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(I hope you’ve been enjoying our new Hartmann Capital Weekly compiled by our new Head of Communications. However once a month, as usual, you’ll hear my personal thoughts on the market. I hope you find it insightful!)

To Investors and Colleagues,

I am always fascinated by how repetitive this market is without a fault. Overnight critics in a bear market turn into overnight supporters in a bull market. It can seem overwhelming trying to navigate the sentiment of this market as an outsider, as mainstream media seems to change their tune faster than Floridian clouds decide whether it’s time for sunshine or rain (…we’ve been getting daily 5 minute flash rains at the new Miami office, for those not familiar with Floridian climatology).

In the 80’s Reagan used to get the moniker of being the ‘Teflon President’ because no bad news would stick to him. Bitcoin in many ways has a similar characteristic. When market sentiment is bullish, no bad news can shake Bitcoin off its path. To quote my market update from May 2019

“Against all expectations Bitcoin continued what seemed like an already over-extended rally to $5,200, thrashing through its major resistance at $6,000 only to ascend to $7,000, $8,000, and even peak above $9,000 for a few minutes. What is most impressive is that it did so at a time when all our worst nightmares came true: A US Congressman threatened to ban Bitcoin, the biggest crypto exchange got hacked for deca-millions, and the leading stable coin got found out to not be backed fully by USD.“

However the same counts in reverse when sentiment turns bearish. No matter how good the news are, the market does not seem to care as it is looking for reasons to be bearish. Look no further than the avalanche of good news happening in the last few weeks which we reported on in our last two weeklies (1 & 2).

While it’s impossible for us to always perfectly nail when the macro sentiment shifts, I wanted to use this month’s market update not only to explore one of the most powerful metaphors that dispels half of the worries and concerns fueling the bearish sentiment out there, but also highlights one of the thought experiments that fuels my personal multi-year conviction why digital assets will succeed, even during the darkest times like November 2018 and March 2020.

Let’s go back in time to one of the most famous experiments in Game Theory… the Prisoner’s Dilemma.

I hope you enjoy,

Felix Hartmann, Managing Partner

Game Theory 101: The Prisoner’s Dilemma

To understand the ‘Crypto Opposition’s Dilemma’, which we will explore shortly, let’s explore one of the most classical experiments in Game Theory. The infamous ‘Prisoner’s Dilemma’.

The setup is following:

You and an acquaintance are down on your luck and decide to rob a gas station. You end up getting caught in the act, however all they can prove at that point is that you trespassed.

In order to nail you for your attempted robbery, they put you and your accomplice in two separate rooms and interrogate you.

Both you and your accomplice are offered a deal:

If you both confess, you walk away with 6 years in Jail. However if your accomplice confesses and you lie, you will go to jail for 10 years (nearly twice as long!) while he walks free.

Only if you both lie and don’t confess will you walk away with just 1 year each for trespassing.

What do you do? Think for a second.

While your first instinct might be “Duh! I’d lie! It’s the best outcome for everyone!”, you must remember that you cannot coordinate with your accomplice and cannot force or convince him of your strategy. You are either at the whim of his decision, or you optimize for what’s your best outcome.

And human nature, and thereby game theory, looks to play for the best outcome for oneself. You want to minimize your time in jail and while you can’t guarantee he will keep quiet, your outcome possibilities of 6 or 0 years if you confess is strictly dominant to the outcomes of 10 or 1 years if you don’t confess. So you confess.

Why does any of this matter? What if I told you that this basic premise of coordination failure is the source of nearly all lesser than ideal outcomes for us as individuals? Let’s explore…

The Banker’s Dilemma

Hundreds of banks get caught committing all sorts of ills against their customers, from extortionary interest rates on credit, to a laundry list of account and transfer fees, to limited banking hours, and miserable service. Out of rebellion rises a competing financial system, let’s call it, hmm… DeFi?

Of course the banks would make the most money if they would all coalesce and ban this ‘evil’ DeFi together.

