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FTX related updates
We would like to provide an update on the situation at FTX and how it affects us. To summarize, this month, FTX and Alameda Research were over-leveraged with FTT tokens as collateral. As of this morning, both companies have filed for bankruptcy. The total damage is not yet known, but online estimates put it in the billions of dollars. User deposits on the FTX exchange were also traded at a significant discount. This could mean that those who had funds on FTX lost most of their funds.
Generally speaking, our approach to these situations focuses first on securing as much of the portfolio as possible. Then, once we've taken all possible steps, we can update our LPs on what we've done and what's going on with our fund. But above all, our aim is to reduce the risk of permanent capital loss. The market fell sharply on this news, which will be reflected in our results, but we expect it to do the same when the market rebounds. In this case, what we mainly want to avoid is the permanent loss of assets.
Our approach is to generally reduce exposure to centralized counterparties while maintaining some trading flexibility. Our primary risk/loss in the FTX event comes from our Blockfolio acquisition proceeds denominated in FTT and FTX shares. We cleared FTT as much as possible on Tuesday 8th November. Prior to the crash, our FTX stock and FTT token positions combined accounted for less than 3% of our firm's total AUM on Monday night.
Immediately after Tuesday morning's news of FTX/Alameda's troubles, our team assembled a virtual war room to assess the impact on our early-stage portfolio and take action. Our goal is to 1) identify potential risks our portfolio teams may face and 2) reach out directly to at-risk teams to provide any assistance we can.
We have conducted this test in similar stressful environments in our industry (e.g. 3 AC bankruptcy, 2018 crypto winter). In times of crisis, “we have to move fast.” Speed is of the essence for a business in crisis, and it is more important than surviving and emerging stronger on the other side of the crisis.
We identified and contacted the portfolio team from among our early stage token and blockchain venture capital firms that we believe may have potentially significant counterparty or custody exposure to FTX/Alameda. After speaking with investors or receiving investor updates, the vast majority of portfolio teams approached reported that they had little counterparty or custody exposure to FTX/Alameda. Our initial impression is that this limited exposure is due in part to active risk management and custody/financial management practices that we seek out and regularly emphasize to our founders, but we expect the coming weeks and months to Provide more insights.
In the short term, those who lost their funds on the FTX exchange will suffer. More broadly, we expect further price volatility across the crypto ecosystem as concerns over contagion prompt asset holders to adjust their portfolios. Assets related to FTX (Solana and its underlying projects, Aptos, etc.) will likely be hit the hardest. The incident could also be a setback for the app, as some retail users who lost their funds opted to leave the field, while others who might have joined earlier were scared to stay on the sidelines. We expect institutions that were previously wary of this space to deepen their skepticism. This is to be expected, but unfortunately not serious enough to warrant alarm. They may take longer, but we believe they will happen sooner than many expected.
On a personal level, the FTX debacle reminds us of what we are doing. As a company and an ecosystem, our mission is not to replicate the risks and inefficiencies of the traditional financial sector. It is about building a more efficient, decentralized, and open financial ecosystem. This vision keeps us more motivated than ever and makes us more grateful for the support of LPs who share the same vision. This process may not always be easy or smooth, but it is necessary. We want to thank each of you for participating with us.
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bitcoin halving
The money supply function of the Bitcoin protocol is the polar opposite of quantitative easing. The Bitcoin code indicates that a total of 21 million bitcoins will be issued, with the supply of new coins decreasing over time.
Today, 6.25 bitcoins are issued every ten minutes, independent of human will.
Bitcoin's supply and distribution rule set is purely mathematically based, predictable and transparent by design.
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Almost halved
The next halving is expected to take place on April 20, 2024. Mining rewards will drop from 6.25 BTC/block to 3.125 BTC/block.
Efficient market theory says that if we all know it's going to happen, then it has to be priced. To paraphrase Warren Buffett on dogma: "The market is almost always efficient, but the difference between almost and always is $80 billion to me." So even if we think everyone knows something , which doesn't mean there isn't a ton of money to be made.
If the demand for new Bitcoins remains the same and the supply of new Bitcoins is cut in half, this will force the price up. Demand for Bitcoin has also increased in anticipation of price increases ahead of the Bitcoin halving event.
For years, we have emphasized that the halving is a big deal, but it will take years to play out. A typical bottom occurs 1.3 years before the halving, and on average, the market peaks 1.3 years after the halving. The whole process took 2.6 years to see the full impact.
If history repeats itself, the price of Bitcoin will bottom out on December 30, 2022. We will then see a rally that continues until early 2024, followed by a strong rally after the actual halving. The chart below shows what could happen if Bitcoin repeats the performance of previous halvings.
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Stock-To-Flow Model Price Prediction
The framework we use to analyze the impact of halvings is to look at the change in the stock-to-flow ratio for each halving. The first halving resulted in a 17% reduction in the supply of new bitcoins. That's had a huge impact on new supply, and it's had a huge impact on prices.
As the ratio of new bitcoin supply decreases from the previous two halvings to the next, the impact of each subsequent halving on price may gradually diminish. The image below is a graph depicting past halving supply reductions, the percentage of balance bitcoins during the halving.
The 2016 halving of the supply of new bitcoins was only a third of what it was the first time around. Interestingly, it affects only a third of the price.
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epilogue
epilogue
When people wonder whether the halving is fully reflected in the price, I am reminded of a famous quote from Kraken co-founder Jesse Powell. On a call with investors during the last halving:
Jesse Powell: Bitcoin itself, has not yet been reasonably priced.
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