Bitcoin and the “Pain Trade” Revisited

As an investor, when searching for direction in a volatile market, a useful heuristic to use is what traders lovingly referred to as “The Pain Trade” indicator. This indicator was described to me originally in 2007 by a New York Wall Street stockbroker this way, “The market will move in the direction to hurt the maximum number of people.” While everyone’s definition of the “Pain Trade” varies, they all address the tendency of markets to deliver the maximum amount of punishment to the larger consensus.  This is especially true when the underlying asset is a high profile asset such as shares of Apple, or in this case, Bitcoin. High profile public “pain” is especially more painful than low profile private “pain” and the market reacts accordingly.

At Sarson Funds, Bitcoin’s current rally and its refusal to settle is a great example of the “Pain Trade” principle in action. Thanks to the continuing and sustained efforts of industry leaders like Fidelity, Goldman Sachs, BlackRock, Intercontinental Group, CME, JP Morgan and others, Bitcoin is being normalized into existing financial frameworks and investors are getting caught flat-footed.  When will the rally stop? According to the “Pain Trade” indicator, not until a drop in price delivers an aggregate punishment that is greater in total pain than what those uninvested in Bitcoin are currently experiencing.

Our investment products are built by advisors and sold through advisors. We bring Wall Street standards for research, risk management, and transparency to digital asset investing so that you can safely incorporate cryptocurrency allocations into your clients’ investment portfolios. We offer white-labeled portfolios, client-focused educational pieces, and cryptocurrency regulatory insights. Our product lineup (fact cards enclosed) currently includes large and small coin cryptocurrency strategies and a large-cap “covered call” cryptocurrency portfolio that offers floating monthly income in excess of 20% annualized at today’s implied volatility levels. 

 

Warm Regards,

John Sarson

Managing Partner & CEO

 

PS: If you would like to join our mailing list, please sign up at www.sarsonfunds.com or look for our LinkedIn in group, “Cryptocurrency Financial Advisors”.

Encryption Will Drive Cryptocurrency’s Next Innovation Wave

Encryption will drive cryptocurrency's next wave of innovation

Encryption will drive cryptocurrency's next wave of innovation

Securing a Blockchain-Built Future: How Cryptography will Drive the Next Cryptocurrency Innovation Wave

With world financial system begins to embrace the wave of blockchain-powered digital assets and cryptocurrencies entering the vocabulary of Wall Street and Main Street investors alike, we look ahead to the next big wave of crypto innovation – securing a blockchain-built future.

Cryptocurrencies and digital assets rely on secure, encrypted consensus to validate transactions and empower the mechanics of decentralized finance. Advances in computing processing power, and developments in quantum computing, mean the market for digital assets will need to respond with quantum resistant encryption solutions in order to propel blockchain technology to the next level of global adoption.

To educate digital asset investors, cryptocurrency financial advisors, and blockchain technology market analysts on the issues and opportunities in digital asset encryption advances, Sarson Funds is pleased to provide the first in a series of investor guides to understanding encryption and the market opportunities poised to emerge as the world’s blockchain infrastructure grows.

This first release includes two overview pieces designed specifically for digital asset investors interested in the market dynamics and investment opportunities in cryptocurrency encryption advances (available for download below):

First, is a white paper from the Sarson Funds analyst team:

Sarson Funds Blockchain Cryptography White Paper

The white paper is accompanied by an easy to digest compendium overview of digital asset cryptography:

Cryptography Investor Guide Sarson Funds

We trust digital asset investors and cryptocurrency financial advisors find these resources useful as the world transitions to a new era of democratized financial, personal data sovereignty, and a secure future built on blockchain.

 

BarclayHedge Names 2 Sarson Funds Strategies in Top 5 Crypto Fund List

In the September 1st, 2020 BarclayHedge list of top performing crypto funds, both the Sarson Funds’ Large Coin and Small Coin strategies earned spots in the top five performing cryptocurrency hedge funds for July 2020.

Sarson Funds’ flagship Large Coin strategy, Blockchain Momentum LP, earned the number two spot on the list, up 35.25% MTD with the Small Coin strategy, Fifth Khagan LP, at number four, up 31.68% MTD.

Both Pantera Capital Management’s ICO Fund and Digital Asset Fund, as well Altana‘s Digital Currency Fund also made the top five.

See full listing below:

Click here for the full listing.

