim Nicholas Taleb explains anti-fragility as “a property of systems that increase in capability to thrive as a result of stressors, shocks, volatility, noise, mistakes, faults, attacks, or failures.”

Centralized exchanges presenting a custody risk? No problem, decentralized exchanges now have more volume than Coinbase.

Banks denying crypto firms banking services? No problem, a crypto exchange now has a US banking charter.

Love Bitcoin’s monetary policy, but Ethereum’s speed and versatility? No problem, there’s now over 1.3 billion USD worth of Bitcoin on Ethereum.

With every single blow that is dealt to the industry, it becomes more secure, resilient, and indestructible.

2. A Cambrian Explosion:

What was first? The chicken or the egg?

A similar Catch-22 existed for all too long in the decentralized finance space.

How can you get users without liquidity?

How can you get liquidity without users?

Ultimately this paradox was solved this summer with a real life, real time, social experiment of incentives of insane proportions.

Projects offered millions of dollars to users to simply use their products and provide liquidity. In fact, one project even air-dropped around $2,000 to each of its users.

While these types of incentives surely are not sustainable, in many cases they don’t have to be. All that was needed was to bring the industry out of its stalemate phase where there were no users and no liquidity.

Now there’s over a million users with Web 3.0 wallets in their browsers, savvy at engaging with smart contracts, and a healthy amount of funds to deploy on experiments.

More importantly, having talked with countless teams, we find treasuries replenished from token appreciation and renewed interest, which has allowed several teams to convert some of their reserves into stable values, ensuring 1-3+ years of guaranteed burn rate.

Not only does this de-risk project failure due to lack of funds, but it has also given them the needed fuel to attract more developer talent and expand their efforts. We have seen more recruiting and hiring in the digital asset space than we ever have since 2017. This fundamental growth early on in the cycle will likely carry fruit 6-24 months from now and could very likely extend this bull market into a multi-year cycle.

But perhaps the biggest paradigm shift is interoperability. While startups tend to work in silos, the open source nature of digital assets and their decentralized networks has led to more collaboration and a faster rate of innovation than anything we’ve ever seen before.

For example, our first activist investment Melon, which provides decentralized asset management, integrates with decentralized exchanges like Kyber Network and Uniswap. It’s governance is run through the decentralized governance protocol Aragon. And if you want a nice UI/UX you can pull up your Melon fund’s positions and performance on Zerion.

In the past startups would try to re-invent the wheel and build everything themselves. Today we see protocols niche down on perfecting one piece to the puzzle and integrate with others, and allow others to integrate with them freely. This way, any entrepreneur has lending, trading, insurance, and any other ‘money verb’ you can think of at his/her fingertips to build incredible financial infrastructure.

Will there be bugs and bad actors along the way? Sure.

But the open source and interoperable nature of decentralized technologies has proven to unleash a Cambrian explosion of innovation.

3. Follow the Money:

People speak louder with their wallet than with their lips.

TV and print analysts aren’t paid to be right. They are paid to get clicks and views.

If you still hold the news in high regard, ask yourself what people do with yesterday’s newspaper. Likely it’s in the trash, a bird cage, or used as a wrapping device for shipping.

So if words are meaningless all too often, we have to follow the money.

Here’s some of the most impressive bets we’ve seen on digital assets since ‘the bubble popped’ in 2017:

October 2020: Grayscale Bitcoin Trust, the most popular institutional ETP, approaches $5 billion in assets.

August 2020: Nasdaq-listed company MicroStrategy moves $425 million of its balance sheet to Bitcoin as its new reserve asset

May 2020: Multi-billionaire hedge fund titan Paul Tudor Jones allocated 2% of his assets towards Bitcoin.

April 2020: Andreessen Horowitz, Silicon Valley’s most renown venture firm, raised half a billion dollars for its second crypto venture fund.

April 2019: Harvard endowment fund invested $11.5 million into Blockstack’s initial coin offering.

February 2019: Morgan Creek Digital scores the first US pension funds to invest in crypto

Public companies, endowments funds, pension funds, venture funds, hedge funds, and institutional allocators have all began allocating to digital assets.

Nobody wants to be first on the dance floor. One misstep and you look foolish. Being first comes with reputation risk. But nobody wants to be last either and miss the party.

As a result you generally see a polar opposite make-up of early movers. Those with no reputation to lose, and those with such massive reputations that allocators trust their judgement even when they don’t understand the underlying itself.

Today it’s the Harvard’s, Andreessen’s, and Tudor Jones’s of the world.

Tomorrow it’s the mid-tiers.

And then eventually it will be the laggards.

Once every so often critics are saying that old Bitcoin investors are ‘dumping’ their Bitcoin on new unknowing allocators. They call it a greater fools game. However the blockchain tracks every single on-chain Bitcoin transaction. And the blockchain cannot lie. Not only are such allegation factually incorrect, but in fact the exact opposite is the case. ‘Aged’ Bitcoins are making up a larger portion of the total supply than ever before. Such long term holders are creating a supply sink, as the amount of Bitcoin circulating on exchanges grows smaller and smaller.

