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2022 - Digital Assets
First things first: Wishing all my subscribers and readers a healthy and deeply meaningful 2022 ! May Omicron (and any other Greek letters of doom) never trouble you or your loved ones. May you be hedged against (temporary or less temporary) inflation. May you find Alpha of the financial kind. May you skilfully avoid bullshit, time-wasters, frenemies, office politics and fake news. May the year 2023 find us all to be a better version of ourselves.
I have spoken.
My 2020 thesis that crypto & digital assets will develop into a major asset class has proved 100% correct as the ecosystem has grown to circa 2.3 trillion dollars market cap1. 2021 has been a breakout year for these assets and I expect in 2022 digital assets will gain much wider recognition and adoption globally but still at the beginning of a decade long supertanker trend.
I would like to quickly revisit my early 2020 static pandemic portfolio as I think it is time to rebalance it substantially or even unwind it.
Why stop out a winning trade up 533% ?
Well in short: inflation and the associated uncertainties around monetary policy adjustment speed. Markets that have been a one way street will become more choppy and an active management approach is suitable for the coming year. I had written an article on tactical asset allocation here. In my view (and after admittedly being wrong about beta last year) active is the way to go.
How about the virus ?
I think we are close to the end of the tunnel. This virus will be with us for a long time and I think markets are already pricing in the most probable scenario of weaker mutations. In the case of a killer mutation there is a larger epidemiological and monetary toolbox to fall back upon and I think this is also priced in to some extent. If there is a multi-sigma black swan event hitting the markets it won’t be coming from this theme.
What about digital assets ?
BTC: The “Digital Gold” of the asset class has significantly reduced its dominance in the space as other L1 protocols and Altcoins have grabbed investor’s attention. Expect BTC to grind higher as more institutional investors and corporate treasuries allocate. The era of retail driven rallies is mostly over but this also means we will see fewer and less severe liquidations from highly levered accounts. Stay long, don’t freak out, ride out the vol. The HODLers abide.
ETH: As transition to Proof of Stake nears and supply of ETH reduces I can easily see ETH outperforming again BTC in the new year. The one investment I think should be in every portfolio together with BTC. Relative value plays vs solid L1s are interesting. Gas fees still a major turnoff.
Altcoins: L1s will compete with L2 scaling solutions. It is unclear if L2 scaling can detach itself totally from L1 scalability but that will be a secondary point given the noise in the space. Expect ecosystems with many DApps to outperform. As always the number of scams will continue to be high so credible teams are going to be a key point in asset selection. The anonymous builder trend will fizzle out and the meme coins will have a harder time this year. This universe of assets is the most interesting trading space.
DeFi: Similar to the explosion of startups in the dot-com era, a lot of DeFi will be gone in the next years. The ones that survive will be the new capital markets infrastructure of the 2020s. Avoid complex incentive mechanisms and tokenomics and focus on the utility. Finally beware of algorithmic stablecoins that claim they have solved the under (or zero) collateralization issue. It is only when you-know-what hits the fan that this can be proved, not in the white-paper. The most interesting and deeply intellectually stimulating area of crypto.
Metaverse & Gaming: A massive darling of both investors and retail punters. I will be in the minority and say it is bound to disappoint given massively inflated expectations. Few understand that game dynamics, storytelling and community are not created easily (and at scale), especially when one faces challenges of real time delivery using AR/VR on legacy hardware. Having said that, the potential launch of Apple hardware in this space could be a catalyst for some massive winners here.
NFT: This is the year that NFTs break out from ape/penguin/punk jpegs and massive insider trading to take their rightful place as core financial lego building blocks of modern portfolios. In the same way people were debating if a 1% allocation to BTC made sense they will soon debate if a 1% allocation to an NFT index or fractionalized NFT portfolio makes sense. And remember : NFTs can represent anything non fungible ! Not only stoned cartoon characters.
DAO: The ancient Greeks found out the limits of democracy 2500 years ago. The DAO communities will need to attack again this issue if true decentralisation can be claimed for the structures. A force to be reckoned with in terms of crowdfunding, they have a long way to go as effective governance mechanisms.
Tokenisation: It has been the theme that is always there but never really takes off. I expect more of the same until the regulatory framework is such so that institutions can be properly involved. I think 2023 onwards.
Volatility : Implied vols are relatively low and are headed lower. DeFi projects that are active in selling vega for extra yield are the main driver here but also a sign of the asset class maturing. Look for opportunities in tails long vol or skew trades. I will be doing much more here this year as the liquidity has improved dramatically. I expect complex structured products on-chain to be a major innovation.
Regulation: Regulators globally will operate at two speeds. The ones that understand the inevitability of the technology will seek to regulate but not eliminate innovation. The ones that are stuck in the dark ages will try to ban the tech and scare investors. I think there will be regulatory clarity in the US till year end and the bright spot onshore will be the in the UAE.
Enterprise: “Blockchain, not Bitcoin” was a stupid statement and still is. It is equivalent to saying “[insert database], not [application]”. That phrase which was created out of fear of ridicule and/or career risk will disappear in 2022 making enterprise blockchain ventures an unexpected winner for patient investors and builders.
One of the resolutions that I have recently made is that I will not be spending any more time in 2022 trying to debate with anyone about the value of digital assets. The only upside of these discussions is that I have found my best contrarian indicators to be super knowledgeable finance OGs vehemently opposed to the asset class. For the crypto FUD crowd I will just leave a few quotes here that may help put things in perspective.
“The horse is here to stay but the automobile is only a novelty, a fad.”
- President of the Michigan Savings Bank advising Henry Ford’s lawyer, Horace Rackham, not to invest in the Ford Motor Company, 1903
“There is no reason for any individual to have a computer in his home”
- Ken Olson, DEC CEO, 1977
“There is no chance the iPhone is going to get any significant market share. No chance”
- Microsoft CEO Steve Ballmer, 2007
I stopped writing this newsletter in early 2021 as I joined the investment committee of a regulated asset manager, leading their digital assets effort. It was a period where I learned a lot about the perception of crypto by traditional finance investors and I also had the privilege to work with a great team. It was however, a grey area from a regulatory standpoint whether I should continue this newsletter, hence the pause.
For the rest of the year, I will try to send monthly posts on subjects that I find interesting and hopefully you as well. There will be a bias to digital assets as a thematic but this won’t be another crypto only newsletter. I am also considering a more frequent weekly format with active strategy ideas if there is demand; DM me to let me know if that would be of interest !
This may be a good point to spell out that this newsletter is not investment advice and it is for information purposes only. It is an open public record of my personal interests and trading (and associated P/L !).