 

How Crypto-Exchanges Just Got Crypto-ed

All businesses are guilty of complacency at times.  Sometimes that complacency can remain unchecked for years. Ultimately, better, faster, cheaper wins. Western Union, MoneyGram, SWIFT, it’s been nice knowing you.  In the crypto industry, we call the disruptive application of blockchain technology “getting crypto-ed” (‘crypto’ being the placeholder for any and all applications of blockchain technology).

As it turns out, even disruptive crypto-startups themselves can get crypto-ed.

Such is the case now with crypto-exchanges. Coinbase, Bittrex, Binance, Kraken, Gemini and the like have attempted a head-on disruption of traditional stock and commodity exchanges. Buried under an onslaught of new regulation, however, the exchanges have not met the demands of either crypto traders or token issuers. Traders are demanding access to newly minted globally available tokens while token issuers are looking for markets to list their tokens.

Add to that the cost of listings and time. Exchange listings easily cost hundreds of thousands of dollars and often take months. Jurisdictional issues have also become a hindrance as exchanges are closing off individual token markets to traders in certain jurisdictions (such as the US and Europe).

Crypto-disruption is swift and without bias, even towards other crypto disruptors. So something had to give, and it did.  Crypto traders found a work-around in the form of a “swap” with another holder of the desired asset.  Startup decentralized platforms such as Uniswap, Balancer, Curve, Compound, Synthetix and many others have created marketplaces where traders buy and sell with one another in a trustless, near instant way, using Etherum-based smart-contracts as a behind-the-scenes framework for the transaction. This enables traders to swap one crypto for another without counter-party risk or the need for any third party involvement. And boy, did the market like it!  

(Source: Uniswap.info/home – August 25, 2020)

Transactions in this swap market happen “on-chain”, which in the opinion of anyone who believes in the core tenants of cryptocurrencies, is infinitely preferable to working with an exchange partner who may or may not be designated as a “custodian” by a governmental agency who ultimately can interfere with the execution of a transaction. 

These swap platforms have soared in popularity and have taken volume and its associated fees away from crypto-exchanges. Uniswap now does nearly $200mm in volume per day, more than most “established” exchanges. Also, the fee revenue for making a market (in a very crypto fashion) flows to the person providing the liquidity, not to the exchange. Mark it down as another fee disintermediated and returned to the customer.

 We’ve barely scratched the surface on the number and type of businesses that will be “getting crypto-ed” in the next few years. (Title insurers, mobile networks, and financial services – I’m looking at you).  Any business not leveraging new technology is at risk of innovation-borne disruption.  The best businesses know that constant technological vigilance is a prerequisite for survival.   Companies that have joined the Ethereum Enterprise Alliance see the barbarians at the gate and are making the right moves.  Unfortunately, sometimes even seeing the barbarians is not enough to save your business from being “crypto-ed”.

–  John Sarson, CEO, Sarson Funds

Sarson Funds’ Strategies Named Month’s Top Performing Crypto Funds

In the August 18, 2020 NilssonHedge list of top performing crypto funds, Sarson Funds’ Large Coin and Small Coin strategies earned top honors as the month’s two best performing cryptocurrency hedge funds.

Sarson Funds’ flagship Large Coin strategy, Blockchain Momentum LP, earned the number one spot on the list, up 35% MTD, which was just ahead of the Small Coin strategy, Fifth Khagan LP, at 32% MTD. See full listing below:

The report caps off a series of recent performance awards for Sarson Funds cryptocurrency investment products, including recent awards from BarclayHedge.

Read the full list and article HERE.

Future-Proof: EEA Driving Big Business to Ethereum

Since inception, Ethereum has courted the attention of large companies. At the enterprise-level, no blockchain protocol offers the robust maturity and prospects of Ethereum-powered smart contracts.

However, as CoinDesk reports, it wasn’t until 2017 that a formal large-scale corporate consortium around Ethereum came into fruition: the Enterprise Ethereum Alliance (EEA).

Sarson Funds has long covered the EEA and the powerful firms coordinating Ethereum best-practices across a diverse set of sectors. With market giants such as JP Morgan, Microsoft, Santander, E&Y, Citi and more, the EEA created a concerted effort to get large corporates and tech providers on the same page when implementing private (or “permissioned”) versions of Ethereum technology.

Thereafter, the EEA became a kind of standards organization for blockchain business, with an eye on a future state when the public blockchain might join with private implementations.

Check out the Sarson Funds Snapshot on the Enterprise Ethereum Alliance below.