Around 45% of all Bitcoin have been held for more than two years. In fact, nearly 10% of all Bitcoin have not moved in over 10 years. This pattern of coin ‘aging’ (look at the light green band expanding downwards) can be seen both in the accumulation of 2013 as well as in the accumulation of 2016. Structurally we may be in the final stage of an accumulation before a parabolic run.

Final Thoughts:

The best performing assets - from Bitcoin to Tesla - are all volatile. The key is to pay attention to the holy trinity of asymmetric plays - position size, time horizon, and product delivery. One will keep you solvent, one will keep you patient, and one will filter the doers from the dreamers.

TIMESTAMP 09/30 - 10/2 2020:

DJI - $27,682

S&P - $3,355

BTC - $10,500

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

As predicted in our last market update titled “Breaking Out - The 4th Epoch of Crypto”, we saw the long awaited breakout of crypto assets, leaving behind one of the longest winters in the industry. Capitalizing on this move, we recorded our second best month in the fund’s two year history, and are already off to another fantastic start in August. We are now back on track to closing the year on triple digit returns.

While some digital assets have seen mind-numbing growth (1000%+ returns on a few small cap decentralized finance projects), we recognize that we are still in the first quarter of this cycle. Below the fold we’ll put this recent growth into perspective and set some benchmarks for both bitcoin and the decentralized finance space.

We believe that no investment offers the same asymmetric returns as the digital asset space, and failing to be allocated is a bigger portfolio risk than being allocated.

In a time of contraction, we believe in expansion. As the markets are off to new levels we are expanding the team in order to be the best digital asset hedge fund in the industry.

The world is in for a rollercoaster, socially, politically, and economically. We hope that our analysis can give you some guidance in order to be well prepared and protected.

Sincerely,

Felix Hartmann, Managing Partner

‘DeFi’ng Gravity

Since early 2019 we’ve been vocal proponents of the decentralized finance (DeFi) sector. While Bitcoin serves as sound money, decentralized finance protocols aim to solve all the other financial services that banks offer, ranging from lending, to trading, to insurance and more. All the undesirable parts of banking, the lack of transparency, the slow speed, the cost, the discriminatory practices, the bureaucracy, etc. are all replaced with public, transparent, incorruptible code and smart contracts.

Since the goal is going bankless, these projects fill a critical niche and use case.

While these projects initially suffered a slow bleed all throughout crypto winter, the sector is finally having its moment. The charts above seem reminiscent of the 2017 ICO mania, but in reality are just the starting shot to what may be one of the biggest digital asset bull markets we have seen to date.

To put it in perspective take a look at the following graphics:

That red sliver you can see in the center? That is the entire market capitalization of all digital assets including bitcoin, when compared to the other major asset classes.

Clearly whether bitcoin replaces gold or the money supply, it is unmistakably clear that we are STILL incredibly early.

When you think that our 2022 bitcoin target at $200,000 is a pipe dream, remember that the red sliver would merely grow to 1/3rd the size of gold’s slice at such a price.

Now what about decentralized finance?

The crypto native audience reading this may call it a bubble.

The non-crypto natives have likely never even heard of DeFi and are scratching their heads.

It’s not until strangers from the second group start trying to give me unsolicited DeFi picks that the first group is right.

Anecdotes aside here is another break down:

As you can see, the red-hot DeFi sector is a sliver of a sliver.

DeFi projects in 2020 are at the market size of buying Bitcoin in 2013.

We are incredibly early, but there’s flashing signs like the user adoption growth (see below) that signals that we are at the beginning of a massive trend.

Another reason for sustainability in the alt coin market is the emergence of earnings.

In 2017 some ‘coins’ (an unfortunate misnomer for nearly every digital asset) like Iota achieved market capitalizations north of $10 billion with nothing but a white-paper. Today the sector has matured a lot and finally appears to put weight on proper fundamental analysis that focuses on value accrual. Something we shine at.

Warren Buffet once said that he does not like crypto-currencies because they do not produce anything. Little does he know that the DeFi sector is already raking in tens of millions of dollars a year in earnings, producing PE ratios that even he would consider a ‘deal’.

While there may only ever be 1-3 sound crypto monies (BTC, ETH, and ZEC), other digital assets are positioned to be the next wave of multi-billion dollar tech plays.

In a world where we print trillions a month, and money hemorrhaging companies like Uber are worth $60 billion, Nikola, a truck company with $0 revenue is worth $16 billion, and something as ‘groundbreaking’ as video chat via Zoom is worth $70 billion, it’s fair to say that profitable new technologies that can disrupt the entire finance sector easily deserve 8-9 figure market capitalizations per protocol.

DeFi at a $5 billion and bitcoin at a $200 billion market cap in 2020 amidst global monetary easing will be looked back to as the no-brainer investment that you wish you had allocated to.

Iceberg Ahead

Before we close this months update, I wanted to leave you with one graphic.

What you are looking at is not the currency of Lebanon, Zimbabwe, or Venezuela.

It is the US Dollar.

Since its March peak it has dropped 10%.

Three years ago I received some accusations of wearing a tin foil hat when publishing an article discussing the fraudulent nature of MMT and the US dollar as we know it today. While unpopular then, it is now the biggest narrative on Wall Street.

The US dollar is weakening in front of our eyes, and with another $1-3 Trillion in stimulus, this trend is likely to continue.

