The PDF Version of this report can be found here.
General Market Update
This month was marked by a mixed performance across global financial markets. Markets continued their upward trend in the first half of the month amid cooling inflation in the U.S and signs of a slowing labor market. Big banks reported solid earnings while smaller banks' results were mixed with an approximately $600 Billion decline in customer deposits. Markets pulled back in the second half of the month following surprising inflation data from the U.K that came in above 10% renewing fears that higher rates are needed and for longer periods. The crypto market was impacted heavily by the pullback as it triggered over $1 Billion in liquidations erasing all of April’s gains with Bitcoin going down from over $30,500 back to where it was at the start of the month, at around $27,500, before rebounding back to the $30,000 level. There have also been heightened concerns regarding a U.S Debt Ceiling Crisis if congress does not agree on raising the debt limit, as the U.S would default on its debt obligations. Although highly unlikely, the consequences of a default could be economically disastrous, sending shock waves through global financial markets. The issues facing the U.S right now such as high inflation, a potential bank and debt ceiling crisis along with a combination of several other factors, including the looming outlook of an upcoming recession and the attempt at de-dollarization by BRICS, has cast a dim view on the strength of the U.S. Dollar.
Update on Banking Crises
First Republic Bank that was offered a lifeline last month by the largest banks in the U.S is on the brink of collapse following a disappointing earnings report that highlighted a 40% drop in customer deposits in Q1. If First Republic Bank was to fail, it would be one of the five largest bank failures in US history.
Bank deposits have been declining, with significant outflows observed over the past few months. The "bank walk" (as opposed to a “bank run”) away from low-yielding bank savings accounts is continuing, with banks losing a big share of their deposit base. This is mainly due to a significant gap between market rates and bank rates, which is expected to widen further if the Fed hikes rates again on May 3. If the Fed continues with its rate hikes, it will risk intensifying the fall of other regional banks by turning this “bank walk” into a “bank run”. Markets are therefore expecting the Fed to revert to printing money.
The banking crisis is not over yet, and the impact of these financial market distortions, along with the debt ceiling issue, may have significant implications for the economy. We believe that this situation leaves us in a tricky position with regards to our approach to cash. On the one hand, the tightening of liquidity conditions makes cash a favorable asset, while the loss of confidence in the banking system and the potential of monetary stimulus makes cash a weak asset to hold. We will continue to monitor the situation closely and adjust our strategy accordingly.
Blockchain and AI
Following ChatGPT’s launch back in December, Artificial intelligence (AI) has been consistently making headlines in the world of technology, as it promises to revolutionize the way we live and work. We at 3GI Ventures, firmly believe in the potential of this groundbreaking technology and have incorporated ChatGPT and AI extensively to streamline our processes and enhance our efficiency.
Furthermore, we recognize that AI and blockchain are strongly complementary technologies, with the potential to reinforce each other's strengths. Given that blockchain technology is largely used to change the way data and value are stored, used, and transferred, and AI is used for improving efficiency, extracting utility from data, and eliminating boring and repetitive tasks, the two technologies are naturally compatible. It is no surprise then, that the two technologies are headed toward an intersection, where they will begin to enable a range of new use cases while helping to improve and augment existing ones.
At 3GI Ventures, we're genuinely excited about the dynamic duo of AI and blockchain! We believe that bringing these two game-changing technologies together sets the stage for incredible breakthroughs and advancements.
3GI Strategy Breakdown Performance
In light of the macroeconomic developments referred to above and following the crypto market pullback in the second half of the month, we decided to increase our overall portfolio cash allocation from 25% to almost 35%. We will likely either increase or decrease the cash allocation following the Fed’s interest rate decision on May 3, 2023 depending on the outcome of the meeting and the market’s reaction to it.
