June 2018 Commentary

March 30, 2020

I like to provide a quick update on the news in the crypto-world. It is quite evident that large financial institutions are slowly entering into bitcoin trading as they have realized that this is a new asset class.

  • Securities and Exchange Commission has announced that it will not classify Ether or bitcoin as securities. This is big step forward for the cryptocurrency community.
  • Chicago Board Options Exchange (CBOE), the world’s largest futures exchange has filed for a bitcoin ETF with SEC to enable investors in public markets to trade bitcoin. I believe that it has a high chance of being approved by SEC.
  • HTC is a leading manufacturer of smartphones shipping over 100 million phones. They have announced a new blockchain phone. This phone could serve as node for Bitcoin and Ethereum networks, act as cold storage device, process crypto payments, hold personal identity and support decentralized applications natively. I like the team that is advising this company. Each one of their advisors made outstanding contributions in the blockchain space.
  • Mining giant Bitmain closed a Series B funding round which values the firm at approximately $12 billion.
  • Leading venture capital firm Andreessen Horowitz raised $300 million for its first crypto-focused fund. Marc Andreessen, who was the original founder of Netscape, said Cryptocurrencies will have bigger impact on humanity than internet.
  • LMAX Exchange group is launching a crypto currency exchange dedicated to institutional clients. This exchange has traded over $10 trillion in fiat currencies and operates in 100 countries. Forex markets trade orders of magnitude larger than stock markets.

I want to acknowledge the severe correction we are experiencing in the crypto-asset prices throughout the month of June. I certainly feel the pain of limited partners as my own funds are invested along with yours. If you are relatively new to crypto investing, this can be a sobering lesson of what volatility in this market truly means and the importance of investing with a long-term focus.

 If you are a veteran crypto-asset investor, a 50%+ price slide is something we have experienced many times in the past. It is simply par for the course- the price we pay to get exposure to an asset that has risen over 12,249,900% in the last 8 years (see calculations) and demonstrates the potential to grow much further. Bitcoin alone has provided an annualized return of 333% in 8 years. The following chart shows that bitcoin experienced a drop of more than 40%, 9 times in its brief history and still produced these outstanding results for its patient investors.What is remarkable is that it has dropped more than 85%, 3 times in its short history and came back with full force. I request all partners to judge the fund performance only on a 3-year basis against S&P 500, which is long enough horizon to even out the volatility of bitcoin markets.

Bitcoin corrections:

Nonetheless, this correction served as an important reminder that:

  • This market is volatile
  • The risk of loss in this market is not non-existent, but the potential reward is larger than anything we have probably ever seen as investors. The two go hand in hand.
  • This is a long-term investment on a long-term project. New systems of value, financial services, governance and infrastructure are being built. They hold the potential to augment, or potentially even replace, aspects of our society that were built slowly over centuries.

Once you understand the magnitude of what is being built, you can see that from the perspective of human history, it is being built incredibly fast. We are building the infrastructure for native digital currency for the humanity from scratch. Yet, from the perspective of our everyday human lives-including text messages, emails, tweets and status updates-we have a sense of societal impatience for anything that is not delivered instantaneously.

Our job as investors is to override that tendency and do what majority cannot do: Accept and embrace the time frame involved. In terms of a compound annual growth rate, I believe we are positioned to experience incredible returns over the next 5 years and beyond. Our fund performance since inception is positive with CAGR of 87.17% (see calculations), despite the significant correction. During the same period the S&P 500 returned a CAGR of 10.53%.

A bit of basic mathematical reality reminds us that if IC fund could sustain our current growth rate of 87.17%, $100,000 would turn into $52,766,999 in only a single decade( see calculations) even though we are at the bottom of the bear market as of today. There is lot of wisdom in this quote which offers perspective:

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. “ – Bill Gates

A similar parallel can be drawn to the topic of investing itself, when taking compound growth into consideration. Please keep in mind that we have barely scratched the surface in digital currencies as a technology. If I can even use the analogy from the internet growth, blockchain technology is probably close to the dial-up modem technology we used to have in 1995. It was clunky and hard to use, because it takes time to build the infrastructure. All the best companies in this space have not been invented yet and we probably cannot even imagine, as someone who looks at Netscape browser from 1995. Very few of us in 1995, could have imagined Facebook, Wikipedia, Google, Mobile phones, Netflix, WeChat, Skype while using our dial-up modems to access internet. I would argue that sound money will have much more profound impact on the society than internet. I found the following graph very insightful.

What the graph shows is how fast the new technologies are adopted by society. First, we had commodity-based money, like gold and silver for several millennia. Then we slowly moved away from gold to gold-backed notes. These gold-backed notes were issued by several private banks before the advent of Federal Reserve. This continue for several years all the way till August 15th, 1971, when U.S.President Richard Nixon ended the convertibility of U.S.dollar to gold. From that day, officially the world is stuck on fiat currency regime where governments can print unlimited quantities of money. This paper currency currently is just based on faith or a formal decree from the government. This changed dramatically in 2009, where people can leave the fiat and move to a currency based on mathematics.

It can be seen clearly from number of charts on www.blockchain.info that bitcoin adoption rate is doubling every year starting from 2010. Currently based on numerous sources around 30 million people hold bitcoin around the world. Let us approximate that number to 0.5% of the world’s population. If the same rate of growth continues it will grow to be around 64% of the world’s population in a matter of 7 years. If you notice the growth of mobile phones from the above chart, in a matter of 10 years almost 60% of world currently own mobile phones which was very close to 1% in 2005. It is not a stretch of imagination to think that bitcoin will be able to reach the 50% of the world’s currencies in 7 years. Our fund is well positioned to capture this phenomenal rise in digital currencies.

Managing Partner
Email: sam@ikkurty.capital