Make-It Capital Edition #24

THE WORLD AS WE SAW IT IN JULY 2022

The World of Cryptocurrencies

The 75 bps hike the?FED?pulled through?a few days back was expected by the market causing a short-to-mid-term crypto rallye. The total market capitalization?(M/C) increased by 29% in July, or $247.6bn.?

Bitcoin (btc) is up 20% for the month being outshone by Ethereum (ETH) rising 58% p.m. Not surprisingly, bitcoin lost in market dominance (-2% to?41%) while ETH picked up steam to reach 18.8% in July.?

Investors seem to gain more confidence in ETH's switch to ESG-friendly proof-of-stake by means of?The?Merge?now?scheduled?for September 19th. As?Vitali Buterin?postulated this month, even after?a successfully implemented?Merge, ETH would still only be at?55% of its capabilities. However, The Merge will result in a pretty stable 5% yield on staked ETH. Adding the EIP-1559 upgrade, basically rendering ETH into a deflationary asset, the ETH?staking yield might very well?be equivalent to the?treasury yield for Web3.?Vitaly further?whetted investors' appetite announcing?ETH's?upcoming roadmap:?

To reach 100%, four more stages need to be implemented.?The Surge?(increasing transactions per second (TPS) from 15 to 100,000) using zero-knowledge proofs and sharding,?The Verge?(facilitating the process to becoming an ETH validator thus increasing ETH’s decentralization),?The Purge?(deleting old data from the ETH blockchain?that is no longer required), and?The Splurge?(upgrades for quantum resistance plus 'all the other fun stuff'.) A timeline was not provided.

This month we are introducing two new metrics that we deem very valuable to gauge the overall health of markets as well as future tendencies. One is the relation of the ten most prominent stable coins to M/C (% STABLE), the other, the ratio of decentralized finance applications' (DeFi) total value locked (TVL) to M/C (%?DeFi TVL).?(As input sources for the DeFi ratio show major discrepancies, we have taken a median of the 5 most prominent feeder sites.)

% STABLE:??Although the market had to swallow the (orchestrated?)?Terra?/?Luna?/?UST?debacle, the ratio of stable coins to M/C?has nonetheless doubled from 7% from the beginning of 2022 to 14% in July.?In nominal terms stablecoins shed some $8bn during the year.?They just lost a lot less than cryptocurrencies (down $1tn). The clear loser in the stablecoin market this year has been the big kid on the block, Tether (USDT), shedding some $12bn, or 15%. Clear winners are Circle's?USDC?(+ $12.5bn or 29%) and Paxos'?BUSD?(+ $3.2bn or 21%). Nevertheless, Tether still remains the largest stablecoin with a 21% lead over USDC.

% DeFi TVL:??The median DeFi TVL has fallen in lockstep with the general market from $151bn to $82bn: This represents a nominal decrease of roughly 46% maintaining the same?percentage of M/C at roughly 7%.

Especially % STABLE?indicates a flight to more safety amid a tricky market environment to say the least. We might have expected to see a higher percentage increase in DeFi protocols to M/C. However, investors might have been spooked by some centralized finance (CeFi) collapses. More on those below.

On a different note, one of the main reasons for another crypto drop earlier in the month?was?Elon Musk?announcing having sold 75% of?Tesla's?bitcoin holdings. He purchased $1.5bn worth of bitcoin on or around February 8, 2021. As the news was spread on Feb 8th, let’s assume he bought on Feb 7th?at roughly $39k per btc. That would mean he initially held some 38,500 btc. If he sold 75% for$936m, he made a significant loss to the tune of?$175m. Now, what was the reasoning for?him?selling? He posits cash flow issues?stemming from Covid-related?supply chain disruptions?in China. So, it appears,?once these are?sorted out paired with?the majority of bitcoin being mined in an eco-friendly manner, he might very well turn into?a buyer yet again in the not too distant future.?

The World of Commodities

Vladmir Putin's physical and psychological war machine continues to drive energy markets. Natural gas as per US-futures?is now up 122% this year with oil currently sitting at a gain of 39% despite recent weakness.

