As Q2 finally ended yesterday, we have seen one of the worst years for markets in over half a century with the S&P 500 down more than 20% since the start of the year.
In this update, we are going to talk about our fund performance over time, explain how we recognized and avoided much of this downturn, and share some overall thoughts about how we are thinking about the future- although we want to be very clear that nothing found in this article constitutes financial advice.
Currently, The Jupiter Fund is down around 25% since starting the fund in November. If you compare this to ETH, which is down over 75% during the same time, it would indicate that we have outperformed ETH by 50% so far. While not as great as we would have hoped, we are significantly outperforming our benchmark as first-time fund managers.
As TJF is an open-ended fund, investor returns vary slightly depending on when they joined. Investors can login to our website to see individual reports and a more in-depth analysis of fund performance from inception until the end of Q2. Read on to learn more about our thoughts on the past and current markets, and how we were able to identify this large downturn.
Starting in January, we shifted our cryptocurrency focus to primarily Bitcoin and trusted stable coins, adjusting to a more risk-adverse strategy as we started ‘battening down the hatches’ prior to the market’s choppy waters.
As the markets fill these untested liquidity gaps, it’s important to take notice of bear market relief rallies. Sell side liquidity works the same as buy side liquidity and as price pushes down further to fill this important gap, people start to find that price increasingly attractive so it will, from time to time, rebalance in the future.
In short, it is important to recognize that we are still in a bear market because, for example, a push towards a $24,000 Bitcoin doesn’t necessarily mean that the market will reverse back to the upside, it could also mean that the markets are rebalancing orders and grabbing more liquidity for the next leg down.
Large institutional players and hedge funds call this ‘Exit Liquidity from Retail.’ Unfortunately, we continue to have issues with our institutional exchange, FTX, that not only has been front running our orders, but is completely ignoring our persistent improvement proposals. Even though FTX is widely regarded as one of, if not the most reputable centralized crypto exchanges for institutions, their website is incredibly buggy. As developers ourselves, we have been submitting several proposals on how to improve the user experience on their platform but it seems that these proposals have completely fall on deaf ears.
Since our major Bitcoin sell at $47,000, we have been sitting cash in USDC, patiently waiting to buy the dip when the time is right. We have managed to save over 50% of capital on this short alone, and over 60% on our Ethereum short sell at $3,400 opened at the end of Q1.
Current State of the Markets
Over the past few years, there has been excessive greed in all markets, especially crypto markets, so investors who took a short-term perspective and did not responsibly manage risk are now getting flushed out. As the economy tightens, people switch from pretending to be productive to actually being productive. As Warren Buffet famously states “Only when the tide goes out do you discover who’s been swimming naked.”
While margin calls and forced selling are painful in the short term, fueled by the added downside pressure across markets (BTC is down 72% from its ATH just 7 months ago and most coins are in similar or worse conditions). Although not great for people who are new investors to crypto, we believe this will be a good thing for the space in the long term.
Over these last few years, all sorts of investing but especially crypto has become toxic and unproductive; full of unsophisticated investors not doing proper due diligence, large institutions pumping their own holdings, and over-leveraged grifters with large social media followings trying to suck retail into opportunities that have not been vetted at the level they should. This seemed to work well during the latest bull market, but it quite apparently was not sustainable.
Some firms taking part in this behavior (like Luna, Celsius, and Three Arrows Capital) are now running into major liquidity issues, causing them to sell coins at lower and lower prices. Forced sellers depress prices in the short term as they grab for liquidity, but what we are already seeing is a culture shift to a better environment for builders and creators, with less noise, price talk, and charlatans capturing unsophisticated investor’s attention.
We have also started observing investors spending much more time conducting proper diligence on potential investment decisions, and therefore capital is flowing to more quality projects, companies, and teams than it has in the recent past; we believe this trend will continue as there will be less liquidity but hopefully more quality projects out there. The millionth “next gen layer 1” will not work anymore, but being a market leader in an emerging category that is advancing the space will be what attracts capital.
Where are we headed?
The primary reason we say there will likely be less liquidity out there is because of widespread inflation having negative impacts on people across demographics, especially middle and lower classes around the world. We have been talking about inflation as a major potential issue for some time now, which can be seen in numerous previous public articles and our latest non-marketed article, which analyzes a variety of different perspectives when considering the inflationary impacts of recent stimuli. As you can see from the graph below, Energy as a category alone has risen over 34% since last year (and this was from half a month ago)…
Alongside inflation, asset prices are getting wrecked. We talk about specific assets a lot in this article and our most recent one reference above, but many hedge funds that own these assets are taking massive losses as well. Tiger Global, a well-known asset manager with numerous strategies and funds has seen over $17B of hedge fund losses in this recent sell-off.
On top of this, the U.S. Consumer Confidence Index fell sharply this month, dropping ~4 points to ~96.7 as worries about high inflation leave consumers anticipating economic growth to weaken significantly in the second half of the year. CCI is now lower than it was in early 2020.
Given current global and economic tensions, it is important to be able to sit on the sidelines and let things unfold. While we are still extremely bullish on the future of cryptocurrencies, blockchains, and what that technology can unlock for the world, we are and have been bearish on price since the start of 2022 and will remain that way until this thing is fully unraveled.
In the meantime, we continue to analyze markets, diligence a myriad of interesting opportunities we see on a frequent basis, and educate ourselves as much as possible.
Thank you for reading and happy investing.
The BMIG + TJF Team