Momentum Strategy
Our momentum strategy underperformed benchmark assets this month due to the crypto market pullback which typically hits emerging tokens a.k.a Alt-coins more than it does to major large cap assets like Bitcoin and Ethereum. Our top momentum performer for the month was once again Pendle with a return of over 44% in April alone followed by Rocketpool rising 8% amid the successful Ethereum Shapella upgrade which saw the return of the liquid staking narrative. While three out of our seven momentum tokens delivered positive returns in April, we had four that were in the red, some of which were double digits under. Overall, we closed three positions in April (Polygon, GMX and Dopex) and made only one new investment in Flashstake (more on it below).
We initially opened a position in the decentralized derivative exchange, GMX, back in April 2022. Our entry price at the time was $35 per token but we kept increasing our position size in GMX throughout last year with cost averaging at $39 per GMX token bought. We took profits at different price levels according to our profit taking strategy. We have now closed our position in GMX at an average sale price of $70 while the highest price we took some profit at was $81. Our total return on GMX investment was 78%. The reason behind our decision to close our position in GMX was due to increased competition in the decentralized perpetual trading protocols as well as higher opportunity cost in terms of stronger momentum picks.
We also closed our position in the Decentralized Options Vault Protocol, Dopex. The decision was also in part due to increasing competition among new decentralized options protocols that attracted options traders away from Dopex. Although we still believe that Dopex will continue to grow, it has however dropped out of our criteria to qualify as a momentum play for the time being.
We made a new investment in a protocol called Flashstake which allows users to claim up to two years worth of fixed-rate yield today. Our investment was made just before the market pulled back and hence we took a hard hit on this one. However, we remain holding this position as we believe it is bound for upside given the utility of the protocol and the dedication of the team developing the project with plenty of upgrades and features are expected in the near future.
Swing Trading
We sold part of our position in Ethereum for an approximately 8% return since our last entry at the beginning of March. We are still holding onto our 1.5x leveraged Ethereum long position we established by utilizing the Liquity protocol by looping into Ethereum. As a reminder of the structure of this trade, we are providing Ethereum as collateral and borrowing stablecoins against our collateral. We then convert the borrowed stablecoins into more Ethereum, put that newly acquired Ethereum as collateral and borrow more stablecoins against the new collateral. We keep repeating this process to achieve virtually free leverage while maintaining a healthy safety margin at a liquidation price of our choosing.
Yield Farming Strategy
We have been using Flashstake protocol to earn upfront fixed yield of 25% APY on our GLP position. We were also earning around 20% APY on our Ethereum position by selling covered-call options through Lyra Finance.
Portfolio Snapshot As of April 30, 2023
3GI Performance
3GI was up 15% at one point this month before the market pullback and up 103% on a Year to Date basis as illustrated in the blue line peaking in mid-April on the chart below. The monthly gains were wiped off as the market sentiment turned bearish in the second half of the month. The market drawdown occurred across the entire crypto market hitting most crypto assets including Bitcoin and Ethereum. However the damage at 3GI was more severe as we had big allocations in riskier assets that were hit much harder, one of which was down over 50% only a week after we invested 8% of our portfolio size in it. This is not surprising as the asset referred to is a micro cap token and could retrace its losses just as easily. Hence the rule, high risk high returns.
Currently, the market is focused on the upcoming FOMC meeting on May 3, 2023. We are maintaining a neutral position until there is a significant shift in sentiment in either direction.
Crypto News
Abu Dhabi Global Markets Proposes a new framework for a decentralized economy – Link
Visa is Hiring More Crypto Developers To Drive Mainstream Adoption - Link
Mastercard introduced its “Mastercard Crypto Credential” and its collaboration with blockchains - Link
Europe passes landmark crypto regulation - Link
Lawmakers have released a new discussion draft bill to provide a regulatory framework for stablecoins in the US - Link
US Lawmakers Slam SEC Chair over Multiple Rushed Rules and Hostility against Crypto Firms - Link
The Russian central bank is mulling the idea of using cryptocurrencies for international settlements - Link
UK could roll out crypto regulation within a year - Link
UK Government Wants to Change Tax Laws to Better Suit DeFi - Link