Déjà Vu
June 8, 2021
Welcome to the M31 Capital Investor Newsletter! We use this platform to share monthly updates on the industry, our views on the broader market, important crypto-native metrics, as well as to highlight specific cryptoassets and decentralized finance (DeFi) protocols we find interesting.
For those reading who are new to M31 Capital, we are a global alternative investment firm focused exclusively on digital assets backed by cryptography and blockchain technology. This new asset class, pioneered by Bitcoin, is beginning to change the way humans coordinate economic activity at a global scale and holds the potential to create trillions of dollars of value in the process. M31 Capital exists to promote this paradigm shift and to capture the unique, cryptoasset-specific investment opportunities for our investors along the way.
We at M31 Capital have staked our careers and our reputations on the success of this technology. As always, we thank you for putting your trust in us and for your support of this new asset class. Please feel free to reach out to our Investor Relations team with any questions, ideas, feedback, or just to say hi: contact@m31.capital.
Nathan Montone
Chief Executive Officer
M31 Capital Management, LLC
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May Performance
Market highlights and rationale from a selection of the most interesting assets in the industry:
(NOTE: M31 Capital may or may not hold positions in the following tokens)
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P A R T N E R H I G H L I G H T S
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Déjà Vu
What year is it?? Energy FUD, China ban FUD, environmental impact FUD, regulatory FUD, 50% drawdowns, public figures trying to "fix" Bitcoin...
We've seen all of this before - 2013, 2014, again in 2017, again in 2018, 2019 - and I mean exactly this. The same exact "crackdowns" and criticisms. The same exact news headlines.
Just as misleading and uninformed as they were the last time(s) around.
But first, let's start with the carnage: Bitcoin crashed from ~$60k to ~$29k, dragging the entire market with it, and erasing $1 Trillion of the industry's market cap in the process.
It was Bitcoin's 2nd worst monthly return since 2011. If you held throughout this, congrats: you're officially an OG now.
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What happened?
In last month's newsletter I said that I anticipated an increase in regulatory and media attacks on Bitcoin & crypto, and almost immediately we got a nonstop avalanche of regulatory and media attacks on Bitcoin & crypto.
Many were quick to point blame at Elon Musk's tweets criticizing the environmental impact of Bitcoin mining which were then immediately (read: suspiciously) followed up by articles claiming China is banning cryptocurrencies.
The truth is Bitcoin mining is good for the environment. Miners seek out the cheapest form of energy they can find, and nothing is cheaper than free: solar, wind, hydro.
This makes Bitcoin the most powerful incentive humans have to increase the energy capture of renewables technologies.
The glaring exception to this is China where coal-powered electricity is heavily subsidized.
So, as China cracks down on Bitcoin mining, the entire Bitcoin network immediately becomes greener.
Does the media care to cover this nuance? Of course not. So, many took the headlines at face value.
Plus, the market was already over-extended. Bitcoin ran from $9k to $65k with barely a hiccup... we were overdue. Highly levered traders got cocky, took on too much risk and were heavily liquidated.
Most of them were new to the space and hadn't yet seen crypto's infamous downside volatility, so they panic sold, exacerbating the selloff.
Fear vs. Fact
Here were the main FUD highlights debunked in chronological order:
CPI Report
- Fear: Consumer inflation came in much higher than expected, so the Fed might taper!
- Fact: High consumer inflation is exactly what Bitcoin exists to protect people from.
Elon Musk / Tesla
- Fear: Tesla might sell their Bitcoin!
- Fact: Tesla publicly announced they will *not* sell any of their BTC.
Environmental Impact
- Fear: Bitcoin mining is bad for the environment!
- Fact: Coal-powered Bitcoin mining (the minority) is bad for the environment
China Ban
- Fear: China is going to ban Bitcoin mining!
- Fact: China is targeting coal-powered mining, solving the environmental problem above
Regulation
- Fear: The regulators are going to crack down on bad actors!
- Fact: The regulators are going to crack down on bad actors.
Eliminating leverage, speculators, and bad actors from the system, while decentralizing hashpower and moving the majority of Bitcoin mining from dirty coal to clean hydro... these were extremely bullish developments the media couldn't help but present as bearish.
As for the China ban, a reminder that China has banned Bitcoin every year since its inception. The "Annual China Ban", as we call it at M31 Capital, has become a right of passage for newcomers.
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A Look Under the Hood
Onchain metrics shows that the sell pressure came primarily from addresses younger than 3 months.
Long term holders are holding while short term speculators were washed out.
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Funds and institutions, however, quietly bought the dip.
Square, Microstrategy, Tesla, and others all doubled down on their Bitcoin strategies. Meanwhile:
- Ray Dalio officially came out as a Bitcoiner
- Carl Icahn announced plans to deploy $1.5 Billion into crypto assets
May's coordinated selloff allowed institutions to accumulate more BTC at a massive discount. In one day they scooped up more than 122,500 BTC. This level of buying suggests the market is far from finished with this bull cycle. In fact, it may just be getting started.
Bottom line: short term speculators panic sold to longer term believers, setting the network up on much stronger footing going forward.
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A Perfect Fractal?
Comparing Bitcoin's 2021 price chart to its 2013 chart (importantly, also a post-Halving year), it follows almost perfectly. Eerily so.
