F5 Crypto Fund | Market Report

Prof. Dr. Hermann Elendner

Due to simultaneous events in both the traditional financial market and the crypto market, there have been increased volatility and price declines, with Bitcoin experiencing a drop of about –15%. How does F5 Crypto assess the current developments?

What happened?

The following independent events have triggered the current developments due to their coinciding timing:

• The largest drop in the Nikkei since Black Monday in 1987, following the interest rate hike by the Japanese central bank last Friday, put pressure on the yen and intensified concerns in the stock market, which in turn
• fueled fears of recession in the US after the poor employment figures last Friday, especially
• at a time of escalating conflict in the Middle East and rising international tensions,
• which also caused the volatility index VIX to spike.
  
  Simultaneously, in the crypto market,
• after 10 years of legal proceedings, to the payouts of BTC from the MtGox liquidation (see our monthly report),
• a sell-off of ETH worth nearly half a billion by Jump Trading,
• while Grayscale had to endure ETH outflows worth over 1 billion due to the approval of the Ethereum ETF.

Each of these events on their own would hardly trigger such a strong market reaction; however, their coinciding timing led to amplified price effects.

What background information is essential for understanding?

Crypto assets, particularly Bitcoin, have a dual role since their increasing integration into the financial market:

1. Risk Assets: Crypto assets have historically exhibited high volatility and are fundamentally technology-driven investments. We know from the stock market, where technology stocks represent a volatile sector, that market disruptions lead to disproportionate selling pressure in these assets, known as “risk off.” When institutional investors rapidly reduce risk, tech assets are particularly affected, further increasing volatility.
   
   For many new participants in the crypto market, the difference between a Coinbase stock (COIN) and a Bitcoin position (BTC) is not significant. Therefore, a sudden desire to reduce risk in the financial market also leads to selling pressure in the crypto market.
2. Safe Haven: At the same time, Bitcoin offers a hedge against financial-system crises due to its technical decoupling. For example, when faulty software, such as the recent case with CrowdStrike, leads to severe outages in the banking sector’s monoculture, Bitcoin continues to operate reliably and unaffected. In this sense, Bitcoin serves a role comparable to that of gold.

However, these two roles are exactly opposite: a “risk-on asset” behaves procyclically, while a safe haven asset behaves countercyclically. Which effect is stronger for cryptocurrencies?

To say that the current price decline proves the risk perspective is dominating is too simplistic a view. It depends on the time horizon:

• In the short term, the risk aspect indeed takes precedence – after all, portfolio risk can undoubtedly be reduced immediately by selling off risky positions.
• In the long term, however, the insurance aspect prevails – after all, even at a price of €47,000, Bitcoin is still clear evidence that crypto is the asset class with the best performance of the last decade.

Selbst Gold ist aktuell heute leicht im Minus. Sicherer Hafen bedeutet eben nicht, daß eine perfekte Korrelation von –1 mit dem Aktienmarkt bestünde (was ökonomisch gar nicht ginge), sondern daß ein Portfolio, welches den Absicherungswert inkludiert, langfristig besser aufgestellt ist.

Even gold is currently slightly down today. A safe haven does not mean that there is a perfect correlation of -1 with the stock market (which is economically impossible), but rather that a portfolio including the safe-haven asset is better positioned in the long term.

How is the F5 Crypto Fund acting in this environment?

First, behaviorally-driven reactions must be avoided. While it is crucial to respond quickly to newly emerging fundamental information of medium to long-term significance (as we did, for example, after the fall of FTX [in German] or the collapse of Terra/LUNA [in German]), scientific research documents a tendency for the typical investor to react irrationally, particularly due to loss aversion (Kahneman/Tversky, 1979).

One of the added values of actively managed investments is the avoidance of such psychologically rather than economically motivated actions. The decision to reduce the investment rate does not depend on the returns of the last few hours but on the expectations for the coming days, weeks, and months.

Here, despite the cooled economic situation and increased international risks, F5 Crypto’s management currently sees no reason to assume a break in the emerging crypto bull market. Consequently, the F5 Crypto Fund remains fully invested.

Does this imply that the portfolio does not respond to price developments? Not at all: Since a correction impacts the small caps of the crypto market more than its bellwether Bitcoin, the current moment presents an excellent opportunity to advance our planned gradual reallocation from large caps to mid- and small caps [in German] significantly. In financial jargon: For small tokens with high beta, such a correction represents a favourable buying opportunity.

As a specific example, Aave (AAVE) has lost more than twice as much as Bitcoin. The planned increase in the fund’s position in this strong cash flow-generating, profitable protocol can now be executed at a particularly favourable valuation.

In general, as always: Crypto markets are characterised by high dynamism and still incomplete efficiency. Active management is therefore more significant in the crypto market than in any other asset class. This is why F5 Crypto always keeps a finger on the pulse of the market and seizes every opportunity to benefit from temporary disruptions with the F5 Crypto Fund through swift and decisive action.