The most influential economy of Europe, Germany, nonetheless has decided to continue with the plan to close down the remaining three nuclear fission plants this year amid the hemorrhaging gas and oil shortages stemming from the Ukraine conflict. Germany especially was and still is?dependent on cheap Russian gas to the tune of 55% of total supply.??And now, to cover the shortfall,?German politicos intend to turn back to the filthiest of all energy sources: coal.

Moreover, they still refrain from importing any natural gas that has been generated by means of fracking. Even more so, nobody seems to know this, but Germany has plenty of shale gas in the State of Lower Saxony - to the tune of covering all the Russian shortfalls. To reach it, one would have to apply fracking technologies. You guessed right, Germany is not tapping into these due to environmental concerns... Let's root for coal instead.?Hmm.

Neither gold, silver, nor copper could piggyback on rising fear, albeit for different reasons. Gold, a yieldless asset (if you don't hold it through gold-backed crypto) cannot compete in a global yield surging environment. Add to that the strengthening US dollar, and you the recipe for gold hitting a new 52-week low. Still, gold usually acts as an inflation hedge and it failing to do so until now probably won't last much longer. Gold has not been this hated since 2019. The Commitment of Traders (COT) report for gold shows incredibly bearish values right now. And as the COT highlights what speculators, i.e. the opposite of Wall Street smart money, are doing, it provides a powerful contrarian indicator. We would not be surprised to see gold substantially higher in 12 months time.?

Our canary in the coalmine,?Dr. Copper, is down around 20% for the year indicating extremely bearish sentiment with regard to global economic growth. This is a very spectacular move, as copper usually increases by a modest?2.6% per year (since 1988). We might see some further losses, however, when comparing to similar extreme historic copper market bears, prices were catapulted higher by on average 51% within 12 months?from the having touched the?nadir of the respective bear market.?

Other interesting year-to-date?moves in the commodity markets include a 53% rise in uranium prices, 109% in titanium, 423% in Lithium, as well as 83% for butter and an amazing 244% for US eggs. Then again, we can also log in major price declines, such as -38% in iron ore and -55% in steel. Well, as?Réné Decartes?put it: 'Common sense is the most widely shared commodity in the world, for every man is convinced that he is well supplied with it.'

The Rest ...

In terms of market returns, the first six months represent?the worst start in more than 50 years. Per perspective, that is the year Richard Nixon got elected and we still had a gold standard. The current market conditions are clearly extraordinary. Usually, bonds are the big gainers during such demanding times as investors flock to perceived safety. However, not so this time around. In fact, this is the first time in history when both stocks and bonds have fallen by more than 10%.?

In the early 80s, then Fed chair Volcker raised and kept rates at double digits for 14 months - the so-called "Volcker Shock". This is not an option for now chair?Jerome Powell. The?Federal Funds Rate?(the only rate the FED has direct control over) now stands at 2.50%. This does not appear incredibly high, however, these rate levels already increase just annual interest expense to 1.5x the total military budget or total Medicare costs. For perspective, in the 1970s, the US government's debt to gross domestic product (GDP) was at 31% with an annual budget deficit of 2% of GDP. Today these ratios clock in at 122% and 7%, respectively.?There is not a lot of wiggle room left. Interest payments already encompass more than 12% of total tax income. And we are not talking about debt retirements here.?

The Fed will continue to endeavor talking inflation down. The advent of a possibly helpful recession is endorsed by the very unusual divergence between part-time employed and unemployed hinting at higher unemployment in the near future. The increasing?high-yield bond spread?as well as the inverted?Yield Curve?support recessionary tendencies incoming. Currently, all indications point to a 1974-style short and sweet recession taming inflation.

Stock indices in the "Western" world experienced a strong rallye since mid-July. The question remains: Is this another bear market trap? During the 2008/2009 crisis, we encountered five such bear market rallyes?for the S&P 500 (up 8%. 12%, 7%, 18% and 24% while hitting lower lows later) before the market turned for good. Since the beginning of the year, we were exposed to three such bear market upticks (11%, 7%, and 9%). Is history rhyming?

Then again, asset prices tend to recover 6-12 months prior to the economy. Adding to that are some contrarian indicators flashing brightly. For one, investor sentiment is abysmal with only 26.9% of investors positive for the coming six months (compared to the historical average of 38%). Also, 46.5% of investors are bearish, which is well above the long-term average of 30.5%. Then there is the latest monthly survey of its fund managers by?Bank of America. The respondents reported a 14-year low in stock allocation, a 21-year high in cash balances, and extreme negativity about global growth and profits.?

