Fund’s & Cryptocurrency Market Report / Dec 2020
A new spring for the blockchain industry?
Plenty of people are happy to see the back of 2020, with its pandemic and associated economic slowdown. On the other hand, financial markets, including the cryptocurrency market, showed positive dynamics that exceeded the expectations of many investors.
For the blockchain industry, 2020 has definitely become a breakthrough year. Many people compare it with the heady days of 2017, due to rapid growth in the form of:
- Bitcoin setting a new All-Time High (ATH), which our CEO has written about here;
- The Ethereum ecosystem booming (largely thanks to DeFi)
- Projects based on NFT and social tokens attracting wide attention;
- Experiments with CBDC (Central Bank Digital Currency) starting in China.
All this may indicate to us that the “crypto winter” has come to an end and a new spring has begun for the blockchain industry.
The sun rises on Bitcoin call options
How to profit from this new spring in the short term? Those who’ve been tracking the Bitcoin ATH might well have noticed the availability of some new crypto derivatives that offer this promise, albeit with extremely high risk.
In December, the Deribit exchange opened trading for a new option contract called the BTC-24SEP21 Call, with a strike at $100,000. At the time of writing, the price of this contract is equal to $1,000.
As BR Capital is bullish on Bitcoin, and because we think such derivatives are part of a broader and important trend within crypto, we decided to evaluate the pros and cons of this option contract. Here’s a taste of our thinking:
First of all, the current BTC price is in the “discovery” phase. New price levels are unpredictable, but in this climate it is more likely that volatility of the market will increase as more traders make impulsive decisions.
Secondly, there’s the reward-risk ratio for this contract, which we see in a range from 4 to 50. Investing a small amount that you can safely afford to lose minimises the risk, while expected rewards are huge and within the realms of possibility.
Finally, we’ve simulated the possible scenarios that can be expected in the coming months. One of them is illustrated below. If the BTC price reaches somewhere between $50,000 and $100,000 in 180 days, this will lead to a volatility increase of 50%, and the price of the call option could reach anywhere from $4,000 to $30,000
Another more optimistic scenario: the price rises faster, let’s say to $50,000 in just 90 days. In that case, we can see the price of the option in a range from $10,000 to $50,000. The worst scenario is when the price walks sideways or slightly grows not higher than $35,000 in 180 days then the expected value of the option is likely to decrease. In other words, a call option like this is not just about Bitcoin growth, but the precise nature of that growth — which makes it extremely risky unless you’re happy to lose every cent you put in.
The MVRV approach to Bitcoin price tracking
If you’re even going to consider something as wild as a Bitcoin call option, then it’s essential for having some principles against which to assess bitcoin price movements and form expectations for the future. At BR Capital, we’ve developed a number of such methods of analysis, but one that’s of particular interest right now is called MVRV: Market Value to Realized Value.
The above image is quite popular on social media. Many interpret this chart as a prediction that the price of Bitcoin in this cycle will exceed $200,000. But let’s figure out what is shown on the graph.
The Market Value to Realized Value (MVRV) ratio is a long-term metric used to assess bitcoin’s market cycles over the long term. The metric was created by Murad Mahmudov and David Puell, building on Nic Carter’s measure of realized cap.
To understand the MVRV ratio, the definitions of its components are required:
- Market value: the number of coins circulating multiplied by the current price, also known as market capitalization.
- Realized value: similar to market value but accounts for lost coins and coins that are held as a store of value, which is done by aggregating the UTXOs and assigning a price to each one based on when they were last moved. The realized cap can also be thought of as the sum of levels which long-term buyers entered their bitcoin positions.
The MVRV ratio is obtained by dividing the market value by the realised value. This can be interpreted as a potential profit of holders who can potentially sell Bitcoins on current prices. We can see that MVRV has reached 20 points levels 4 times, while for now it is far away from even 5 points. It is reasonable to agree that the price of Bitcoin has a potential to increase more, but there’s absolutely no guarantee that it “has to” reach the same levels of MVRV ever or to do so in this cycle. Any indicator is only a derivative from the price or volume, dynamics, etc.
MVRV does not predict any price action, however, it can indicate some possible levels where, historically, the desire of investors to take profits prevailed over the fear of losing a part of this profit.
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Non-fungibles and Social Finance
Beyond Bitcoin, two other new market segments are worthy of note as we move into 2021: these are NFT (unique “non-fungible” digital objects) and so-called SoFi (Social Finance).
BR Capital is actively involved in market research and funding in both of these segments. For instance, BR Capital has joined Flamingo DAO, an organization dedicated to investing in digital art, collectibles markets, and the product ecosystem emerging around the NFT technology.
Since October 2020, daily NFT trading volumes have consistently exceeded $250,000, with the accumulated volume of transactions surpassing $150m.
NFTs representing digital works of art have both collectible value (cost of ownership) and value from use (utility). For example, a painting presented in the form of an NFT can be displayed not only on digital art aggregator websites but also in alternative virtual reality environments. In the same manner, a digital wearable can be not just stored but also used for its intended purpose — to dress up and attend a virtual event or get-together. For instance, Decentraland virtual universe hosts various events where real people and companies can mingle using digital avatars: exhibitions, conferences, parties etc.
The concepts of Social Tokens and Social Finance (SoFi) cover such emerging phenomena as tokenization of popularity, digital reputation, and decentralized social networks. This market segment is very new, but it’s already attracting the attention of younger crypto users. Independent content ownership, new community incentive systems, digital avatars and non-fungible merchandise — these are just a few of the hot experimental areas, with some finished products already available.
Web 2.0 social networks are likely to face serious competition from decentralized products. These legacy networks will also have to integrate — directly or indirectly — with the new ecosystems where users can independently monetize their activities. The Fund’s team is constantly monitoring this emerging market to identify its trends and metrics.
Pipeline Update and Portfolio Structure
Based on the facts outlined above, the fund continues to adhere to the Ethereum ecosystem focus strategy. The new assets in the Fund’s portfolio include EPNS, ConsenSys, 1inch, Delta Exchange and Badger DAO. You are welcome to visit the portfolio section on our website to see the full list of Fund’s investments.
In the coming months, we will also expand the range of our charity activities, including both project development grants and donations to non-profit organizations. We believe that the crypto industry should not stay away from the social issues, since a company’s social impact also contributes to its overall success.
Our quantitative trading fund also continues its growth in trading volume, both in the Bitcoin and USD equivalents.
Upcoming events of note
- CME announced the launch of Ethereum futures in February 2020. A big step forward to institutionalising Ether as an asset.
- Coinbase has disclosed plans to conduct an IPO next year. From our point of view, Coinbase sets the right time for IPO — crypto market is healthy and interest from persons like Elon Musk demonstrates huge opportunities for exchanges business. Coinbase Prime as an institutional branch of Coinbase also can convert clients to own investors. On the other hand there is an opinion that as soon as Coinbase becomes a public company this may lead to changes in listing policy (what coins and tokens to list on exchange) and the first sign we see is a decision for XRP delisting.
- New records on crypto derivatives (trading volumes and open interest both at ATH) show a significant growth of the crypto-oriented trading this year. Volumes on CME alone exceed $2.5B daily. This trend has all the chances to continue and BR Capital remains focused on this sector.
Happy new year to all our readers!
Hey, if you’ve made it this far, then it can only mean one thing: that you share our passion for our emerging crypto financial system. In turn, this means you’re in for an exciting 2021, and we’ll be here with you throughout the year, sharing our thoughts and opinions (as we’re never shy to do!).
Whatever you get up to, and wherever you choose to invest your time and money, we wish you the best of luck for 2021!
