While your cryptocurrency holdings may be severely underwater, at least you do not have to publicly disclose it.
It is coming to that time of year that all of the cryptocurrency funds have to report the quarterly numbers, and they are not looking pretty. They are all coming to grips with the impact of previous record quarters and the subsequent falls.
I’m going to take a look into some of these funds and what the falls in their portfolios means for the broader crypto fund ecosystem.
While many of the crypto funds are private and will try and keep their returns out of the public eye, we have insight into two very prominent funds in the space.
These are Galaxy Digital and Pantera capital.
For those who do not know, Galaxy digital is run by Wall Street veteran Mike Novogratz. He is a celebrity in the cryptocurrency ecosystem who has brought a great deal of interest from Wall Street into crypto.
Unfortunately, Galaxy Digital has had a rough last few quarters.
Given that the company is listed on the TSX Venture Exchange (TSXV), they are required to release these quarterly results. On the 29th of November they released their 3rd quarter results as well as the results for the 9 months ended 30th September 2018.
Galaxy lost $76 million in the third quarter of the year which made up the the bulk of the $175m loss that occurred over the first nine months of the year. This is also pretty unfortunate given that Mike called a bottom in the crypto market in the middle of September.
This is the BGCI chart…I think we put in a low yesterday. retouched the highs of late last year and the point of acceleration that led to the massive rally/bubble… markets like to retrace to the breakout..we retraced the whole of the bubble. #callingabottom pic.twitter.com/EasTBYgjSj
— Michael Novogratz (@novogratz) September 13, 2018
While the call came just before a short uplift in the price, it fell right back down again. After the disclosure of the numbers, Galaxy digital’s share price fell by over 10% and the TSX had to suspend trading.
Unfortunately, these numbers will not have captured the losses that have most likely occurred over the past month in November. Short of a miracle rally in the next few weeks, the fourth quarter and indeed the whole year are likely to be much more bleak.
Mike Novogratz was pretty open about the challenges that Crypto funds had been facing throughout the year. In an interview that he held with the Financial times in late November he said:
[But] this year has been challenging. It sucks to build a business in a bear market
All of us believers can agree Mike, it really does suck!
Unlike Galaxy digital, Pantera is not a listed company. This means that they do not have to publicly disclose their earnings to the broader market.
However, according to a letter to its clients, the billion dollar fund has also had a tough year.
As you can see, the fund reported a 72.7% loss in the year till the end of August. They even reported a 40.8% loss in the fund since December 2017 (prior to bull run). These numbers are only up until August so like the above example with Galaxy, they have not captured the recent sell off that we have witnessed.
Despite this though, Dan Morehead (Pantera’s founder), is still long term bullish on the price of Bitcoin. In an interview with Bloomberg he said that
Six or eight years ago there was probably a million people on earth using it, now there are 50 million people that use it… I think in a decade it’s going to be billions of people using it…
As long as Pantera’s investors are as convinced in the long term trajectory of Bitcoin and cryptocurrency, Dan can stick it out for the long term.
It’s not Just the Funds
While the cryptocurrency funds are the most present example of businesses that are feeling the heat from the crypto crash, they are most certainly not the only example.
Cryptocurrency miners are another business that is heavily exposed to prices. They don’t only sell an asset that is falling in value but they have to meet monthly expenses such as electricity (not to mention return on capital equipment).
There have been rumors for some time now that Bitmain, the largest mining operation, is having trouble with their upcoming IPO. For example, there were concerns with the IPO given the amount of Bitcoin cash they had on their books.
Moreover, the SCMP reports that Bitmain and other mining equipment manufacturers are likely to suffer collateral damage as a result of a potential trade war between the USA and China.
Then you also have the impact that the fall in cryptocurrency trading activity is likely to have on the exchanges.
While exchanges are not public and are unlikely to report their earnings, you can get a pretty good idea of how well they are doing by their traffic stats as well as their public 24 hour volumes.
As you can see from the above image, there has been a fall in the Alexa rank of coinbase.com continuously since the beginning of the year. The Alexa ranking is one of the most accurate metrics of how a site stacks up in terms of their rankings.
Taking a look at the above image, we have the 24 hour volume of the Bittrex exchange from the 2nd of January on the left and the 9th of December on the right. As you can see, the volume over the past 24 hours now is a mere 1% of the volume that it had at the height of the bull market.
Exchanges make money on fees. Lower volume => Lower fees => No Christmas Bonuses.
Where to Now?
While these numbers are indeed quite depressing, how things are likely to progress really depends on what view the company or fund takes.
Much like how you view your own crypto portfolio, these CEOs and managers are likely to take a cold hard look at their operations, assets and long term vision. Do they fall for the FUD and leave the game or do they adapt and become more nimble / selective?
Some big players have chosen the latter. For example, Joe Lubin (co-founder of Ethereum) sent a letter to his Consensys employees around how the company will adapt to the new market conditions.
In terms of the funds that we have examined above, they are likely to stick it out. Mike Novogratz and Dan Moorhead are adherents to the power of blockchain technology and cryptocurrencies. They seem to be in it for the long game and have strong investors behind them.
For further green shoots of a potential recovery, you need look no further than where other institutional investors are entering the market. Money managers, high frequency trading firms and investment banks are taking the leap into the digital asset world.
So, while you are not alone in your large crypto losses, you are also not alone in your beliefs of a brighter crypto future.
Featured Image via Fotolia