You can read CoinDesk’s full article, written by Ian Allison, here.

US Clears Path to Bank on Bitcoin

With a momentous decision for cryptocurrency proponents, Uncle Sam may be on the path to rightfully leading the blockchain renaissance.

Just shy of 60 days into his role leading the US Government’s Office of the Comptroller of the Currency (OCC), Acting Comptroller Brian Brooks formally permits national and state banks the authority to provide custody for cryptocurrency and digital assets.

“It’s not clear that customers always want their financial services in a bundled form.” Brooks continued, “One of the reasons for a rise in FinTech is an unbundling that is happening.”  Prior to joining the OCC, Brooks was chief legal officer at Coinbase; the largest cryptocurrency exchange in the United States with over 30 million users.

 

“From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today,” said Acting Comptroller of the Currency Brian P. Brooks. “This opinion clarifies that banks can continue satisfying their customers’ needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency.”

You can read the letter in its entirety here.

Blockchain Wars: COVID-19 Edition

With United States refocusing attention on controlling the spread of COVID-19, China continues to pursue its goal of global leadership in blockchain technology.

Following on the success of last year’s blockchain initiatives, China successfully moved nearly their entire population off of paper money – a change affecting Chinese citizens of all economic levels. Panhandlers on the streets of Beijing now display QR codes for donations into their digital bank accounts.

As was reported by the Wall Street Journal in April, four large cities in China are piloting full digital currency integration. China’s Central Banked recently completed a “Certification of FinTech Products” program, a year-long public education campaign on blockchain technology. These initiatives, along with President Xi’s open and continued public support of digital currency dominance, have propelled China into a blockchain technology and cryptocurrency leadership position.

Compared to its largest global rival, the United States has not kept pace. Washington’s knowledge gap and financial regulatory ineffectiveness were showcased clearly during the early hearings on Facebook’s proposed cryptocurrency, Libra. The hearings quickly exposed that neither chamber of Congress understands nor appreciates the impact that cryptocurrency and blockchain technology are poised to have on the future of the world’s financial architecture.

So what has been the net effect? Facebook is moving forward with Libra – but they are leaving American investors out and instead partnering with companies and countries outside of Washington’s regulatory reach. More evidence of American crypto-flight came in the form of PayPal’s decision this week to test its new Bitcoin buying feature in Europe instead of its home country, the United States. The United States is increasingly seen as hostile toward digital currency integration and is driving financial innovation offshore in the process .

Fortunately, there is legislation being proposed that will allow for companies in the United States to safely compete for positions in the coming digital economy without the fear of being caught on the wrong side of yet to be written legislation. Voices on both sides of the political aisle seem to understand failing to act is a failure to provide American business with the framework they need to compete on the future global stage.

Blockchain technology stands poised to rebuild the way data, digital assets and currencies move around the globe. The global financial landscape will be restructured to reflect the immutability and instant transferability of blockchain-based assets and currencies. Waiting for third-party transaction validations are becoming a thing of the past. Goldman Sachs, Fidelity, IBM, The Bank of England, The Bank of Japan, the ECB, the Federal Reserve and the IMF have all commented on the inevitability of this changing paradigm.

Without action to support the adoption of cryptocurrency and blockchain technology, it is all but assured that the United States will see a decline in its political and economic influence. The abandonment of the US dollar as the world’s favored “transaction currency” (the currency the world uses to trade international goods like oil and gold) will be the first sign in this decline of US economic hegemony – but it won’t be the last.

Politicians are starting to take notice but are uncertain as to how to proceed. Looking backwards and hanging on to the past is not a winning strategy. The United States must once again embrace its innovative spirit and evolve.

China has taken the first steps toward dominating the future of the internet and of finance. Indeed, the first shots in the coming “Blockchain Wars” have been fired!

BarclayHedge: Top 5 Crypto Fund List Includes 2 from Sarson Funds

In a release from CryptoFund.News, BarclayHedge‘s April 2020 list of best performing crypto funds was announced, with Sarson Funds leading the pack, occupying 2 of the top 5 spots.

Sarson Funds’ flagship Large Coin strategy, Blockchain Momentum LP, was number 3 on the list, up 36.02%, which was just behind Pantera Capital’s Pantera Bitcoin Fund at 36.94%.

Fifth Khagan, LP, the Small Coin (aka AltCoin) strategy was number 5 on the list, up 33.62%

Read the full list and article HERE.