While the liquidity crisis in March shocked many, causing them to cling to cash, be careful of being over exposed to any fiat currency in the current monetary policy climate. There are better ways to hedge yourself or achieve diversification.

In the famous words of Ray Dalio, manager of the world’s biggest hedge fund:

“Cash is trash!”

To a bright decentralized future,

Felix Hartmann, Managing Partner

TIMESTAMP 08/10/2020:

DJI - $27,791

S&P - $3,360

BTC - $11,700

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

2020 has been a year of statistical outliers.

Record unemployment, record monetary easing, pandemics, riots and civil unrest, negative oil prices, 4 of the 25 worst trading days for the US stock market… as well as the strongest 50 day rally for the S&P500.

The dichotomy of the last two in particular has Wall Street stumped.

Historians will have a field day exploring where their models broke or what caused these seismic shifts across the board.

But until then, it’s our job as asset managers to find alpha amidst the madness.

While we spent much of the past 3 months uncovering the countless theses that could guide markets this week, this month, this year, I ultimately found truth in our very own maxim at Hartmann Digital Assets that’s been printed on our documents for over a year:

The future belongs to those who invest in it.

The truth is, nobody knows what will happen tomorrow.

Maybe there will be another riot. Maybe there will be another stock market crash.

But over the next 24 months, we can say with certainty that there will be innovation.

Elon will keep building rockets getting us closer to Mars. Bezos will keep expanding the Amazon empire.

And ultimately the money will flow to those that innovate and accrue value.

While people are distracting themselves betting whether or not Hertz will go bankrupt or recover, the real alpha lies in betting on the future that most are too distracted to see right now.

In this quarterly update, I will share with you some of my findings of not just why but also where within the digital asset sector we see immense asymmetric opportunities that have gone vastly unnoticed.

We believe that no investment offers the same asymmetric returns as the digital asset space. We continue to put our money where our mouth is and as nearly every month for the past two years, management is investing additional personal capital into the fund. We also continue to be deep in the green for 2020, despite unprecedented events.

I hope you enjoy this update and it helps you see the future more clearly.

Because while it may be cloudy right now, the future is brighter than it seems,

Sincerely,

Felix Hartmann, Managing Partner

Why Crypto Assets are One of the few Investable Assets in the Current Economic Climate

In a world that is seeking alpha, we’ve entered a chapter that seems to have so little left. And while alpha appears to be a rare find at this time, the world has more cash than ever before after trillions of dollars in stimulus injections. Let’s explore where bored money could go:

Bonds: Interest rates are in the gutter. A 10-Year-Treasury now only pays ~0.64% interest. Match that with inflation and you’re running a deficit.

Currencies: Many currencies other than the US Dollar have a significant chance of currency collapse. Below you can see the national currencies from Turkey, South Africa, Iran, Brazil, Russia, and Nigeria lose 55% to 93% of their value against the US dollar since 2013.

And while the Dollar is unlikely to collapse, we are printing more of it than ever before in history.

Real Estate: The least liquid of all investments. Real Estate is currently undergoing a seismic shift as we are starting to see migration patterns out of urban cities into less crowded cities and states. COVID proved that you can do your job remotely, and big cities like New York will feel the pinch. Riots in larger cities are not helping this cause either. The value accrual mantra of Real Estate “Location, location, location” literally may lose a lot of its weight in a more digital world. To make things worse Home-Price Index is at similarly overvalued levels compared to the Consumer Price Index as in 2008.

Equities: Non-tech stock fundamentals are hemorrhaging yet the Fed stimulus has driven prices up far detached from reality. Tech stocks have entered Fantasy Land with Zoom (ZM) now having a PE ratio of 2,100… (for reference Ben Graham, mentor of Warren Buffett and author of the classic, the Intelligent Investor recommended looking for stocks with a PE ratio of 9 or below). You could surely short the markets, but that too comes with unlimited risk should Jerome Powell keep firing off rounds off ink on his magic money printer. Not even dividends are part of the deal anymore.

Commodities: Global demand has been strangled. Oil already crashed below $0 once this year. Physical commodities come with expenses making them a pricey long term buy and hold especially when prices are continuously dropping.

Gold: Resistant to the Fed, yet already at around a $11 Trillion Dollar Market Cap. One deals with the caveat of having to choose between seizability by centralized ownership and illiquidity/untransferability when personally holding physical gold. Still, gold surely deserves a partial allocation in anyone’s portfolio in an era of global monetary experimentation. But it will serve more of a hedge than an investment.

Crypto Assets: Digital gold opportunity in bitcoin with nearly 1/100th the market-cap of gold. Resistant to the Fed. Transferable and unseizable. High growth tech opportunities in ether and DeFi that can change the world with a cumulative market cap less than Zoom.

As you can see, it’s a rare setup where most asset classes are either bland, risky, uncertain, or all of the above. Once more institutions wake up to this and notice that Crypto Assets provide a mix of growth, value and inflation protection all at once, the asset class is primed for a massive move in this 24 month period. And cryptos’ global presence provides a geo-political moat as tensions tend to accelerate their adoption rather than stifle it.

