Luke's Crypto Fund achieved a return of 9.3% over the second quarter of FY2022.Over the quarter, we significantly increased our exposure to Crypto, and subsequently reversed course early in December, as the global economy began pivoting towards a deflationary environment into 2022, with high beta assets, such as crypto currencies, heavily sold off over December.
The breakdown of our holding’s contribution to performance over the past month is outlined in Figure 1 below:
Figure 1 - Performance Contribution Bar Chart
Following guidance from our Macro oracle, 42 Macro, we began reducing our exposure to Crypto assets in early December. Maximalists will not like to hear this, but Crypto assets behave very similarly to high beta assets. This is demonstrated by the chart in Figure 2 below, sourced from 42 Macro (sourced from Darius Dale’s twitter feed). EVERY CRYPTO INVESTOR NEEDS TO PIN FIGURE 2 TO THEIR WALL. In terms of risk management, we believe this chart is the most important chart available to crypto investors today. Figure 2 shows that Bitcoin’s annualised expected returns are negative in a deflationary environment. It is likely we will be entering this phase in Q4 of FY 2021/22. In the immediate term (Q3 2021/22), we may see a rally as Reflation / Inflation regimes currently dominate the macro regime.
Figure 2- Bitcoin Macro Back test Chart (Source: 42 Macro)
Our Crypto portfolio as at December 31, 2021 is as outlined in Figure 3 below:
Figure 3 - Crypto Fund Asset Allocation Pie Chart
Our largest position was cash (USD & AUD) , at over 43% of the portfolio.
TRADING ACTIVITY
Based on the Macro Outlook, we sold down our Crypto positions quite aggressively.
In early December, we reduced our overall Crypto exposure selling out entirely of Bitcoin, Sushi, and Ethereum. We sold half our position in Solana, and trimmed our Polygon and Luna positions.
Late in December, we began adding Ethereum back to the portfolio.
During December, we loaned out our Polkadot currency tokens as part of the crowd loan process (venture capitalism for the masses) to the Moonbeam and Parallel Finance projects, and they were both successful in their bids to win parachain slots on the Polkadot platform. We have been awarded tokens for both projects, and we are excited in particular by the prospects for the Moonbeam parachain.
OVERALL ASSET ALLOCATION
We reduced our crypto exposure since our last update (given our Crypto portfolio is sitting on 43% cash). However, we may increase our short term position size, given the near term environment is conducive to high crypto returns, noting extreme caution is essential in what will become an increasingly dangerous environment for Crypto wealth. Our overall asset allocation across all three funds is outlined in Figure 4 below.
Figure 4 - Overall Asset Allocation Pie Chart
KEY LEARNINGS FROM THIS MONTH
Although our overall Crypto exposure is relatively modest, we continue to invest the majority of our time in learning and identifying the opportunities and risks within the sector.
We have been focusing, in particular, on the opportunities staking, and liquidity pools provide in generating an income stream, and additional returns. A few areas of interest to us are:
Staking Ethereum using the Rocket Pool protocol, enabling node operators to effectively rent out staking to investors.
Tomb stable coin and the corresponding liquidity pools, designed as a stable coin substitute for the Fantom token, to increase liquidity on the Opera network. Tomb Finance was recently rescued by Harry Yeh, following a blockchain exploit that undermined the Tomb Finance model in September 2021. Harry has committed significant resources to the protocol and underwritten compensation to token holders who experienced losses due to the exploit. We think Harry’s commitment to the protocol has significantly reduced the risk that the Tomb token to Fantom peg.
Long term staking. We have began staking our long term positions. Staking yields presently range from 9 to 183% (not a type-o, with $GLMR staking rewards at over 183%, which will reduce over time as crowdloan investors begin staking their rewards).
Take care all.
Regards,
Sean