PWC Report: Global Crypto AUM Doubles

PwC’s 2020 Crypto Hedge Fund Report highlights a Remarkable Year for Crypto Funds.

Faith in crypto is surging. In its continued emergence as a store of value asset class in the face of COVID-19, cryptocurrency investors have continually sought new ways to profit off of the emerging market. According to Price WaterhouseCoopers (PwC), an Enterprise Ethereum Alliance member, and Elwood Asset Management’s 2020 Crypto Hedge Fund Report, crypto hedge funds have experienced the recent momentum of digital assets, as they report an estimated doubling of crypto AUM across the world’s most successful digital asset investing institutions.

The report states, “by sharing these insights with the broader crypto industry, our goal is to encourage the adoption of sound practices by market participants as the ecosystem matures.” A  heightening trust and maturing industry is surely displayed in their findings.

The report surveyed the world’s largest crypto hedge funds by AUM and found that global AUM has increased from $1 billion USD to over $2 billion through the past year. Also highlighted was an increase in the average and median AUM of these funds, with both measures doubling by year end as crypto funds’ average AUM was recorded at $44 million with a median of $8.2 million. The percentage of crypto funds managing at least 20 million AUM also experienced significant growth this year, rising from 19% in 2019 to 35% in their most recent results.

In lieu of crypto’s recent success, Henri Arslanian of PwC in a meeting with crypto news source The Block, said that “The changes the crypto hedge fund industry has seen in the past 12 months, from additional regulatory clarity to the accelerated implementation of best practices, are great examples of how fast the industry is becoming increasingly institutionalized.”

Fund Emergence Correlated with Bitcoin Price Activity

According to the report, the emergence of crypto hedge funds has closely followed the swings of bitcoin, as 40% of funds emerged following the 2017 all-time high and the slowed growth of new funds following the crypto winter in early 2019.

With such correspondence, the report recognizes that of all the holdings of these funds, 49% of daily trading is allocated towards Bitcoin, while 97% of these funds actively trade the asset in their investment strategies.

Among the top altcoins traded by these companies, 67% of funds reported to trade Ethereum (ETH), 38% traded both Ripple’s XRP and Litecoin (LTC), while 31% traded Bitcoin Cash (BCH). The depth of activity and attention that altcoins like these are receiving alongside Bitcoin within investment vehicles displays the maturation of digital assets that PwC and Elwood referred to in their report.

Common Investors and Investment Vehicles

PwC and Elwood also reported that 48% percent of crypto hedge funds are owned by family offices, while 42% are under the umbrella of high-net-worth individuals. A rather notable measure is that venture capital funds make up just over three percent of crypto funds, displaying an unexpected underperformance in a sector that many would hope to greater embrace the momentum of blockchain technology.

Within the hedge funds reported, PwC and Elwood found that there are generally four types of crypto investment strategies, these being:

    • Discretionary Long Only (funds with a long term investor lock-up),
    • Discretionary Long/Short (funds that take long and short strategies such as asset reallocation following industry events and technical analysis),
    • Quantitative (liquidation backed strategies including arbitrage and market-making), and
    • Multi-Strategy (combined strategies from the other three categories). Of these investment strategies, the most widely utilized are quantitative strategies, occupying almost half of all investment vehicles.

In the past year, the quantitative strategy was also the highest performing for surveyed funds, returning an average of 58% on the year, giving sense to why it is the most widely utilized approach. The Discretionary Long Only strategy acquired a 42% return, the Long/Short strategy tallied a 33% return, and the Multi-Strategy approach returned 19% on the year.

Breaking Down Investment Strategies

To further examine the quantitative strategy heavily utilized by crypto firms, PwC and Elwood also reported on the liquidation activities involved in the quant approach. Within their quantitative strategy, 56% of funds trade crypto derivatives, 48% actively short crypto assets, 38% engage with cash-settled futures, and 31% utilize options. Additionally, 42% of companies reported to engage in staking, 38% in lending, and 27% in borrowing.

Conclusion

While the asset class continues to mature, the findings of PwC and Elwood Asset Management mark 2019 as a tremendously successful year for crypto and the influx of capital into its’ associated investment funds. As attention has been brought to Bitcoin in the recent months, Sarson Funds is hopeful that while 2019 was a productive year, 2020 capital inflow will outperform the past year, especially with Bitcoin’s recent halving attracting larger than ever support for the asset class.