In fact it’s no longer what if. In the past Quarter we had hedge fund titan Paul Tudor Jones officially allocated his fund into bitcoin, and Renaissance Technologies, now the biggest hedge fund in the world, get approved to trade bitcoin futures. The first big players are accumulating, not tomorrow but today. And their foresight will likely pay off, and when it does, all the vanilla equity funds out there will copy the legends and follow suit. No one wants to be first. But also no one wants to be last.

Bitcoin’s Unprecedented Supply/Demand Economics

This month something incredible happened. Every 4 years the bitcoin algorithm halves the supply flow of bitcoin. The last time this happened was in 2016. Now it happened again. As a result, bitcoin for the first time has an inflation rate lower than Central Banks, and nearly on par with Gold.

What’s more stunning than a 1.5% inflation rate though, is the enormous institutional demand. One of the most popular venues for institutions to get a bitcoin allocation is through Grayscale, which provides a number of exchange traded products such as the Bitcoin Trust, GBTC. And Grayscale alone has bought more than 150% of the bitcoins being mined since the halving. Meaning one company alone is soaking more coins out of circulation than mining is replacing. Square, Inc. bought up similar numbers to Grayscale back in Q1 making current supply flow a tiny stream compared to demand. Add major players like Paul Tudor Jones starting the institutional buying spree, there’s only one way for bitcoin.

Ethereum’s Meteoric (Fundamental) Rise

In a world where nearly everything seems overpriced, we find ether to be in an incredible position for asymmetric returns. All its fundamental KPI are up, its 3 year anticipated 2.0 upgrade is scheduled to go live this year, and its price is back to May 2017 levels leaving incredible upside. We are betting big on Ethereum and its layer 2 stack as we believe price will soon catch up to fundamentals. Here’s a few key factors that we believe most have not caught onto yet:

Stablecoin Settlement

Stablecoins have become incredibly popular around the world. They essentially are dollars that exist outside the reach of the banking system and move swiftly at close to 0 cost across the Ethereum blockchain. In February they had a cumulative market cap of around $5 billion. Now they make up over $11 billion. And while transactions only cost cents, those cents go to the Ethereum network, which with the right volume can turn into millions of dollars in daily economic activity. As more money leaves the banks and goes digital via stablecoins, the more earnings Ethereum accrues.

Bitcoin on Ethereum

Yes you read that right. More and more bitcoin is moving onto Ethereum. While bitcoin makes great digital gold, the Ethereum stack offers countless ways to use that digital gold beyond just holding. More on that in a second. The fact remains that we are seeing a massive spike in bitcoin moving onto Ethereum right this moment. And just like the settlement of stablecoins, ether will accrue more value when more of bitcoin’s economic activity moves onto the Ethereum network.

Decentralized Finance

I could write and entire report on Decentralized Finance (in short DeFi), and I probably will one day, but today I will share the cliffs-notes. We’ve been following the DeFi space for nearly 2 years now, and while things were uncertain and clunky then, we’ve seen an incredible growth in adoption, UI/UX, and interoperability.

In terms of adoption we saw assets locked in DeFi rise from $1bn to $1.5bn in June alone. This is comparable to a bank having $1.5bn in client assets. Except this one is decentralized. DeFi did in 2 years what Lending Club did in 5.

In terms of UI/UX, crypto has long suffered from developer-centric designs that are… well… functional. When I ran my first Ethereum node in early 2017 the apps and tools we worked with looked like they were stolen from the 90’s. Today the designs are comparable with those of Robinhood and leading fin tech companies.

ETH 2.0

With the launch of ETH 2.0 (scheduled for July 30th), Ethereum will switch onto proof of stake. This means no more miners and instead stake holder validation. Therefore it is projected that anyone owning 32 ether and running a validator node can earn an estimated 4-10% APY (via collected fees from all of the above as well as newly minted ETH tokens). This staking revenue will add additional demand for ether as we experienced when Tezos popularized its staking.

Technical Analysis

From a charting perspective ether is ripe for a massive breakout. It’s still down 76% against bitcoin since the ratio peaked in January of 2018. At the same time the ratio has made continuously higher lows for 10 months and is about to break both its major multi-year resistance, as well as the 200 3 day moving average. When ether breaks out we imagine it will recover a lot of the ground it lost against bitcoin over the years.

Alt-coin Graveyard Capital Redistribution

All the alt-coins in circulation are worth nearly $100 billion, down from their peak of $500 billion. Of those, roughly $30 billion are allocated to ether and its DeFi layer 2 stack. The other $70 billion are mostly stuck in dead protocols that have accomplished close to nothing over the past 3-4 years, or alternatively have no way of accruing value for their token. I am not in the mudslinging business, so I won’t name any names (I’ll surely short them), but I could certainly write a trilogy on why Ripple is not worth $8 billion. It stands to reason that countless of these “ghost-town” layer 1 protocols, will lose market share and see all that capital flow over into the protocols that are seeing real value accrual via network fee earnings. As I said back in December of 2018 “This is the period when […] many projects will have failed. This is the ideal time to start looking for the projects that are still working hard despite the financial pressure. At this time we will start strategically buying into quality projects whose prices got decimated during the market sell-off, but are still progressing fundamentally.” That time has finally come.

We are excited for the countless opportunities the digital asset markets are presenting and are honored to be stewarding capital in these emerging markets on your behalf.

