The Rise of Cosmos
Hartmann Capital Newsletter, Monday January 10 2022
Market by Numbers
ETH Corrects - Cosmos Outperforms
We ended 2021 with a concern for the majors, especially ETH. Unfortunately, the $3,600 support we highlighted broke hard this week, with ETH ending the week down 14% YTD. Happy New Year.
The excuse this time was a global risk-off trade driven by the revelation at the December FOMC that the Fed will start tapering – reducing the size of its balance sheet – sooner than expected. Rate hikes appear more likely than they did last week.
Stock markets were hammered, but BTC and ETH felt the brunt of the sell-off.
We worried that L1s would lose momentum without ETH’s leadership. We also would have expected more volatile markets given recent BTC weakness. So far, however, ETH’s sneezes have not given all the L1s a cold. The L1 trio of “Solunavax” (Solana, Terra (LUNA) and Avalanche), perhaps unsurprisingly after a phenomenal run, did indeed fall more than ETH.
Solana is down nearly 50% from its all time high, giving back all of its post-summer gains. While LUNA was an important driver of our performance in 2021, we never warmed to Solana. While unbelievably fast (when running) and backed by Alameda/FTX founder Sam Bankman-Fried, its fast order-book DEXs have yet to gain the traction that was expected. Additionally, Solana-based VC-owned protocol tokens were issued at what now can be seen as egregious valuations.
While we acknowledge BTC as the original cryptocurrency, we have never felt it belongs in a hedge-fund. Investors can easily access that Beta for themselves, either directly or through tax-efficient funds. Bitcoin is down just over 40%, further justifying our position. In fact, with this latest move, BTC has given back all of its gains over the last twelve months.
Besides ETH, BTC and the leading L1s, others too succumbed to selling pressure this week. Yet this correction finally revealed that the rest of crypto was no longer solely the poor cousin to BTC, and could indeed have a life of its own.
For example, Cosmos ecosystem L1s and Fantom actually rose, resulting in massive outperformance. While Fantom is still not fully recovered from a recent pause after its long run alongside Solunavax, Cosmos’s native token ATOM hit all time highs on Binance.
We’ve long believed in Cosmos chains such as Secret Network (SCRT), and have recently added Sentinel (DVPN), Akash (AKT), JUNO and OSMO to our high-conviction allocation. ATOM, the native token, had always appeared less attractive due to its poor tokenomics. What has changed for us is a renewed expectation that ATOM will finally find value-accruing use cases, driven by the growth of the entire ecosystem. It also doesn’t hurt that ATOM LP pairs on Osmosis have APYs that often hit three figures.
Cosmos IBC and Osmosis, an L1 decentralized exchange, together make bridging chains such as Terra, Secret and Kava inexpensive, safe and easy. Osmosis’s TVL doubled in the past two weeks alone.
But what good is a chain with seamless interoperability if nobody comes to build or to use? Well, devs are building on Cosmos. Though Polkadot is much busier and Solana is inching ahead in a much shorter time, Cosmos is the next most active non-Ethereum chain measured by active devs. The two others in Solunavax are nowhere near the same level, though to be fair they are much newer chains.
So what is being built on Cosmos besides the seamless bridging Osmosis DEX? Well the dWeb, certainly. Akash and DVPN are decentralized iterations of Web2 stalwarts cloud computing and virtual private networks (VPNs). Osmosis DEX already uses Akash for cloud computing. As more dWeb/Web3 get built out, demand for decentralized infrastructure should grow.
We also firmly believe that Juno (JUNO) will become the de facto Cosmos EVM smart contract platform, benefiting a central role in the interchain dynamics of the Cosmos IBC. Because Cosmos Hub is intended to be neutral territory on the layer 1 blockchain, the Cosmos community, including Sunny Aggrawal, Jack Zampolin, has rallied behind Juno to be the main chain for DeFi, NFTs and more. A hard-capped supply and the most developed ecosystem makes JUNO an attractive bet on Cosmos as the next L1 to gain traction with users.
Our big three on Cosmos – JUNO, OSMO and ATOM – have shrugged off the cryptocurrency market volatility this year. The three are each up 80% since late December, while ETH is down 16%.
We predicted last year that asset selection was going to play a bigger role in returns this year, and so far – after only a week – we already have one example of the trend to lower correlation. It’s a sign of maturity that we are becoming a market of tokens rather than a token market. Based on the start of the year, choosing the right asset looks to be increasingly important in profiting in digital assets.
Hartmann Capital Weekly written by Head of Research, Rasheed Saleuddin, PhD, CFA
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.