January 31, 2023

3GI Ventures January 2023 Report

General Market Update

The crypto market started the year on a positive note with a strong rally that saw BTC rise by 38%, ETH by 37%, and TCAP (crypto market cap) by 25% in the first three weeks, while the S&P and NASDAQ increased by 5 and 8% respectively. The December 2022 inflation rate came in as expected, raising hopes that peak inflation is behind us. One reason behind the rally was that markets were starting to price in lower interest rate hikes than initially projected by the Fed while some investors believe a reversal in rate hikes later this year is not out of the question. The market saw a minor pullback on January 18th in light of a weaker than expected retail spending report - although it was a good indication of slowing inflation, it raised concerns of an upcoming recession. On that same day in the crypto world, news emerged that Genesis, a centralized crypto lender, was filing for bankruptcy, and the Department of Justice was investigating a Russian crypto exchange.

The market resumed its rally afterwards as talks of a milder-interest rate increase in February surfaced, with Bitcoin rallying towards $24,000 before pulling back to around $23,000 at the end of the month.

The market outlook is still dominated by the inflation narrative and subsequent rate changes. At the moment, the market seems uncertain about whether the Fed will ease monetary policy or continue with a hawkish policy, leading to another bear market. Therefore, the recent market rally may not be sustained due to the Federal Reserve's intent on fighting inflation, especially if the Fed pushes back strongly against it at their next meeting which will be taking place on February 1.

China’s reopening is a double edged sword whereby there will be an increase in demand for commodities causing raw materials prices to rise but at the same time it will help loosen up supply chain bottlenecks which will remove pressure from supply constraints. 

All eyes will be on the FOMC (Federal Open Market Committee) meeting. If the Fed stops Quantitative Tightening, cuts rates or recommences Quantitative Easing, then the rally is expected to continue which we feel is improbable. 

3GI Strategy Breakdown Performance

In January 2023, our momentum strategy allocation (representing 50% of our overall portfolio) achieved 2.5x the market’s return, 55.65% versus the market’s return of 22.03%. January’s top performing momentum assets in our portfolio were Rocket-Pool (up 77%) and Gains-Network (up 119.52%). Three of our momentum positions reached profit-taking levels at least once this month, with Gains Network reaching it three times. 

We added two new DeFi positions to our momentum portfolio, Pendle Finance & Liquity, bringing the total number of momentum assets to 7. We are anticipating upcoming narratives surrounding yield trading and decentralized stablecoins, so we are positioning ourselves accordingly.

Our yield farming activities have been performing well. We closed an LP position for which we were providing liquidity on a decentralized exchange and collecting trading fees in return. The activity returned 25% in fees over the period of two months. Our covered-call options strategy has been yielding an annualized return of approximately 30%.

Our swing strategy returned approximately 32% this month and it was amplified up to 34.3% by utilizing covered-calls mentioned above. 

If you would like a refresher on our updated investment strategy, please refer to our 2022 annual letter here.

The price of 3GI Token increased by 29.29% from $0.56 to $0.73 in January 2023, reaching $0.76 (35.7%) at one point this month. It is important to note that although this return is very close to Ethereum’s 31.53%, 3GI is highly hedged against any market downturns by utilizing cash reserves and other hedging strategies (e.g. non-directional options) and therefore the risk to reward ratio of 3GI is much higher than that of Ethereum or even Bitcoin. This means that 3GI does not decline in the same intensity that these other assets and the overall crypto market does during a downturn. As illustrated in the above section, the unhedged part of our portfolio did indeed beat all benchmarks with a 55.65% return.

We are confident that our current investment strategy is well positioned to perform consistently whereby we perform well in a bull market while protecting our portfolio from market declines.

Here is a snapshot of 3GI Venture’s Portfolio Allocation at the end of January 2023.  

Noteworthy Crypto News

  • Investment Firm, Bernstein, published a report calling for institutional investors that now is the time to get into crypto and expect crypto revenues to grow by 16x from $25 billion in 2023 to $400 billion by 2033 - Link
  • Boston Consulting Group (BCG) estimates that the asset tokenization market will reach $16 trillion by 2030. That represents 10% of global GDP - Link
  • Goldman Sachs ranks Bitcoin as top performing asset for 2023 - Link
  • Elon Musk is trying to build a Twitter payments system — and crypto may be part of it - Link

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