To a bright decentralized future,

Felix Hartmann, Managing Partner

TIMESTAMP 06/22/2020:

DJI - $26,024

S&P - $3,117

BTC - $9,685

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

If March was not historic enough, April has continued to shatter expectations, models, and what many consider reality:

• In a historic supply/demand debacle crude oil plunged from an April high of $30 all the way down to around NEGATIVE $40. While prices have since recovered they remain largely unprofitable for US production at these levels.

• With an entire month on lock-down we saw unemployment rise by 30 million Americans (~20% of the workforce) between March 21st and April 25th.

• Despite only being on lock-down for ~15 days of Q1, the quarter ended up contracting US GDP by 4.8%, making it the worst quarter since the peak of the Great Recession.

If this rather dark backdrop does not cause pause, this will:

• US Stocks had their best month since 1987

We are in truly uncharted territory with a world in lockdown, civil and constitutional rights being put in question, and markets systemically failing when not propped up by Federal Reserve emergency powers (the propping up itself causing a flawed believe set amongst investors that every problem can be printed away).

This month we want to take a chance to unpack two long term paths Bitcoin is likely to take. They start with the same set up, but take vastly different routes. (Read in full below the fold).

It would also be amiss not to comment on the upcoming Bitcoin Halving. While the Bitcoin Halving is coming up in 12 days and highly significant over the long term, we believe that global macro forces at play currently are more powerful than a 1.7% annual inflation decrease.

We continue to be one of the few funds in the world that remains in the double digit green for 2020, and we like to keep it that way. In a year of uncertainty, we value risk management more than ever. Knowing this, Management added additional capital to their own investment in the fund. We’ll continue to go above and beyond to guide you through these uncertain times. If you ever have any questions, and perhaps need more guidance on how you can personally adjust to these economic conditions, feel free to reach out.

Sincerely,

Felix Hartmann, Managing Partner

The Setup - The Dollar Wreaking Ball

To explore the future we must start with the present.

When we discuss the value of Bitcoin, it generally is in terms of US Dollars. BTC/USD is the most commonly traded cryptocurrency pairing.

Generally it is the BTC part of the equation that drives the motion, but for once we argue that it is the USD portion that deserves our undivided attention to understand the future of this currency pairing.

While everyone is worried about the Fed inflating the Dollar with their recent emergency measures, the reality is that for the last 10 years, the Dollar has been in a bull market.

While not noticeable against equities, it is glaringly obvious that the Dollar has been gaining strength when comparing it against essentially any other major global currency. Here for example you can see the Dollar rise against the British Pound, Japanese Yen, Euro, Russian Ruble, Chinese Yuan, Canadian Dollar, and Australian Dollar.

Why is this problematic?

Around 12 trillion Dollars worth of US Dollar denominated debt are held between foreign entities. That could be Japan owing the UK a US Dollar sum, that could be a Middle Eastern loan to an African or Latin American country, etc.

As the global economy contracts, investors sell off their assets and naturally buy into the Dollar. We saw this in March when the US Dollar’s strength spiked during the first market crash of 2020 (we say first, because we don’t believe it will be the last).

As the Dollar strengthens, foreigners watch as their outstanding USD denominated debt grows in relation to their own wealth. A 100mm USD debt held by a European could be paid off with around 66mm Euro around ‘09-’11. Today that exact same debt without any interest added would cost them ~90mm Euro due to the strengthening of the Dollar.

We entered a global deleveraging in 2020, as the ease of credit began to contract. The $12 trillion in credit held by foreign entities, however, need to continue to be serviced. And unlike any kind of domestic debt, which the Federal Reserve could find a creative way to take care off, these foreign entities can only do one thing: Print their own currency, sell it, and buy dollars. This in turn devalues their local currency, and strengthens the US Dollar further.

You’ve created a run on the Dollar.

And that Dollar is turning into a wrecking ball for economies globally, particularly emerging economies that must devalue their own currencies to service their debts. And even those without debts will seek safety in the only strong currency left or the papers behind it that its central bank has vowed to keep buying. The whole world will flee to US Dollars and Treasuries.

Bitcoin is the constant. The Fed’s choices are the variable. Let’s explore the two paths.

Path 1: Devaluing the Dollar

Summary: Fed chooses to stop the damage of the wreaking ball by inflating the dollar. Capital allocators and individuals alike will flee to store of values like Bitcoin and Gold. (Odds: 30%, Function: SoV)

Everyone loves this theory, yet we find it the less credible one (as much as we would like to).

As the wreaking ball does damage globally and causing the first local currencies to collapse, the wreaking ball causes several side effects:

• US domestic equities rise as they are the only companies operating in a stable environment, attracting foreign capital more than ever.

• Imports become incredibly cheap, while exports decline drastically as USD denominated products are now too expensive and uncompetitive.

This can in effect cause just as much damage to the US economy, even though the stock market may look great, but that has never been a good gauge for economic health as we learned this month.

So whether it is due to international appeal or out of domestic woes, the US may actually be encouraged to implement some SERIOUS devaluation efforts. Rather than a $2 trillion stimulus package, we would be looking at perhaps $20 trillion. It will take a lot to break the ever declining velocity of money and to help provide at least a fraction of liquidity to the $250+ trillion in global debt.

