Letter to shareholders, Q3 2019

Dear investors,

2019 is coming to an end and we are happy to recap the Q3 2019 in our quarterly Letter to Investors. We will comment on the biggest crypto market trends and evaluate the current state of our investments. We will cover Libra, Chinese crypto policy, Bitcoin and Ethereum ecosystems as well as the performance of our Sigil portfolio.

On Libra and being permissionless

In Q3 the major Crypto headlines were captured by Facebook’s Libra project. Libra is basically a brand new blockchain with its own stablecoin. We think that Libra is very interesting attempt at striking the right balance between decentralization and accountability. Libra code is open-source, but the blockchain itself was to be governed by Libra Association, consisting of trusted (mostly american) corporations, making it essentially a permissioned blockchain with Proof of Authority. 

Libra stablecoin was interesting experiment by itself, it was meant to be backed by basket of major fiat currencies (USD, EUR, GBP, RMB…) held in reserve in custody of Libra Association. Association would then earn a risk-free interest on the deposit, making it a profitable business model for members of the Association. However, regulators across globe see Libra project as a competition and a threat to monetary sovereignty of the nation states. With over 3 billion Facebook users exposed to Libra’s payment system and monetary policy, Libra could indeed compete with many nation states.

Despite the best efforts of Libra Association to explain its mission to bank the unbanked and be fully compliant with regulations in the process, it failed to persuade the authorities both in Europe and in the US. CEO of Facebook, Mark Zuckerberg was called to a lengthy hearing with the US congress. Majority of senators were openly opposing Libra and straight hostile towards Facebook and its CEO.

At this moment Libra Association is quickly losing support with major partners rescinding their membership in the Association. This demonstrates the huge gap between truly permissionless and decentralized crypto-networks built by community of open-source contributors, such as Bitcoin and Ethereum and permissioned, centralized networks built by corporations. The decentralized projects are not currently facing any opposition from the regulators because they are seen as an altruistic open-source innovation and it has been confirmed by SEC that Ethereum is not a security, so there is currently no regulatory pressure from the SEC or CFTC in the US.

The Bitcoin market and China

Bitcoin, the undisputed king of crypto, went through a turbulent period during Q3 with price dropping from almost 12000 USD to 8000 USD. However, such volatility is not uncommon and experienced crypto investors should remain unfazed.

China, the most important market for Bitcoin mining, surprised us with interesting turn of rhetoric. Bitcoin mining is no longer on the “blacklist” of industries that should be forced out of the country, which has sparked some positive momentum in the bitcoin community and even added a price stimulus to (in our opinion) worthless crypto projects that are seen as having potential exposure to China. We generally advise to remain cautious and take this PR with a grain of salt. For the past 4 years China has been sending mixed signals towards cryptocurrencies. 

We DO NOT think that betting on “Chinese coins” – tokens of leading Chinese based blockchains –  is the best way to capitalize on this trend, despite early pumps of said coins, driven by hype. Instead we believe that the recent PR narrative may be just a preparation for the launch of a Chinese native (centrally controlled) “cryptocurrency” – it is not a coincidence that the announcement of new Chinese digital policies was timed right after Libra regulatory hearings. The Chinese cryptocurrency will most probably be implemented on a custom permissioned “blockchain”, which you can imagine to work a little bit like “intranet”. So the Chinese “blockchain” will not be a public, open, permissionless network but rather a centralized digital ledger directly (or indirectly) controlled by the CCP.  Consequently, China will push the “public” crypto networks out of its market, starting with a crackdown on their accounts on social media (official media accounts of Tron and Binance were already banned from chinese social platform Weibo).

However, it is very interesting to see that Bitcoin itself is currently treated as something positive in China. We even noted the People’s Bank of China releasing bitcoin education materials. All this could signal that China will create its own cryptocurrency and blockchain platform in order to innovate towards the digital era with a permissioned attitude, BUT  China seems to be ready to also start leveraging its leadership in Bitcoin mining. Regions around Chinese hydro plants attracted a concentrated presence of bitcoin miners in the past due to the low price of electricity. And it seems that after initial defensive push from the government, the CCP might have realized Bitcoin could be a strategic tool in Chinese geo-political strategy.

US market is also starting to focus on Bitcoin mining. We noted a significant initiatives from the area of renewable resources like this 200 million USD fundraise with participation of Peter Thiel.

Putting our speculations hat on, we think that it could lead to a nation-state level hashrate competition. Nation-states putting Bitcoin mining among their interests could bring Bitcoin adoption to a next level. 

Bitcoin hashrate is metric that measures computational power used to secure the Bitcoin network via mining. We can see that hashrate is constantly growing and breaking new highs, currently reaching 100 exahashes. All that despite the price being far from all time high, which shows high confidence and increasing investments in Bitcoin’s future by miners.