Rather than getting infected by the negativity virus, we might want to hold it with?Shelby Davis, one of the most successful investors of all time, turning his wife's loan of $50K into $900M from 1947 to 1994 (witnessing quite a few bear markets in the meantime). His credo was: 'Out of crisis comes opportunity. You make most of your money in a bear market. You just don't know it at the time'.

MAKE-IT CAPITAL FUND (the Fund)

The Fund is operated by Make-It Singapore and managed by Make-It New Zealand. As a?unique hedge fund for a comprehensive blockchain / cryptocurrency portfolio, the Fund?empowers investors to participate in the complete ecosphere of the blockchain universe with just one investment. The Fund always trades at exactly NAV and is?open to institutional and accredited investors.

The main objective of the Fund is capital preservation by reducing risk and volatility. This is achieved by employing our proprietary 5-pillar strategy.

Despite a challenging environment, the Fund is still on track with an overperformance over bitcoin of some 18% in the last 12 months as well as by demonstrating less risk and volatility as documented in significantly lower maximum drawdowns. Current NAV stands at 2.20.?The Fund?continues to profit from diversification in to the five pillars. Currently, DeFi and market making activities generate?free cash flow. We still have a considerable cash position and intend to deploy that once the market provides us with a clear signal rather than stepping into?potential bear market traps.

During July, investors witnessed (hopefully indirectly) the collapse of a few centralized finance (CeFi) houses:?Celsius,?Voyager Digital,?Vauld?to name a few names. All had investment allocations with the now defunct hedge fund Three Arrows Capital?(3AC)?which at a certain time had some $10bn in assets under management (AUM). 3AC's closeness to?Do Kwon, the founder of the spectacularly imploded?Terra / Luna /UST?chain, got 3AC way overexposed which in turn?cost them dearly.?

However, remarkably,?there was?not a single bankruptcy associated with DeFi,?endorsing decentralized finance as a much more secure alternative going forward.?There is nothing "flawed" or "broken"?with digital assets. Instead, the weak market was caused by too much leveraged risk concentrated within too few centralized players. After all, there was nothing inherently bad about mortgage-backed securities either during the?Great Financial Crisis. What caused the contagion in 2008/2009 was excessively leveraged trades by a few players turning sour rapidly.?

Defying extreme volatility paired with?the crypto market slump this year, venture capital is still pouring into early stage opportunities to the tune of $18bn so far. This month, in particular,?Multicoin Capital?announced its 3rd VC-Fund amounting to $430m while?Variant?raised $450m to 'double-down on Web3 amid the crypto winter'. And after raising $4.5bn for early stage investments recently,?Dan Morehead?of?Pantera,?announced the creation of a later stage fund concentrating on Series B, C, and D growth investing in the blockchain world. After all, the global adoption rate of anything blockchain-related is?twice as high?as what we experienced with the?growth of the?internet or the mobile communications revolution.

Our cover picture, of course, shows the first ever published frame from the new $10bn?James Webb Telescope. What is so amazing is that ii provides us with a slither of understanding how vast our universe is. The image covers a patch of sky approximately the size of a grain of sand held at arm's length by someone on the ground. It represents just a pinpoint in the sky, nevertheless, shows a myriad of galaxies.

Our blockchain universe clearly is not and will never be as vast, however, the possibilities and influences on basically every industry on earth seem equally endless.

Closing, we would like to draw your attention to the former CTO of?Coinbase?and onetime general partner of?Andreesen Horowitz,?Balaji Srinivasan, as he?really seems to be onto something with his new book "The Network State".?

With regard to growing online communities which will be exploding?upon the advent of a functioning?metaverse, this synopsis might very well turn into?reality: 'A network state is a highly aligned online community with a capacity for?collective action that crowdfunds territory around the world and eventually?gains diplomatic recognition from pre-existing states.'?

We are truly entering a new world, let's hope it is brave.

Thank you for your time and attention.

Sincerely,

Philipp von Gottberg

PS:?Should you be interested in delving deeper into The Network State, here is a link to the online version of the book:

https://thenetworkstate.com/