After the 2013 crash was a +1,600% rally over the next 5 months, July to December.
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And if we compare Bitcoin's 2021 price chart to its 2017 chart (another post-Halving year), it also follows almost perfectly.
After the 2017 crash was a +900% rally over the next 5 months, July to December.
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Factoring in other similar liquidation events in 2018 and 2020, the average post-crash recovery was 1,087.5%
While rare, buying these dips has historically been the most profitable Bitcoin investment strategy, and I don't see this pullback being an exception. The structure is too similar.
The same cascading liquidation process with similar drawdown magnitudes in the exact same stage of the 4-year cycle (post-halving years) triggered by exactly the same FUD: China ban, energy use, and regulation.
Each one even has its own public figure trying to “fix” Bitcoin: Elon with Doge, Craig Wright with BSV, Roger Ver with BCH!
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Holding or buying through large drawdowns (avg. -35.3%) in a post-Halving year has produced superior short term returns on recovery (avg. +162.3%)
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TL;DR
Nothing fundamentally changed about Bitcoin or any other crypto asset. The money printing hasn't stopped, inflation is now visibly rising, tokens are moving from weak hands to strong hands, and not a single DeFi protocol broke during a stress test that would have collapsed every major traditional bank in the world.
Everything that happened over the last month is positive: hashrate is exiting China and decentralizing around the world (much of it coming to the U.S.), mining is getting greener, excessive leverage was cleansed from the market, and tokens moved from weak handed speculators to strong handed believers.
Call me crazy, but that all sounds... bullish
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N A R R A T I V E F O C U S
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DeFi Summer (Pt. II)
Unlike in 2013 when the Decentralized Finance sector didn't exist or in 2017 when it was all whitepapers and vaporware, DeFi in 2021 actually works.
We have real, working products with real usage generating real cash flow.
Every centralized financial service you can think of - lending, trading, insurance - can now be done without a bank or a banker (or their fees). And with much more resiliency.
During last month's selloff, every single centralized exchange went down. Coinbase, Binance, Huobi, OkEX, etc. all went offline at some point during the chaos, exacerbating the selloff as buyers and sellers were not able to connect and find the market equilibrium.
Decentralized exchanges, on the other hand - Uniswap, THORChain, SushiSwap, Curve, 1inch, etc. - worked perfectly despite processing $10s of Billions more in transaction volume than they've ever done before:
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Not a single protocol crashed, stablecoins held their pegs, DEXs didn't have a single minute of downtime - everything just worked.
DeFi held up significantly better than its centralized competitors and passed its first real stress test with flying colors.
This is such an important point because we need to know that the space aiming to become the future of finance is robust enough to withstand extreme volatility without issue.
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DeFi is still a small subsector of the crypto industry, but it will grow to be a massively important one. And as it grows, it's good to keep this distinction in mind: DeFi has price risk, but no systemic risk. It's volatile but doesn't break.
By comparison, TradFi has no price risk: there's always a "buyer of last resort", circuit breakers at the exchanges, central bank intervention, bailouts, etc.
However, it's systemic risk is high. When it fails, it take the world with it a la 1929, 2008, etc.
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Conclusion
This is what first drew me to crypto back in 2011. A new, anti-fragile financial system that doesn't break in times of stress, where ownership of assets is clear, losses are not socialized, and transparency that makes insider advantages impossible.
Short term, May was a bad month for prices. Long term, it was a very bullish confirmation of DeFi as the future of finance.
If you are interested in investing with M31 Capital, visit this page to access our subscription materials. You can also always reach our Investor Relations team at: contact@m31.capital
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PROTOCOL HIGHLIGHT
In our ongoing effort to be a value-add educational resource for our investors, we include a section in each newsletter highlighting an interesting or important part of the crypto ecosystem
Arbitrum
The biggest challenges for developers building on Ethereum are high fees and slow transactions.
Arbitrum is a layer 2 scaling solution for Ethereum dApps aiming to solve this by using optimistic rollups to make transactions faster and cheaper. Notable DeFi projects including Uniswap and Sushiswap have already announced their commitment to using Arbitrum.
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Describe it in one sentence
Optimistic rollups run computation offchain and settle final transaction data onchain, which decreases the number of transactions in each Ethereum block, and therefore lowers gas fees.
Why It Matters
Arbitrum tests show a 55x cost reduction with their Uniswap V2 port. Since rollups are EVM compatible, all contracts on Ethereum can be ported onto it, without changing code. With Ethereum gas fees decreasing, Ethereum dapps will be able to support a lot more activity. This has implications at the blockchain layer (MATIC, BSC, Solana), and the application layer (Quickswap, Pancake Swap, Raydium).
Arbitrum’s recent blog post indicated that over 250 teams were interested in deploying on their mainnet, and they’re currently onboarding these teams. Currently, there is no specific date as to when they’ll open for all developers.
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If you want to start working at a Web3 project today, take a look at
M31 Capital's Jobs Board to see opportunities at some of our token investments.
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What We're Reading
A selection of our favorite articles this month:
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U P C O M I N G E V E N T S
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The M31 Capital team will be speaking at and attending a number of upcoming conferences and events. Please reach out if you are interested in connecting, or better yet - meet us there:
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