2022 is shaping up to be another “what the hell” year. This year’s bogyman is the rise of inflation globally, a problem that many developed markets and policymakers haven’t had to deal with for a long time. Inflation comes from global supply chain bottlenecks that have persisted longer than central bankers initially imagined. This has caught central bankers offside as they find themselves way behind the curve, unable to alleviate inflationary pressures quickly. You see, there is nothing policymakers can do about the supply side of the inflation equation. You can’t just print more real goods and services. As a result, their attention seems to be on destroying demand through rising interest rates and tightening liquidity. It’s almost as if they are trying to architect a recession to kill demand and curb inflation, for now…
We could very well be on the cusp of a long-term regime change in central banking policy. The last fifty years have seen the constant lowering of the cost of money and the build-up of a tremendous amount of debt. Any change to this, whether it be prolonged periods of rising interest rates or policies targeted at getting debt levels under control, will structurally affect the liquidity of financial markets. We are witnessing the end of the long-term debt cycle and the rerating of asset prices that come as a result of this new regime.
Source: Lyn Alden, A Century of Monetary and Fiscal Policy.
This rerating can be seen in the year to date performance of broad market indices as investors continue to price in aggressive financial conditions going forward. The Nasdaq is down -28,8%. SP500 -17,83%, Bitcoin -37,71% and Ethereum -47,62%. This equates to trillions of dollars of paper wealth that have evaporated. We expect conditions for long-duration investments to remain tough for now, however, it’s worth noting that the market is solely focused on a single theme, and prices today reflect peak aggressive monetary policy going forward. If central bankers achieve the demand destruction they seem so focused on, the narrative could quickly shift as the economy finds itself in a recession.
Source: Tradingview. The YTD performance of the Nasdaq, SP500, Gold, BTC and ETH.
As with every downturn in crypto prices comes the commentary from traditional finance participants. Something which never seems to surprise me is the short term memory of these commentators. If we zoom out for just a second and observe asset price performance since the beginning of the covid crisis, crypto remains the standout asset class, with Bitcoin up 472% and Ethereum up 1356%. Critics seem to conveniently forget that volatility is something we are used to and comfortable with. The drawdown we are currently experiencing is part and parcel of what investing in general-purpose technologies disrupting trillion-dollar industries is all about. Since 2018 we have witnessed five drawdowns greater than 50%. We are currently in our fifth drawdown of a similar magnitude, yet we trade four times higher than where we were at the beginning of a crisis. We have been around for long enough to see every mainstream financial news publication declare crypto dead at least once, and every time they have been wrong. This time is no different.
Source: Performance since March 2020 for the Nasdaq, SP500, Gold, BTC and ETH.
In January, we released an article called “decentralised economic infrastructure“. In this article, we highlighted our thesis for the general-purpose technology that is blockchain; our thesis is that the recourse deterring guarantees of finance today is unscalable and blockchain, through “game theoretic guarantees” will scale global finance and unlock financial use cases not possible on existing rails. Our thesis remains unchanged and, if anything, has strengthened over the last two years. However, incremental advancements in blockchain technology are still required to achieve this vision and validate our core thesis. So, where are we today in the world of blockchain? Below is where we are versus where we are going.
Source: Mapleleaf Capital
So how does crypto go from an inefficient cost function (left diagram) to an efficient cost function (right diagram)? All the pieces of the puzzle are already here. The lightning network reducing costs and unlocking bitcoins payment function. Don’t believe me; download a lighting wallet here —> muun.com. Send me your lightning address, and I will show you a future of instant value settlement at near-zero cost.
Advancements in roll-up technology. We have recently witnessed the first iterations in roll-up technology in the form of optimistic roll-ups such as Optimism and Arbitrum. We are beginning to see the first iterations of zero-knowledge proof roll-ups, further reducing transaction fees by orders of magnitude. ZkSync, an EVM compatible roll up, launched their testnet this month.
Sharding and advancements in data availability through EIP-4844 and Ethereum’s broader sharding roadmap.
These advancements are already creating step changes in what is possible with blockchain technology and everyday, we take another step toward a lower cost function for value transfer. This will completely change the perception of blockchain in the market as we will finally have 10x better product than recourse deterring guarantees. This fits well with the tightening financial conditions as investors will no longer tolerate long duration and instead favour investments that can thrive and produce value today. A 10x better product is what we need to change this perception, and it’s where we are going.
Not only are there advancements at play to take blockchain technology to the next level, but a catalyst for the ETH’s price is quickly approaching. Anyone who has followed crypto has at some point come across the concept of the bitcoin halving, this event represents a halving on bitcoins issuance rate and historically has caused large squeezes on the supply of BTC that propel bitcoins price to new highs. Ethereum is going through its version of the halving in a protocol upgrade called the Merge. After the Merge, Ethereum will become:
1.) A yield-bearing asset (another reason to long ETH in the new central banking regime)
2.) with a deflationary monetary policy
3.) that is fully ESG compliant
In my time in crypto I have never seen an event with this much potential and this many eyes watching before. The Merge is a core reason why the Etherbridge Fund remains overweight Ethereum with positions in other technological approaches (AVAX, MATIC, ATOM and DOT) that serve as a hedge against Ethereum’s execution risks.
Updates on Lima
– We are pleased to announce that we have closed a funding round for Lima Capital. We plan to use this funding to extend our presence in the conversation around blockchain and digital assets globally, continue to build out technology that strengthens our product offering for clients and invest heavily in strengthening our internal capabilities.
– We have embarked on a collaboration effort with Moore Johannesburg. We will extend our educational push through this relationship by creating courses for the CPD campus. Our courses will be made available to every CA(SA), CFA and CFP in the country, which we believe will strengthen our foothold in the South African market.
– We are in the process of launching our podcast, which we have called First Out The Block. We aim to interview 100 entrepreneurs building businesses that leverage blockchain technology in various sectors through this podcast.
– Our Voyager fund navigated arguably the biggest risk flush out in the history of crypto by understanding the flaws of the Terra Luna stablecoin mechanism without losing a cent. On a regulatory front, we see positive commentary on coming regulations by the FSCA in South Africa and FCA in the UK. Regulation remains the core pain point for large capital allocators, and any clarity will unlock large pools of capital that haven’t been available to invest in cryptoassets. We welcome formal regulations and have positioned Lima Capital well to take on institutional clients.
We thank you, our investors, for your support, Lima Capital wouldn’t be here without you. To grow and develop as a fund, and as early adopters in our fund, if you are interested in helping us and open to it, the following would be very welcome. We would love to hear your feedback and always welcome a catch-up call. Introductions to decision makers at financial institutions who may be interested in learning or investing in the space.
1.) Feedback on your experience with us.
2.) Knowing your pain points at Lima Capital can help us refine processes and create a better product.
3.) Introductions to people who may be able to steer us in the right direction in order to achieve our mission of building a sustainable technology driven asset management business.
The Lima Capital Team