March 2017 update

Summary

The fund began the month of March with the following division:

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The overall return for the fund as of March 25th is 132.2% (compared to the overall blockchain market which was up 10%)

These gains were due to our holdings in Ethereum as well as other altcoins. At a high level, we saw a movement of  ~3 billion out of Bitcoin and into Ethereum and other altcoins. As well as an influx of new money which pushed the market capitalization of the sector up ~2 billion USD dollars (currently 23.3 billion USD).

The “next big thing”

It was an exciting month due to several high profile events which drove attention towards the Blockchain sector. Many new investors bought Bitcoin, driven by speculation around the Bitcoin ETF decision.

After this failed to materialize a wave of money was diverted towards the next biggest thing. 

Currently, this is ether, which is the currency needed to run programs on the Ethereum global computer (a network of computers which work together to run programs, blockchain style). The machines which make up this Ethereum network comprise a programmable blockchain.

And the second biggest news item was the first meeting of the Ethereum Alliance. Which reinforced how serious both the academic & developer community is about this technology. Here are the participating members of what is being called “the next internet”

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The Enterprise Ethereum Alliance connects Fortune 500 enterprises, startups, academics, and technology vendors to learn from and build upon the only smart contract supporting blockchain currently running in real-world production – Ethereum – to define enterprise-grade software capable of handling the most complex, highly demanding applications at the speed of business.

Ethereum allows anyone to write a program (such as some business logic or contract) and run it on a distributed network of machines. It’s plug and play solution for making many centralized processes (which are failure prone, costly and vulnerable), decentralized (safe, cheap & reliable). Ethereum is emerging as the first platform level technology for the blockchain sector and most of the entrepreneurial development is happening on top of it.

The collective power of the Ethereum network of computers is also growing rapidly (known as ‘hash rate’) – this means more people are ‘joining the network’ by connecting computers to it. Remember, anyone can connect a computer to the Ethereum network and earn transaction fees for maintaining a local copy of the Ethereum blockchain (which is updated every 15 seconds).

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From a developer perspective, ether is known as the ‘gas price’ needed to run programs on the Ethereum Virtual Machine (EVM). The only way to pay this gas price is to own ether, so demand for the Ethereum Virtual Machine correlates to demand for Ethereum. That’s where the fundamental value of Ethereum lies, it’s a currency for distributed computer time. The price of Ethereum should grow if there is growing demand to run programs on it (developer demand) as well as use them (user demand).

 

To see the rise in network usage here is a chart of global Ethereum transaction volume:

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For these reasons, many Bitcoin holders with post-Bitcoin dreams are dumping their money into Ethereum. It also happens to be the next most visible currency when people visit online exchanges – that’s no accident. The search traffic for Ethereum reached an all time high this month. Note the geographical diversity, too.

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And so we have a perfect storm. Speculation, driven by real news and fundamental value. This resulted in dramatic price action because nobody was selling Ether and everyone wanted in recently. The price of ether up went from 17 to 55 US dollars. The total market capitalization rose from 1.5 billion dollars to 4.5 billion dollars.

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This Ethereum surge has also lead to a swell in the altcoin market in general. In fact, this month represents the largest inflow of capital into the altcoin market in its history. It was a tidal shift:

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Many of these emerging altcoins are behind applications running on the Ethereum network. If we look at the emerging batch of rising altcoins (8th to 16th most popular coins by value today) we notice that three of them are applications running on the Ethereum platform.

  • Augur = distributed prediction market.
  • Steem = distributed reddit.
  • Golem = distributed super computer.

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So we have Ethereum and applications running on Ethereum driving much of the growth in the altcoin sector (aside from a few notable examples such as Dash which competes with Bitcoin directly).

Bitcoin’s big decision

Bitcoin, at this moment, appears a less exciting place to hold funds for most investors and traders. The big issue right now is it’s facing a network slowdown due to higher demand (increased volume).

This slowdown has forced the community to confront a decision they all knew was inevitable – how to upgrade Bitcoin to make it scale beyond the original design. Similar to increasing the number of digits in a phone number (or IP address). A simple, but critical, platform change that effects everyone.

This has led to a divide in the community regarding how to best do it. The decision in these situations is always put to a vote (every computer supporting the network has a vote). Fifty one percent of the vote is needed to come to a consensus. We have two popular pathways to choose: Bitcoin Unlimited or Bitcoin Core.

Here is where we stand:

  1. Bitcoin Unlimited

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2. Bitcoin Core (SegWit)

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Neither has 51% support of the Bitcoin mining community – so we are left with some uncertainty in the markets. One of two things will happen:

  1. The entire community switches to a one new version of Bitcoin.
  2. The Bitcoin community splits into two independent coins and networks (in the same way Ethereum split into Ethereum Classic and Ethereum).

There are arguments on both sides of the table:

  • Bitcoin splitting would be a headache and confuse people, scaring money away
  • Bitcoin splitting would only strengthen one version of Bitcoin in the long run

Because of this uncertainty the price has tested 900 USD and its dominance of the overall market is at a historic low:

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But this presents another opportunity for those who believe that Bitcoin has and will remain the oldest and most trusted technology in this space for the simple job of storing value. It’s the gold of the ecosystem: old, slow and heavy, but dependable. It’s also the first psychological step into this sector for new money and acts as the reserve currency that everyone understands. But right now, it’s possibly undervalued.

Something most investors might be missing is the potential split of Bitcoin has already been effectively priced at the 900 USD level (25% of the value evaporated in the past 2 weeks). More downside is possible as we get closer to a split (this could happen at any time). It is the thesis of this fund that the combined Bitcoin value (split or no split) will continue to rise across the long term. That is, Bitcoin isn’t going to die and get replaced by a shiney new thing for the purpose of storing large amounts of value.

Looking ahead

For this reason we look ahead with the following high level breakdown.

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Bitcoin: Maintaining a 26% share (as a rule Bitcoin will never be less than 25% of the fund, so this is a Bearish stance). However in absolute terms the number of Bitcoin we hold grew by 50% month over month.

Ethereum: Even after trimming profits this represents over 43% of the fund (as a rule any single holding will be limited to 33%). This overly bullish stance is due to the continued price momentum of the current run on Ethereum. Any dramatic price runs this month will be trimmed with a goal of getting this position back to 33%, while maximizing profits.

Other altcoins: This is larger than Bitcoin due to the bullish positioning of the altcoins at the moment. These will also swallow up any capital flight from Bitcoin or Ethereum. Another thesis of this fund is once investors enter this sector they rarely move back into fiat currency as they look to other opportunities in this growing market. The near term goal will be to steer this towards 33% of the fund. These holdings are comprised of 21 different coins and broken down as follows:

Screen Shot 2017-03-25 at 8.46.19 PM.pngScreen Shot 2017-03-25 at 11.14.17 PM.png

Whether the massive gains from this month hold in April or not will help identify whether this past month was truly a rising tide, or a speculative splash. My overall stance is Bullish though I expect some bumps in the weeks ahead during the Bitcoin wars that are brewing.

 

 

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