Historic inflation levels would lead to both cash and bonds being uninteresting. Corporate equity (stocks) would seem just as undesirable as the economy is facing historical GDP contractions due to the virus and lock-downs.

A safe haven asset would be needed more than ever. That could be Bitcoin. It has proven that it could survive the March crash and recover faster than any other asset. Short term volatile, yet long term stability and resilience.

In this scenario people would flood into Bitcoin and our previous estimates of $200,000 per Bitcoin would be fairly conservative, as growth in times of decline will attract more money from all over the world than anyone could imagine. Especially when money is printed by the trillions. Those trillions have to go somewhere.

Bitcoin could secure it’s spot as a safe haven asset for good.

From a charting perspective this theory gains legs when Bitcoin manages to break above $11,000, breaking out of its 3 year resistance. Before that we still find ourselves in a macro bear market.

Path 2: The Reign of King Dollar

Summary: As the Dollar strengthens, all global assets decline in one worldwide flight to the Dollar. Bitcoin first declines alongside all global assets. As local currencies around the world begin to collapse, locals need an alternative. Banking and bureaucracy make it hard for locals to get their hands on USD, so Bitcoin becomes an unofficial global currency in various parts of the world. (Odds 70%, Function: Globally Accessible Currency)

Let’s call it as it is. At the present moment (though that could change at any time), Bitcoin has a near perfect correlation to US equities from February until May. Below see Bitcoin in green and the S&P 500 in red.

As a Bitcoiner I don’t like this. As an asset manager, however, there is no good or bad information. Information is simply that: information.

Until Bitcoin properly decouples from equities we can expect it to mirror the stock market with a dash of extra volatility. That’s not a bad thing if you are on the right side of the trade.

In an environment where the dollar gains more strength while the economy is bleeding from the lock-downs and unemployment is sky high, we can expect long continued sell-offs of nearly every single asset the world has to offer, just like we saw in March. Equities, commodities, currencies, crypto, real estate… nothing was spared from the USD rush in March. Wealth effects, both positive and negative cannot be underestimated.

From a charting perspective we see Bitcoin legging down to previous lows or even lower for a brief period. This can be the greatest opportunity if played right and if strongly allocated to.

At the same time as this would happen, many economies around the world would fall into a tailspin, especially outside the first world. As local currencies collapse, people would be liquidating their wealth into any kind of stable currency they can get their hands on. They will also start working for that currency and accepting payment in it. With poor or highly controlled banking infrastructure, many people won’t have access to traditional currencies like the Dollar or Euro. The local government wouldn’t want that, as history has shown. However a currency that knows no borders is different. Bitcoin has found it’s way into the hardest parts of the world to penetrate from China, to Cuba, and even the International Space Station.

In fact Bitcoin being adopted in crisis regions is no longer theory. We’ve seen this happen in all types of places from Zimbabwe to Venezuela to most recently Lebanon.

This would be the most real sense of adoption and one of the most compelling paths to global adoption, albeit dark without a doubt.

In such an event Bitcoin could quickly rise from the ashes of the global liquidity crisis sell-off, and make itself a name as the money of the people, as most currencies got destroyed by governments. As organic demand drives prices, it would not be long before capital allocators will see this trend and jump in on the action.

Though this path makes Bitcoin live through yet another drop, I believe this path will lead it to much grander success and adoption than we could have ever imagined. It would also be the call to arms to serve the purpose it was created for.

Two Paths, Two Futures

Whether Bitcoin will go into history as a global store of value or as the global currency of the people, may be soon be determined. Which path it will take is still uncertain. For that we will keep a close eye on both the Fed and the charts. We can’t force either path, but merely follow it and be on the right side of the trade. At the end of it all Bitcoin is likely to be much bigger than even we imagined.

One thing is certain though. We are currently living through history. And though many may not know it yet, Bitcoin will end up playing a much larger role in it than most could dare to imagine.

TIMESTAMP 05/01/2020:

DJI - $23,723

S&P - $2,831

BTC - $8,922

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

“There are decades where nothing happens, and there are weeks where decades happen.”

I hope this update finds you well, wherever you are. The past few weeks have been troubling to many. Even for us, despite warning about the economic implications of COVID-19 in our January update, the speed of change came as a shock. A line from our last update on February 29th captures the essence of what we saw unfold in March:

“While the economy may likely recover from the damages of the virus via 'good ol' stimulus', it may be too late to prevent the systemic flaws from tearing down the system itself. With global debt sitting at 230% of global GDP it only takes a few sectors or major institutions from defaulting which could set off a chain reaction leading to a global market melt-down. While this may sound overly dramatic, just remember that it takes centuries to grow a forest and only a few hours to burn it to the ground.”

Let me be clear: These are truly unprecedented times. No one can know for sure what happens tomorrow.

That being said, at a time when emotions run high and the media is playing to our fears and hopes, the best we can do is stay grounded, data driven, and conservative.

While optimism is reignited, and newspapers proclaim the beginning of a new equities bull-market, we believe that the world is not pricing in the tsunami of ripple effects and consequences of global lock-downs.