But alas there are hundreds of banks all over the world and coordination is just downright impossible, especially since whichever bank chooses to comply with the new DeFi system is likely going to steal countless customers from those trying to ban it as it is now able to offer cheaper, faster, and better services.

In this example you merely take the game theoretical matrix from above and replace ‘confess’ with ‘adopt’ and replace ‘don’t confess’ with ‘ban’.

But wait… what if this isn’t even theory?

When I started Hartmann Capital in early 2018, every major bank from J.P. Morgan to Wells Fargo would kick every single crypto company such as ourselves to the curb.

“See the banks won’t allow it” every middle of the bell-curve semi-intellectual would proclaim.

Fortunately that is not how the world works. Because for every bank that has a lot to lose, there is a bank that stands a lot to gain from adopting this new asset class. And that is exactly what Silvergate Bank did.

Back in 2018 when we became a customer of Silvergate Bank, Silvergate was a small privately owned bank that was just 30 years old. Small banks historically don’t make it, and the big ones merely become bigger. Well, Silvergate decided that if everyone will turn away crypto firms, they will simply bank ALL OF THEM. And that’s essentially what happened. You were hard pressed to find a crypto company in 2018 that did not have a Silvergate bank account.

And while J.P. Morgan was busy proclaiming that Bitcoin is a fraud, Silvergate was busy collecting major customers like Coinbase (who still uses Silvergate today). As a result J.P. Morgan is now a laughing stock in the digital asset space that no one would bank with even if they paid us, meanwhile Silvergate has since gone public and saw its stock skyrocket to a $3bn market cap with deeply rooted loyalties in the digital asset space.

Silvergate was merely one of the first adopters in a big way that made obstruction (think ‘don’t confess’) too expensive to continue for major banks like J.P. Morgan and co. A new wave of banks, especially in the neo-bank sector is looking to tap into the powers of DeFi to offer better services to its customers.

Look no further than Metropolitan Commercial Bank’s neo-bank product ‘Current’ which just partnered with Compound Finance, a leading DeFi protocol to offer its customer a 4% APY savings account. Go take a lap ‘Marcus’ by Goldman with your lousy .5% APY.

The Sovereign Nation’s Dilemma

You got time for one more? Ah, the question I’ve been asked perhaps as much as “What’s your name”…

“But what if the government bans Bitcoin?”

There’s 191 states with undisputed sovereignty in the world. As we figured out by now in order for a ban to work every nation needs to ban Bitcoin, in order not to invoke the game theoretical positive incentives for those that adopt early, and negative incentives for those that ban at first and either adopt late or fail to adopt.

Again, middle of the bell-curve intellect will have you think that it is naive to believe the government won’t ban Bitcoin. But believing in global coordination is the ultimate naivety.

Here is a list of things 191 nations cannot agree on:

Banning Landmines

Banning Chemical Weapons

Banning Slavery

The use of nuclear energy

The legality of Cannabis and other drugs (some places its legal, others you lose your head)

…

And you think they are going to come together and ban Bitcoin? That’s rich.

Especially when the first dissidents such as El Salvador have emerged and made Bitcoin legal tender.

So emerges the Sovereign Nation’s Dilemma…

A nation that bans digital assets and technologies like Bitcoin and DeFi, while others embrace it risks:

Financial loss as other nations acquire these assets driving prices up while the banning nation and its people will be left empty-handed.

Talent loss as some of the brightest minds will leave the banning nation to take their talents to a country that is embracing the technology. We saw this for decades with Silicon Valley globally, and post-Covid even domestically with Miami.

Production (GDP) loss as the next ‘FAANG’ sized crypto networks or even deca to hecta billion unicorns like Coinbase will find a home and pay taxes elsewhere.

Don’t get me wrong, a ban by the US or China will always provide a short term blow to prices. But long term it’s a non-event. The digital asset space does not need any one country. But every country needs the digital asset space. Disagreeing with that statement is equal to saying that “my country will be just fine without the internet”.

