Dear Clients and Partners,
Current media headlines are being monopolized by the very recent blow up of the 2nd largest crypto exchange, FTX; the ongoing story will be the focus of our update today as well.
First, October had started off well with crypto markets recovering: BTC growing at 5.05% and BGCI at 8.07%. We were down -1.1%: this is an estimate as we wanted to report timely. While the underlying assets grew in USD terms over the month, the stark decline of USD vs CHF over just this past week led to a negative overall result reported in CHF. We had decided to take some risk off the table, which included building cash positions. Given all the unknowns from a macro standpoint, we wanted to be more defensive while preparing to enter new investments we’ve had under the microscope.
In hindsight, this was prudent, but we couldn’t have anticipated the 2nd largest crypto exchange FTX going bust so quickly. As of this writing, many sources are pointing to the FTX founder Sam Bankman-Fried as having used customer funds to save his failing hedge fund, Alameda Research. Sam Bankman-Fried was a high-profile public figure: he was the 2nd largest donor to the Democratic Party, well connected and engaged in D.C. and with the SEC in driving crypto regulation forward, and recruited top celebrities to pitch for FTX, while also getting major institutional players, such as BlackRock, Sequoia, Pension Funds, to invest in his firm.
We had an indirect exposure to FTX through our underlying funds, who held assets on FTX for trading purposes and weren’t able to withdraw all of those in time. The good news is that the damage was contained to a few single digit percentages of the overall portfolio. Counterparty risk is a considerable one in this space, which is one of the reasons why we spread our investments across different partners.
Apart from the financial damage caused by FTX, the hit the industry took to its image as a whole was huge and has set the sector back.
Nonetheless, this hasn’t affected our long-term view that the technology is here to stay and can (and will) drive a lot more progress, despite the occasional bad actors. The comparison to and memories of the dot-com crash have become vivid for many: back then, the Nasdaq dropped by 78%, $5 trillion of market cap was gone (in crypto, we’re still talking billions), and the “real” economy got hit hard. These days will surely end up being defined as some of crypto’s darkest.
On a more positive note, JP Morgan conducted their first DeFi transaction, UBS is launching the world’s first digital bond on the blockchain, Hong Kong is planning on legalizing crypto trading for retail after having banned it about a year ago, and UK lawmakers voted to recognize crypto as a regulated financial instrument.
While we need to be vigilant, as we expect more fallouts to follow (just like during the LUNA fallout this summer), we are also increasing our efforts even more in finding the right opportunities. We are keeping our dry gunpowder at hand as opportunities will arise but finding and timing those upcoming shots is proving that it will take some stomach to master.
I'll leave you with a brief conversation snippet between Jeff Bezos and Warrent Buffet. Bezos "Your investment thesis is so simple. Why don't more people copy you?" Buffet "Because nobody wants to get rich slow."
As always if you have any questions, just reach out to us. We look forward to hopefully meeting in person at our November 23rd event in Zurich!
Best wishes,
Marc, and your AltAlpha Strategies Team