We see that:

A. An extended economic contraction is unavoidable

B. The flight to the dollar will continue (for now) and assets will continue to sell-off to new lows.

C. When the dust settles, the new dependency on Modern Monetary Theory will pave the way for a resurgence of hard money. Bitcoin and Gold.

I hope you enjoy our analysis, and take it in a spirit of preparedness.

Panic is looking at data after the fact and wishing one had done something different.

Preparedness is looking at data in advance and adjusting accordingly so that one never has to panic in the first place.

Stay safe in these uncertain times. It’s more important than ever that we look out for one another and stick together.

All the best,

- Felix Hartmann // Managing Partner, Hartmann Capital

An Extended Economic Contraction is Unavoidable

1. Unemployment

Until February, the worst week in American history measured by unemployment claims culminated at around 660,000 Americans in 1982 and 2008. Over the past three weeks, more than 16 million Americans filed for unemployment, shattering all previous numbers. This number is likely to continue to rise as state websites are literally breaking down under the excessive traffic (1, 2, 3), and stay home orders have been extended into May. The Federal Reserve estimates that unemployment will rise to a historic 32%. Yes, that is over 7% more Americans unemployed than at the depths of the Great Depression.

Now some might argue that the economy and unemployment will just kick back into action the second lock-downs are over. Not so fast.

Unemployment historically takes the elevator up and the stairs down. It took the United States 5 to 10 years to bring unemployment numbers down from nearly every recession or short term crash. And those recessions peaked at 10% unemployment, not 32%.

Once an employee is let go, the damage is often done. Whether it’s because the business has closed, is downsizing, or simply has meant to let go of the employee for a while and just needed a good reason.

Yes, stimulus loans and checks are (supposedly) on the way for some, but heavily delayed. And as the saying goes, “the government can remain bureaucratic longer than you can remain solvent.” 

2. Earnings

Some analysts have estimated laughable 10-20% revenue adjustments at the beginning of the lock downs. The reality is there are dozens of industries that have gone from mild profits to hemorrhaging losses.

We all know about airlines and cruise ships. But what about restaurants, gyms, movie theaters, beauty salons, etc.? Here’s a stat that will shock you:

Unless the FED plans to unquestioningly hand hundreds of billions of dollars to every industry (which comes with a caveat we’ll discuss in Part C.), you should expect a lot more empty storefronts 6 months from now. Just look at how little cash reserves the average business has, then check the calendar… we’re 30 days in and have a minimum of 30 more to go. We’ll be in the tail-end of survivors when this is over.

While mom and pop shops will get hit hardest, even unprofitable corporations like Uber and Lyft are not exempt. Younger ‘Big Tech’ corporations operate on dreams of future profits. In August of last year Uber reported that it had lost 5.2 BILLION dollars in one quarter. That’s 11.3% in cash losses of its entire market cap in a single quarter. Despite being a non-car owning millennial that Uber’s everywhere, after a month of spending $0 on Uber, I can only speculate of its demise. If it lost $5.2 billion during a boom, it can easily wipe out >$10 billion during lock-downs.

I am eager to see April and May earnings reports, because quite frankly, Winter is Coming.

3. Corporate & Household Debt

Many like to say that unlike the 2008 Great Recession we started off this crisis on strong financial footing. While it is true that most delinquency levels have only slowly ascended over the past few years and were in ‘ok’ territory at the beginning of this, we all know that falling behind is no longer a question of if, but when.

Here’s some highlights of the ripples we are already seeing in our core expenses:

• Requests to delay mortgage payments jump nearly 2,000%

• Nearly a Third of U.S. Apartment Renters Didn’t Pay April Rent

• Auto loan delinquencies hit eight-year high (…oh wait that was already in January)

That’s after two weeks of lock down. Things will get worse before they get better.

Unlike 2008, believe it or not, we actually have significantly more debt than before.

When you combine these house-hold debt levels with the staggering unemployment numbers, a $600 Billion Bailout (the allocation ear marked for individuals), seems cute rather than excessive.

Corporations are no different. Since the financial crisis, corporate debt to GDP has overshot its previous high, sitting at nearly 80% now.

In a time of easy credit, it’s easy not going delinquent on your debts. That’s why we have not seen defaults rise. How? You simply get another loan and use it to service the other loans. This house of cards goes up and up and up, until one day credit stops being easy. And that is exactly what is starting to happen:

Credit tightening at a time of all-time high unemployment and all time high household and corporate debt is the canary in the coal mine that a V-shaped recovery is nothing but a hopeful delusion and everyone is well off re-adjusting and de-leveraging their positions at a time of hope before the next leg down continues.

The Flight to the Dollar Will Continue (For Now)

Every trade has two sides. Buyers and sellers.

If you are selling equities, you are by definition buying cash.

And that is exactly what the world is doing right now.

In March of 2020, the world sold off every asset class they could get their hands on in a global flight to the US Dollar. Gold was not exempt. Bitcoin was not exempt. Oil was not exempt. Even foreign currencies like the Euro saw a peak to low range of 7.5% against the US Dollar.

Why is everyone all the sudden hot for the greenback?

A piece of it was panic. A piece of it was margin calls and liquidations.

But a big part of it is the debt bubble.