Those that adopt will flourish, and those that attempt to ban, will just like in the prisoner’s dilemma, rot in prison for the next ten years as the rest of the world takes a lap on them in technological progress.

Would they prefer to coordinate and get away with a ‘lesser sentence’? Of course, but not only is coordination game-theoretically nearly impossible due to human nature, but more so we are already past the point of coordination with dissidents in banking like Silvergate and nation-states like El Salvador.

Final Thoughts:

It’s often not as simple as it seems. While at first questioning the powers of the state seems like naivety, the true naivety is believing in the ability of human coordination through inefficient political bodies. Part of the reason why crypto-economic systems are so effective and paradigm shifting is that they are able to accomplish global coordination between strangers that have never and will never meet by properly utilizing crypto economic incentive structures to create functioning and flourishing digital economies.

The questions addressed in this letter are likely the most common questions I have received repeatedly in the last 5 years educating about the digital asset space. If some of these thought experiments did not click the first time I recommend going back and re-reading. Because when it clicks it becomes so obvious why a lot of the innovations in this space are long term inevitable, and why every major correction, as we saw in May and June are historic opportunities to take advantage of major market mispricings.

Recent Write-ups:

Strategy Series - The Catalyst Driven Value Trade

Strategy Series - Activist Crypto Investing

Complementary Strategies - Yield Enhancement

TIMESTAMP 07/05 2021:

DJI - $34,786

S&P - $4,352

BTC - $34,700

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit hartmanncapital.substack.com

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To Investors and Colleagues,

Here we go again. Bitcoin is officially dead. In fact the media has already proclaimed so 23 times this year alone. Bitcoin has now died 416 times in the last 10 years according to mainstream media, and you can read every single one on Bitcoin Obituaries. If bitcoin is dead, it has to be a zombie, because somehow it keeps getting back up.

Humor aside, the digital asset space went through its annual crash last month, and while many newcomers were shocked, this was nothing new for the space. In November 2018 and March of 2020 for instance Bitcoin experienced two 50% thirty day corrections. This is not to mention the half dozen 30-40% corrections that Bitcoin sprinkles throughout its average bull run.

In today’s market update I will be dissecting four key health metrics of the digital asset space to determine whether this is a mere pullback amidst a bull run or the beginning of a bear market. We will review the following:

Fundamentals

Technicals

Sentiment

Market Structure

It’s times like these where it’s more important than ever to follow data driven decision making and not fall victim to emotions. Volatile markets can bring forth vast irrationality, both on the way up and on the way down. However navigating through the market’s irrationality is what can allow immense opportunities.

I hope you enjoy this update,

Felix Hartmann, Managing Partner

Digital Asset Market Health Check

Fundamentals

A: Bitcoin - SOV

In order to understand whether or not bitcoin continues to function strongly as a store of value, we have to study the holding patterns of its users. Continued holding of long term owners suggested a further cemented belief in the assets nature as a store of value. Sudden selling would suggest a shift in this narrative.

On-chain UTXO analysis proves that there have never been more Bitcoins held for a period of 3 years or longer. The selling that we have experienced did not come from early investors, or aged coins, rather, selling happened from coins purchased in the last three months, pointing at a speculator driven sell-off.

From an institutional appeal as a reserve asset, while Elon Musk received much heat for initially criticizing Bitcoin, Tesla continues to hold Bitcoin on its balance sheet.

Michael Saylor the CEO of MicroStrategy equally confirms the stance of sticking to Bitcoin as a reserve asset:

And Square soundly joined them:

So not only did all the major public companies holding Bitcoin re-affirm their support for the asset publicly after the crash, but we also saw new supporters join, likely after using the drop to build a position.

