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AA Digital: Performance Update July '23

Dear Alternative Investment Enthusiasts,

The crypto industry had another key moment in front of the courts, during which the SEC’s denial of Grayscale’s conversion of their current Trust structure to a spot BTC ETF was deemed “arbitrary and capricious”. The court unanimously ruled that the SEC must reconsider their ruling, since they couldn’t see the difference between the spot BTC ETF vs the up-to-now-approved BTC futures ETF. Furthermore, the SEC has never explained their differences in the handling of spot vs futures ETFs.

This has been yet another loss for the SEC’s Gensler in front of the courts, with the pressure continuing to build on the SEC to provide context and guidance for their decisions. However, this ruling has now already been confused by headlines stating, “the spot BTC ETF is here or imminent”. It can still take a while until a spot ETF becomes reality in the US, given the current queue of applications that are lined up versus the SEC still having options on the table to stall things further.

The current situation in the US stands as a stark contrast to other countries, which have already moved towards regulatory clarity and support. Highlighting some further notable adoption, PayPal issued their first USD stablecoin and considering their distribution power, this could now truly mark a major step in offering financial solutions at scale for the unbanked. In Switzerland, the number of banks allowing their clients to buy and directly hold blue chip cryptos is steadily growing, most recently including a local cantonal (state) bank.

The US presidential race has also brought BTC support forward, with Democratic candidate RFK Jr disclosing that he bought 2 BTC for each of his children. In Argentina, Javier Milei, a “pro-bitcoiner”, is in the primary race. While all of this information certainly sounds positive and our long-term positive conviction remains unchanged (rather being reinforced continually), it is also important to remind ourselves to have a balanced view. Too often (especially on social media) the crowd erupts in ecstatic joy after events such as this current ruling, only to then quickly fall again into a doomsday depression when the next negative headline drops. It helps to zoom out and to not get consumed by the daily noise.

For the month of July, we were down 2.59%. We have a total return outperformance of 13.74% (vs BGCI) and 1.57% (vs BTC) at a strongly reduced annualized volatility of 27.28% vs 70.90% (for BGCI) and 62.70% (for BTC). For June BTC was down 3.90%, with Bloomberg Crypto Galaxy Index (BCGI) being down 0.63%. During the month, the DeFi segment was most notable given the volatile moments it encountered, as a leading protocol, Curve, was exploited due to an issue rooted within the programming language. One of our funds had a position in Curve, which led to underperformance, while another was able to deliver outperformance through a well-timed execution of their strategy.

Overall, the market is still waiting for a positive catalyst to announce the next bull market. Many observers are pinning their hopes on an approval of the spot BTC ETF, or the next BTC halving happening next year. We’ll see if this recent ETF-related court ruling truly has legs, especially if we consider the brief price relief which was caused by the partial court victory Ripple (XRP) had vs the SEC….only to quickly evaporate thereafter.

Marc Seidel, and your AltAlpha Strategies Team

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