Here is a quite topical and hilariously ill timed example from Business Insider on March 9th, days before the historical Black Thursday crash that can explain the problem in a relatable way:

[On whether to refinance your house to invest in the markets] “Best action: Refinance and invest more aggressively, because a 15-year fixed mortgage with a rate of 3.19% is much lower than the market's expected rate of return.”

Say a family did just that in January, and they saw 30-40% of their life savings that was supposed to pay off their home evaporate in a matter of days, all the while one or both lost their jobs. Chances are they pulled out. And with a potential disappearing of corporate stock buyback demand side, and a retiring boomer generation pension fund sell-side, it may take a while for new highs to be set.

Now that the micro makes sense, let’s think macro.

Currently there are north of $12 trillion in USD denominated debts outstanding that foreign borrowers need to continue to service. Unlike Americans, they cannot run the printing press at the FED to pay them off. Can they create more of their own currency, yes, but it would simply devalue their own currency, destroying their emerging economies in the attempt to pay back those debts, or at least strengthening the dollar further in the case of Europe.

The United States has the unique advantage of owning both the world’s reserve currency and thereby world’s Central Bank, but also owning the most powerful military in the world. Before the US dollar gets “stimulated” into armageddon, we will see emerging country currencies fail, and maybe even the Euro. And as they fail, they will see their wealth buy into the only currency they trust (for now). The dollar.

So while a $2T stimulus has rattled some concerns about inflation, we are actually seeing a deflation at the moment due to the increased international demand for dollars, the decrease in easy credit, and the decline in spending which has caused money velocity to fall to new lows.

It does not mean that the US Dollar is immune to inflation, far from it, but in a world of dominos, it is a big domino, that will require many more to fall before it. And even if it never falls, even if it just trembles, it will cause millions to seek refuge elsewhere.

Let’s take a look at just that.

The Dependency on Modern Monetary Theory will Pave the Way for the Resurgence of Hard Money

FED: “We’re being very aggressive.”

Interviewer: “Can you characterize everything that the Fed has done this past week as essentially flooding the system with money.”

FED: “Yes exactly.”

Interviewer: “And there’s no end to your ability to do that?”

FED: “There’s no end to our ability to do that.”

- 60 Minutes, March 22nd 2020

Stimulus is not a cure. It’s a pain killer.

Are there situations where pain killers are appropriate? Without a doubt.

Do many people get addicted to those painkillers? Absolutely.

I am not concerned about the $2 Trillion stimulus causing significant inflation. In fact I believe that the country needs more stimulus, particularly for small businesses and individuals to keep unemployment and credit defaults from exacerbating. And surely more will come.

So then what’s the issue with printing our way out of problems?

Aside from inflation which may ultimately kick in, it is government dependency that’s the real issue.

Why pay off debts when debts may be forgiven?

Why keep cash for pay-roll when the government covers pay-roll in a crisis?

Why not use insane amounts of leverage, when there are no consequence?

Every-time the government steps in to save the day, crisis preparedness goes down and risk appetite goes up.

Hence we see the same or more insane levels of leverage in financial markets than ever before.

Hence we see companies buyback their own stock, rather than keep cash reserves.

Hence we see households get second and third cars on credit instead of saving for a rainy day.

A negative feedback loop is set into motion, that lasts until the day the chaos is bigger than the government’s power to maintain it.

A series of COVID-19 stimuli may rock the boat, but what will capsize it will be the inability to cut off stimulus from an addicted society.

So where to from here?

For now the dollar will gain strength against nearly every asset class. In the short term perhaps even against Bitcoin and Gold as volatility is likely to spike again in the coming weeks. Earnings season may unleash another wave of brutal sell-offs that will likely spare no asset class.

This mass destruction of value will likely lead to an even more unprecedented level of QE which the FED already announced is now officially unlimited.

At this point when equities approach their lows and the big domino trembles, historically, hard money gains strength.

In the past, hard money were commodities like Gold. Now we have reason to believe Bitcoin will fill that void as the worlds first non-sovereign, hard-capped supply, global, immutable, decentralized, digital store of value.

While Bitcoin certainly suffered a significant drop due to mass liquidations of leverage and short term holders panicking (see graphic), it passed this stress test and ended the month better than most assets.

Unlike equities, Bitcoin carries no debt that can break its back.

Unlike the dollar, Bitcoin cannot be inflated away.

Unlike gold, Bitcoin can easily be transacted in.

And beyond the scope of Bitcoin as a global store of value, it is the Ethereum network and its Layer 2 solutions that are building the new roads and bridges upon which a new and better financial world can be built on. Today they are still young, in fact many of them are still immature. But they are building in quiet. And they are far from frail.

They are Anti-fragile.

And even the worst economic times since the Great Depression have not broken them.

While volatility is certainly still upon us and a longer winter may be ahead for the more ambitious projects, the industry is still significantly undervalued for the problems it aims to solve and the amount of scars and shocks its withstood. The best time to get crypto allocation may just be this coming drop (if and when it comes).

The crypto industry survived four 80%+ market drops and now the start of a global recession. As it continues to progress through it all, it’s safe to say: It is here to stay.

TIMESTAMP 04/09-11 2020:

DJI - $23,719

S&P - $2,786

BTC - $7,335

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.