Notable new entrants into Bitcoin include no other than Ray Dalio, who stated “Personally, I’d rather have bitcoin than a bond” and acknowledged owning the digital currency, and the legendary activist investor Carl Icahn says he is getting involved in digital assets in a big way with over $1bn to be invested. And finally Goldman came out saying that it’s time to take Bitcoin seriously.

It stands to reason that while there was a lot of speculation, some of which we will address in our analysis of market structure, the fundamentals of Bitcoin have not changed. If anything, they have only gotten stronger.

B: DeFi - Value Accruing Tokens

This section can be kept brief as I will refer to our market update from last month. In it I highlighted how many projects in decentralized finance had ridiculously undervalued valuations with PE ratios in the 20’s. After this crash the valuations have become even more ridiculous with some in the single digits and some in the 10’s. These hyper-growth assets are currently trading at multiples you’d find a utility company trading at.

Beyond the earnings and multiples, we once again saw DeFi survive a stress test of epic proportions. I genuinely doubt most commercial banks could survive a single day crash where every piece of collateral on their books gets wiped in half or even cut down by 80%. Well that’s exactly what every major decentralized lender from Maker to Aave to Compound went through over the last two weeks. And not only did they stay solvent, they made a killing doing so. Maker for example earned an additional $9.3mm just from liquidation penalties and as a result burned roughly 34bps of its entire supply just in May.

DeFi is alive and thriving, and neither earnings nor capabilities point towards these assets being overvalued at where they currently stand.

Technicals

Sometimes it’s important to recognize that most market participants in crypto are not yet as educated on fundamentals as we are, and merely trade momentum. This means that fundamentals can be ignored in either direction for extended periods of time. While technical analysis is no dark magic, it does give us historical context particularly when we focus on larger time frames.

One of my favorite tools in particular for knowing where in a trend we are, is the RSI (Relative Strength Index). The RSI tells us when a trend is either overbought or oversold. Historically the daily RSI rarely goes into oversold territory, and the few times that it has in the last 5 years were some of the best times to accumulate as the bottom was either short lived, in, or almost there.

But lets say you want to play devils advocate and say this is the beginning of a bear-market. Even then, now is the time to be long. Every single top saw a 70-200% recoil after the initial breakdown. Short sellers will be caught with their pants down and liquidated, while many that chose not to buy the dip come back buying higher in a frenzy. The real test will be whether or not old highs are met with strength or weakness. That is the moment where paying attention is important.

Sentiment

As the old saying goes, “Buy when there's blood in the streets even if the blood is your own”. The market flipped from euphoria to panic with the blink of an eye. Both emotional states are misguided.

As the Crypto Fear & Greed Index shows, we went from peak greed to peak fear. The last time the market was this fearful was at the lows of the lows of the pandemic crash of March 2020. Nearly every point of extreme fear has historically been an incredible buying opportunity. Not only that, but these wipeouts allow the market to re-calibrate and grow sustainably based on honest and real expectations. Opportunists looking for a quick buck leave, while the builders set up camp and continue to provide value to the industry with a long term mindset.

Zoom out. Nothing has changed.

Market Structure

Market structure is easily the most important facet to look at in order to understand the recent sell off.

On exchanges we saw billions of dollars wiped away by leverage liquidations. May 19th alone saw around $8bn in forced selling as borrowers had no choice but to close their levered long position in order to stay solvent on their futures contracts or margin balances.

On-chain we saw 7 of the 10 largest single day liquidations happen in May alone.

It’s glaringly obvious that the market was over-leveraged going into this correction and much of the selling that occurred was not intentional selling, as much as forced selling by parties that had borrowed too much. This ultimately led to a cascading effect dragging prices to lows not seen in months.

Massive liquidations often lead to capitulation wicks where all leverage wipes out, and funding rates are reset. We saw exactly this happen with many digital assets bouncing 50-80% off their capitulation lows, with funding rates either in the negative due to over-levered short sellers or at regular rates suggesting a fully flushed out futures market.

