Fund Update — Q4 2023

Fund Update — Q4 2023

Previous quarterly update:
Fund Update Q3 2023

Q4 2023 Portfolio Highlights

Solana is up 35% over the past week, adding to its 2023 rally of better than 500%
Exchange-traded products tracking the cryptocurrency saw $12 million in inflows last week, according to CoinShares.
Hut 8 and USBTC Announce Completion of Business Combination
Shares of Hut 8 Corp. common stock are expected to begin trading on Nasdaq and the TSX on December 4 under the ticker symbol “HUT” Completion of the…
Cribl Surpasses $100M in Annual Recurring Revenue in less than Four Years
Cribl announced today that it has surpassed $100 million in annual recurring revenue (ARR), growing from $1 million to $100 million in ARR in less than four years.

Q4 2023 Venture Investments

As mentioned in our previous post "A Shift to Liquidity", our venture portfolio will be primarily focused on follow-on deals for existing portfolio companies and just a few new investments per year. The liquid fund has continued to outperform and moving back into venture capital at this time does not make sense, especially when factoring in our additional criticisms of VC asset class itself. With that in mind, we expect around 1 deal per quarter in 2024.

In Q4 2023, we continued to support our existing companies on business development, go-to-market, growth, and helping raise additional capital. There are many exciting portfolio company updates lined up for Q1 2024.

Market Overview

We believed this 'goldilocks' period in markets would continue through the end of the year, as we sit between peak interest rates, cooling inflation (albeit some sticky prints), and aspirations of rate tapering in 2024. Risk-on behavior jumped in Q4, mostly off of excitement around interest rate reductions next year. Big tech stocks continued to be a secular safe haven pick of sorts, with some hitting all-time highs.

The market's forward-looking consensus is that rate tapering will begin in March and this prediction has been trying to price in for the last few months. We believe the probability still leans in this direction but the Fed’s tone could easily change between now and March. The likelihood as it’s currently being priced may not be as high as it seems. Regardless of when it starts, most in the market believe rate tapering is an automatic signal of bullish continuation and risk-on behavior. This is generally true leading up to and directly after the first interest rate reduction. After that, the question becomes what other impacts could emerge (i.e. growth) and oftentimes, tapering is a fairly long, convoluted path with the market starting to feel uncertainty in different areas. The north star metric of 2024 for many companies will be around margin improvement over raw growth and we'll begin to see those signs more in 2024. We don't foresee a major recession or 'black swan' moment and generally believe the worst is behind the market, but it's certainly plausible to see growth and ratios contract next year.

Crypto has outperformed in this risk-on period, but it has not decoupled. Although the impending Bitcoin ETF may give some defense to crypto performance vs equities, the space is still reliant and correlated with overall market performance. This is easy to forget in crypto since the gains and movements are on another level, but it's all relative.

There is a meme mocking the idea that the ETF is priced in. We don't believe the future inflows of the ETF are priced in (how could they be?). However, we believe the approval event to a large extent is priced in, give or take another ~5-10% pump on positive news. After that, the market might be hit with a "now what?" moment and the aftermath of the event is more likely to be faded than to have an immediate bullish continuation. Q1 as a whole might be a wash, especially after prior bullish quarters – a cool-off period makes sense. This rally may end up resembling the hopeful rally up to a local top of $14,000 in 2019, which was followed by a substantial correction. From a % basis, $48,000 levels are equivalent to $14,000 (both ~30% off from the prior top). These percentages and timeframes never perfectly repeat, but they offer a guide into price action and market psychology, which end up playing out eerily similar. So far, this cycle as a whole has been very close to prior ones, outside of some variance in timeframes.

The Bitcoin halving event is lined up for late April, and this is likely to begin the next narrative post-ETF approval and launch. Actual ETF inflows this year will likely underwhelm expectations. Institutional buyers will take time allocating into the ETF and more education is needed in general.

As we enter January, there is some sense of fatigue and potential fragility in the market beginning. We are well-positioned in either scenario. Despite adding substantial positions in 2023, our cash position is still strong and we will continue to be buyers throughout 2024.

Crypto Performance & Outlook

Our bet on SOL throughout the year (at as low as $12-15) has paid off. Our newer bets into Bitcoin at ranges around $15,000-$22,000 also paid off. We continue holding our core, long term ETH holdings (and older BTC/SOL positions) but did not add any ETH this year. That may change into 2024 if we see an incoming narrative for EVM to outperform. Otherwise, the BTC/SOL spread has been way more powerful to capture upside but maintain lower relative risk with BTC – a call we had made earlier in the year.