DeFi and Ethereum market

Ethereum and it’s native token ETH is increasingly becoming an independent crypto ecosystem. Currently, this ecosystem is focused on DeFi (Decentralized Finance) which is the set of smart contracts and protocols that serve as a basis for new, decentralized and open financial services. In DeFi services such as exchanges, lending, derivatives and insurance are no longer a product offered by banks, brokers and other financial institutions, but rather open protocol layers, secured by Ethereum network. 

How can DeFi revolution change your everyday life?
Think about buying stocks, derivatives, financial products. Think about exchanging value, providing loans, taking an insurance plan. What do all these things have in common? Right, you need to select a central institution to trust. How much do you like your broker or insurance provider? Is it a cheap and reliable service that you 100% trust and that has only the customer interest in mind? Right. How about replacing this central institution with a piece of technology that allows you to instantly transact with the rest of the world without a need to trust anything, because everything is automated and it just works. Very soon you will learn to use this technology in the same way you are comfortable to send an email.   

Ethereum is increasingly acting as a backbone infrastructure layer on top of which these DeFi applications are built. ETH also works as a collateral and reserve asset of many DeFi protocols, which grants it a monetary premium. When more ETH gets locked as a collateral in the DeFi applications, it creates a demand for ETH and acts as a buy pressure on the price of ETH itself. 

We focus our investments on those DeFi projects, that are already in production on mainnet, with real user traction and tokens listed on secondary markets. Good example of such investment is a decentralized derivatives platform and exchange Synthetix, which we researched and invested in.

Many of the projects we are researching offer tokens with programmable incentives in their tokens. Holders of these programmable crypto assets have claims to fees from transactions on the network, but are also incentivized to provide quantifiable work (such as provide liquidity or collateral) for the network. Active participants earn more rewards than passive holders of tokens. We at Sigil aim to be an active participant in these networks, thus maximizing the return from our positions.

Sigil performance

For the first 3 quarters of 2019, Sigil portfolio is up 69.5% in EUR terms.

Sigil has been overperforming also the BTC benchmark in the first five months of the year. In Q3 we underperformed the BTC benchmark by – 25%. This is caused by the simple fact that volatile BTC dominance indicator has spiked up to the all time high in Q3 and has been attacking the unprecedented 70% BTC dominance mark. This is in our opinion positive as it means the market has been cleansing towards value and the price action has been driven by the “smart money” which are either bitcoin maximalist or have a very deep fundamental research approach (like Sigil) where they pick the right assets with the midterm investment horizon. The right DeFi projects will eventually catch up momentum that has potential to overperform BTC by orders of magnitude.

We had some major successes in the beginning of Q4 as our well selected DeFi and Proof of Stake projects regained traction and granted us additional return from rewards for active network participation.

Vision Hill tracks performance of three types of crypto funds (fundamental, quantitative, and opportunistic) and creates a benchmark out of them.

Sigil is probably closest to the fundamental bracket.

We decided to compare Sigil to all three crypto fund benchmarks for the first 3 quarters of 2019 YTD (Q1, Q2, Q3).

As we can see above Sigil LTD currently significantly outperforms all Vision Hill crypto fund indices, with the caveat that the sample size is still very small and variance is high. Some of the highlights from the above data: 

  1. Q2 brought a bitcoin bull run which was very positive for Fundamental funds (+62,8%) and Sigil (+65,7%).
  2. Quants should normally be market neutral which you can see in the Q1 and Q3 where they minimized the losses (-9,3% in Q3 is a small loss) but also capped the upsidein Q1 + Q2 where they stayed significantly behind funds with long crypto exposure. The figure in Q2 is surprisingly high for Quants, probably they managed to profit from volatility that returned with the bull run.
  3. End of Q1 brought +11,6% for Fundamental funds and +28,9% to Sigil thanks to our good positioning in the quarter.
  4. Overall Sigil performance of +69,5% beats the Fundamental funds (29,6%) and Opportunistic crypto funds (29,9%) by a big margin. The quants (+31,5%) are a good place to put money when you expect a bearish momentum. However, with the expected bullish action in 2020 and onwards, we expect the quants to significantly underperform in the future.    

Conclusive remarks:

In the last quarter of 2019, there are a couple of things to watch out for in crypto landscape. Bitcoin trading is switching more and more to derivatives, with increased Bakkt volume and newer derivative exchanges taking shot at Bitmex (such as CoinFLEX and Deribit). DeFi ecosystem will see a big change in MakerDAO and it’s decentralized stablecoin DAI collateral policy – from single collateral (ETH backed), to multicollateral (backed by multiple assets).

We will release more research pieces for interesting projects and keep looking for the best opportunities with favorable risk:reward ratios, strong fundamentals and growing traction.

On behalf of Sigil Team we would like to thank our investors for trusting Sigil with their investments and for being a part of this exciting crypto revolution journey, which we love with all our heart.

With best regards,

Matej Galvánek, Investment Director of Sigil LTD
Pavel Stehno, Fund Director of Sigil LTD

This content piece is performed by Sigil LTD for information and entertainment purposes only and is not to be taken as an investment or financial advice. Sigil LTD does hold positions in some of the aforementioned projects.

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