Final Thoughts:

The market can always stay irrational longer than you can stay solvent, but as long as you stick to spot investments there is no deadline to your solvency. That in itself is a massive advantage and source of alpha the few more veteran crypto funds like ours with over 3 years under our belt navigating these markets had to learn the hard way. Downside volatility is a necessary evil that comes with the beauty of upside volatility, and it will continue to express itself radically fast as long as the crypto market offers highly levered products such as 100-1 leveraged futures contracts.

While the short term will be determined by market participants, fundamentals, technicals, sentiment as well as market structure suggest to us that we are at or near the bottom of this short to medium term correction. Blood was spilled, and it’s time to buy.

In the News:

May 20th: English - The Pomp Podcast

May 21st: German - Der Digitale Minimalist Podcast

May 30th: German - Cash Magazine: «2025 wird der Kryptomarkt mehr wert sein als der Nasdaq»

TIMESTAMP 06/01 2021:

DJI - $34,570

S&P - $4,202

BTC - $36,300

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit hartmanncapital.substack.com

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(Disclosure: Hartmann Digital Assets Fund, LP and Hartmann Ventures, LLC may be allocated to some of the projects mentioned in this market update.)

To Investors and Colleagues,

As the Digital Asset markets keep accelerating, crypto asset managers like myself often have to pause and scratch our heads at the unbelievable dichotomy between what the masses and media view as the digital asset space, and what really is happening in the trenches.

If you tuned on the news, or for that matter ‘Saturday Night Live’, you’d believe the future of Digital Assets are meme-coins named after dogs, from Doge (worth $66bn) to Shiba Inu (worth $15bn).

Claiming that these projects which openly started as jokes, represent the Digital Asset space, is like claiming that the mac ‘n’ cheese you heated up in the microwave is the future of fine dining.

In today’s market update we are going to dive deep into a select number of projects that we are backing in order to highlight the vast differences between what is perceived as the trend in Digital Assets, and what funds and institutional allocators are actually looking at. These of course are neither buying recommendations, nor is this financial advice, as we may change our stance at any time. It is rather meant to give you an insight into the modern day analyses of crypto assets.

You’ll find that while the projects highlighted by the media are nothing but ‘greater fool’ plays that are boiling in bubble territory, many of the projects in the decentralized finance space are so undervalued that even Ben Graham or Warren Buffet would like them.

Let’s dive into it,

Felix Hartmann, Managing Partner

Fun-damentals v. Fundamentals

The crypto space as covered by main-stream media or as we like to call it the ‘meme-token’ space could not be more different from the Decentralized Finance (DeFi) space.

Neither Bitcoin, Ripple, nor Dogecoin accrue value for their users. They all serve as potential currencies. Currencies traditionally are not great investments unless there is a demand for said currency that outpaces its inflation.

Dogecoin for example has a current annual inflation rate of 3.85%, so you might as well hold dollars.

XRP on the other hand has Ripple labs and its founders control more than 50% of its entire $120 billion supply. I wouldn’t trust a currency who claims to be decentralized yet is more centrally controlled than quite a lot of fiat money.

And here is where Bitcoin shines, Bitcoin has a fixed supply schedule making it a strong store of value beyond being a pure currency. Additionally Bitcoin ownership is more fairly distributed than the likes of XRP with 50% sitting in the hands of over 16,000 wallets rather than 1 centralized entity (not to mention that many of these 16,000 wallets likely represent exchanges and lost early wallets spreading 50% ownership likely to the hundreds of thousands).

But that’s where the conversation also stops. Beyond fixed supply economics leading to supply sinks due to holding behaviors, these type of assets have little fundamental value that is permanent or can lead to asset appreciation beyond the hopes of continued buying by market participants.