The fund has grown substantially since inception and our risk strategy is different now and more refined. We don't get antsy on shiny new objects or do too many rotations. Big narrative bets with intent, hedging properly, and building strong base/benchmark positions are the priorities. Our core positions and their respective beta position are as follows:


This spread gives us core capture in the 3 top Layer 1 blockchains, along with beta capture in what we believe are solid, longer term projects on each chain.

Outside of some projects launching in 2024, this is the extent of our current liquid portfolio in crypto. The goal is to not spread too thin across too many assets and eventually go into some higher risk trades later in the cycle when it makes sense and when liquidity in the market permits.

Many funds in the last cycle did things like 'treasury diversification' deals, never built up strong liquid bases, and ended up underperforming simply holding BTC or ETH, which they did not even benchmark against. It's important to position well and as early as possible in crypto cycles, but finishing strong is just as important.

Crypto Narratives

As with any crypto cycle, new narratives emerge and challenge old ones. The initial rumblings of risk also start early and in hindsight, eventually become clear as day. We wanted to highlight a few differing blockchain narratives:

Decentralization. This approach continues to make sense for maximizing credible neutrality, trust, and security. All of this lends itself to the commodities world, lowers securities/regulatory risk, increases institutional willingness, and is the foundation of the industry. There is generally a trade-off with UX due to increased complexity, which has improved over the years – but fees have remained a core issue. Decentralized consensus is costly at scale. This can hurt the average user, but can also make sense when dealing with large or important asset holdings. Block space is more premium in this case, which can serve as a more pristine settlement layer for certain use-cases. We see some of this happening in even Bitcoin now, where ordinals have entirely changed the fee market but ultimately, this can also bolster future security. There is an aspect of first mover advantage that Bitcoin and Ethereum hold, being able to be seen as battletested. Some other chains may be able to increase their battletested claims cycle over cycle but in general, trust and liquidity lend themselves to the more decentralized chains.

Monolithic. This approach makes sense for maximizing UX, low fees, speed, and simplicity for a variety of use-cases. A decentralization trade-off for certain use-cases is realistic in this market, even if it goes against some of the original ideals. Liquidity and TVL may never be as high or robust in this approach, as it is retail-first (e.g. swap pools won't have as much depth but will easily execute for retail sizing). Trading, NFTs, gaming, payments, and other use-cases are where monolithic can outperform. We are more skeptical of the DeFi side. The amount of people touching the chain and its products has the potential to grow much faster but larger holders and whales may be less eager to lockup significant capital. Block space is more commoditized in this approach and less premium, but it addresses glaring issues around fees and subsequently adoption. Despite potential points of failure, which must be prevented and improved over time, it's actually a pragmatic approach to today's problems in the space.

Modular. This is currently one of the most hyped words in the space. Our question is, what does this actually solve for? Today, perhaps some obscure developer needs, but nothing for the end user. Where will value actually accrue in a modular setting? Data availability, another hot buzzword which is a big part of the modular narrative, is typically a concept that is relevant for much more mature industries and often proprietary, enterprise use-cases. Being from the big data space before this, data availability and data lakes were an important part of data analysis for certain, often specialized departments in organizations that needed quick/actionable data (e.g. real-time geospatial data for the trucking industry). The idea data availability is required for crypto right now, or is highly valuable, urgent, or important at this time is mostly built on buzz. Whether or not it's even relevant in an open-source data setting is another question mark. Modular use-cases are currently in their infancy, which doesn't negate them but on principle, it's hard to see what issues this solves for. Of course, this doesn't mean number won't go up in these tokens.

Restaking. No one can explain restaking like they are talking to a 6 year old or why it's necessary or useful in practice, which is a red flag. 'Dot.eth' influencers have attached themselves to restaking as a new paradigm to help their bags go up, but core ETH developers continue to be skeptical, including Vitalik. Restaking is one of those early forces that could sour later in the cycle and cause cascading failure if it gets out of hand, or be a major contributing factor. As yield improves and leverage increases in the overall system, restaking will only exacerbate risk. We already hold concerns on chains relying too much on liquid staking tokens (LSTs) and restaking adds to this risk. We view it as a serious tail risk this cycle. Again, none of this means number won't go up on restaking-adjacent tokens, it just means it's mostly hot air.

As with all these market experiments, we genuinely want them to play out and welcome max experimentation. That does not mean they are immune to criticism however. The market will eventually decide which narratives legitimately address problems versus which are vaporware/hype to create exit liquidity. The narratives that create actual risk in the market should be criticized the most, despite being well-intentioned.

We will write more about crypto markets in the coming months and the various narratives that emerge. Happy New Year!

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