Welcome to 3GI’s October monthly update.
You can access the PDF version of this report by clicking here.
General Market Update
The market outlook is still generally bearish due to global macroeconomic trends which continue to drive financial markets. Crypto market volatility was unusually low compared to equities markets as crypto becomes less sensitive to economic data. We have mentioned in previous reports that crypto was moving in tandem with equity markets, however, the correlation between crypto and the stock market has weakened over the past couple of weeks [Decoupling Thesis - Read below]. Historically, periods of low crypto volatility were followed by big upward price movements.
The U.S. inflation figure for September came out on October 13th at a higher than expected rate of 8.2%. The crypto and equity markets tumbled on the news but suddenly recovered a few hours after in what was a remarkable turnaround. The reasons behind the bounce were likely due to investors’ expectations of the consequences of continued rate hikes that were over exaggerated. Additionally, the fall in prices resulted in attractive valuations that triggered massive buy orders.
There was a strong rally on the 25th & 26th October which saw crypto prices go up by 20%+. The reason behind the rally was due to a short-squeeze that triggered over $1 billion in liquidations. Another reason was attributed to investors expecting that the Federal Reserve will slow down rate hikes after December or perhaps even pause them in light of poor companies’ earnings and rising worries of a recession (US GDP grew by 2.6% in Q3).
The Decoupling Thesis
Cryptocurrencies like Bitcoin were initially designed to create a financial system that is trust-less, permission-less, decentralized and independent of any government or entity. However, as crypto adoption grew, so did the value of crypto assets which in turn attracted investors to speculate on the price movements of those assets just like stocks. That sort of turned crypto into a greater fool theory suggesting that you can sometimes make money through the purchase of an overvalued asset if the asset can later be resold at an even higher price. As a result, the crypto market price movements started acting very similarly to traditional equity markets rather than being independent from the legacy system.
The decoupling theory suggests that there will come a point in time where mass adoption of crypto due to the superior characteristics & benefits it offers over traditional systems will make crypto price movements independent from equities and other traditional financial markets, as growth in real use case adoption would be driving prices rather than investors’ speculation.
The weakening in correlation between Stocks & Crypto could be a sign of decoupling. A good example was on the 26th October when crypto prices rallied almost 20% while tech stocks tumbled after missing earnings expectations.
The sheer amount of crypto projects launching on a daily basis across various sectors is outstanding. Many of those sectors are still in their very early experimentation stages, seeking their product market fit. This is limiting them from attracting substantial user activity. We strongly believe such sectors will create immense value, however we expect it to take some time, given the current macro context.
The Blockchain infrastructure and Decentralized Finance (DeFi) sectors are dominating the sector landscape, attracting the most funds and activity. As a lean fund, we are re-positioning our activities to remain exclusively within those two sectors, allowing us to benefit from the hot sectors and capture substantial value.
With expectations of a looming bear market and an extended recessionary period by many of the top global economists, we are also focusing a part of our efforts on generating sustainable market neutral yields using decentralized finance protocols to ensure the value of our portfolio grows regardless of which direction the market moves.
Another update to our investment strategy which we have been testing and simulating for some time is shortening our investment time horizon. Whereas previously we would invest in an asset with the aim of holding it for a minimum of 3 years, we have now revised our strategy to invest in current market narratives over a period of 3-6 months. We believe this will allow us to capture more value in the short-term without sacrificing the long-term returns.
3GI Performance (MoM)
The total crypto market cap grew from $954.6 Billion at the beginning of the month to ~$1 trillion at the end of month representing an increase of approximately 12.2%; whereas the price of 3GI grew from $0.58 to $0.67 over the same period, an increase of approximately 15.5%.
Airdrops are essentially a marketing tool adopted by crypto projects to acquire users and spread awareness for an upcoming project. Airdrops are basically free money given out to early adopters of a particular project in exchange for engagement with the project. The money is given out in the form of the project’s native token. Similar to the marketing campaign carried out by Paypal in its early days offering money to people who sign up to their service.
So far, our fund has received two airdrops SAFE & HOP Protocol, and we are well positioned to receive other highly anticipated airdrops later this year, namely, Arbitrum & Across Protocol. We consciously use certain protocols for our on-chain activities in anticipation of the project’s future airdrops, allowing us to gain free tokens at no cost. To put things in context, airdrops vary depending on project and user activity but could range from as little as $50 and can go (rarely) up to as much as $50,000.
Noteworthy Crypto Related News
- The European Council approved its most comprehensive crypto regulation framework introduced in Europe, the Markets in Crypto Assets (MiCA). The MiCA proposal goal is to standardize crypto regulation among the 27 EU member states
- Mastercard to offer cryptocurrency-linked cards for customers in the MENA region
- BNY Mellon & Societe Generale have each launched their own digital asset custody platforms, letting clients hold, buy or sell crypto assets
- UK's new prime minister Rishi Sunak is a crypto enthusiast and has plans for the industry. “It’s my ambition to make the U.K. a global hub for crypto-asset technology”
- Smartphone manufacturer Vertu revealed its latest device, Metavertu - a Web3 phone that can run its own blockchain node and turn photos and videos into NFTs with a single click.
- After being acquired by Elon Musk, Twitter will let users buy, sell, and display NFTs directly through tweets with an integration called NFT Tweet Tiles
- Binance, a crypto centralized exchange, contributed $500M towards Elon Musk’s $44B acquisition of Twitter
- Turkey to launch a central bank digital currency (CBDC) next year