February 2020 Market Commentary

Paul Cappelli, Portfolio Manager

March 1, 2020

After a strong start to the year, gravity returned to global markets as fears surrounding the Coronavirus sent markets into the red and they posted their worst overall returns since 2011. During the week of February 24th, stocks fell 11% amidst the uncertainty of how far global disruption would reach. While digital assets did not remain unaffected amidst one of the more violent global sell-offs in recent memory, they did show their chops as an uncorrelated portfolio position with the Bloomberg Galaxy Crypto Index (BGCI) holding on to finish up 1.81% for a final mark of 398.44.

Opening the first half of the month charging hard out of the gates, the BGCI closed with one of its best finishes in nearly ten months on February 14th at 525.32. As pressure mounted across all asset classes, the second half of the month led to choppy price action and mixed returns for holdings of the portfolio. The last fourteen days saw the BGCI fall 24.15%; five of our six holdings fell on the month amidst increased volatility. Ethereum was the fund’s best performing asset with a return of 24.99% and a final price of $225.21. It was a nice resurgence for the Web 3.0 protocol as developers on the platform flocked to ETHDENVER 2020, a signature conference for which ETH builders gather to engage in discourse on growth and the future vision of the Ethereum ecosystem. Competing platform EOS struggled as it fell 14.56% on the month for a final price of $3.50. It was a tough month for payments as all three holdings fell. XRP finished close to flat on the month down 0.92%, despite the Ripple Technologies CEO publicly announcing that the company’s main source of income was selling the XRP token. Ripple Technologies and its executives are said to be the largest holders of the remittance token XRP. Bitcoin forks and payment tokens Bitcoin Cash and Litecoin moved lower in tandem and finished down 16.44% and 12.25% respectively.

February proved to be a volatile month for bitcoin. The flagship asset traded in the low $9,000 range to start the month before climbing above the $10,300 mark on February 14th. As markets sold off and leverage flowed out of the system, bitcoin moved lower in the back half of the month finishing above $10,000 once before an orderly move down to a closing mark of $8,657.34, a modest drop of 7.02%. Even as the market traded lower, both spot and futures exchange volumes remained strong and consistent. By measure of what has become known as the “Real 10” in the spot market, along with Bakkt and CME in futures, combined volumes saw several sessions of 1BN+ which indicates a healthy liquidity environment for bitcoin.

In addition to asset performance, February saw three key developments for the digital assets space that tie to long-term themes. First, SEC Commissioner Hester Pierce proposed new legislation to support token projects in an effort to achieve decentralization. Under the proposal, new projects would be given a three-year grace period from the time of token sale to develop their networks without penalty of securities laws like the Howy Test and Supreme Court Assessment. A second announcement came from the Libra project as they continue to tweak their proposal for how the token will be rolled out. Bloomberg reported that the payment token was undergoing a change to allow digital versions of government-backed currencies. Many believe that this will be viewed as positive for regulators worldwide. The final announcement of the month, which came as little surprise, was the rejection of the Wilshire-Phoenix Bitcoin ETF. Regulators continue to cite their inability to get comfortable with bitcoin’s ability to meet the requirements necessary to get approval for an ETF wrapper. While the asset class has made exceptional strides in improving market structure over the last three years, it’s clear that this type of product is not something we will see in the near term.

As uncertainty in the markets continues to persist and fear grips the headlines, it’s important to look for the positives that may be reflected in the next wave of investment, and consider the role that assets that offer both low correlation and secular growth opportunities can play in a portfolio. Through the first two months of 2020, both bitcoin (+~23%) and the BGCI (+42%) turned in strong performances. While these data points capture just a moment in time, performance of these assets is certainly something to keep an eye on as digital assets continue to grow and fear of the unknown exists in global financial system.