Decentralized Finance protocols have stood out from the rest of the market for being value accruing assets. Many of them have revenues, profits, and treasuries that enable us to fairly value them similarly to equities. Here are four Decentralized Finance networks that make it evident that we are neither in a bubble nor anywhere close to being overvalued:

MAKER DAO ($MKR) - The De-Central Bank

MakerDAO is not a new kid on the block(chain). Quite the opposite, since March 2015, the Maker team has relentlessly worked on creating the first successful decentral bank and decentralized stablecoin. While the past 6 years presented the team with countless trials and tribulations, the 2020 global liquidity crisis being the latest major challenge to the protocol, Maker has successfully found product market fit and is scaling at unbelievable speeds.

At the heart of it, Maker enables anyone to borrow money in the form of DAI, the protocol’s stablecoin, in exchange for providing collateral. Maker then charges an interest rate, the proceeds of which are used to buy and burn the MKR token.

A few noteworthy achievements:

Since December 2017 DAI/SAI has successfully traded continuously at a close to 1-1 peg against USD, without being dollar backed.

Since launch there was only one major instance where CDPs were under-collateralized in the wake of the 2020 liquidity crisis. The decentral bank resolved the issue via decentralized governance by issuing new MKR tokens.

Maker has now issued close to $5 billion worth of its own decentralized stablecoin.

Maker now earns over $200 million a year in profits

Despite rising a cool 713% this year, Maker continues to be undervalued as its fundamentals have risen even faster. With a P/E ratio of 19.99, you will be hard pressed to find a hyper-growth tech stock with orders of magnitude of growth left trading at such a low multiple.

One fun fact for the road: In 2020 Deutsche Bank made 624mm Euros in profit with 1.3 trillion Euros in assets with close to 85,000 employees. MakerDAO is on track to surpass Deutsche Bank in profits this year, already now making roughly 30% of Deutsche’s profits with just $14 billion in assets and just a little over 100 team members.

Code is eating finance. Step aside dinosaurs.

NEXUS MUTUAL ($NXM)- Decentralized Insurance

What happens when all the sudden $155 billion are being banked in smart contracts?

People smarter than the original developers try to find ways to exploit those smart contracts and run off with the money. Goodbye bank robberies, hello smart contract exploits.

Every month some project gets attacked for millions of dollars. Quite naturally this comes at the cost of trust. How can anyone ever feel comfortable enough to put their life savings into code that may or may not be vulnerable to attacks?

Enter smart contract insurance.

Nexus Mutual is the biggest decentralized insurance provider, currently focusing on both smart contract exploits and bugs, as well as centralized exchange hacks.

Who would use such a niche product?

Currently there are over $1.1 billion in on-chain funds insured via Nexus Mutual.

Nexus has thus far collected over $40 million in insurance premiums.

The way it works is that NXM token holders stake their NXM against projects they deem safe. In exchange customers pay these stakers their premium. In the event of an exploit, stakers would have their NXM slashed and the insured would receive ETH as a reimbursement from the capital pool.

While NXM sports around a 25 P/E ratio based on the past 12 months premium collected, it’s worth noting that half of NXMs premiums were collected in the last 45 days alone. Yes the last 45 days were as profitable as the 11 months preceding it.

NXM is also unique for the fact that it uses a bonding curve with a locking mechanism to ensure a minimum capital pool balance. Currently NXM valued at $1bn in market cap, is backed by $620mm worth of ETH, making it one of the few projects with a tangible book value.

Like MakerDAO, as long as Nexus keeps collecting insurance premiums, and ether maintains some value, it has both upward price pressure due to earnings and a price floor due to book value.

BANCOR ($BNT) & SUSHI SWAP ($SUSHI) - Decentralized Exchanges

After watching Coinbase IPO near $100bn, I don’t think I have to explain the value or demand of a crypto exchange. However what if I told you there are entirely decentralized exchanges that allow you to trade any crypto asset in existence for any other crypto asset, without underlying any jurisdiction or depending on third party custody. Enter decentralized exchanges.

Ever since last year decentralized exchanges have experienced massive growth in the decentralized exchange space, to the degree that a few decentralized exchanges have surpassed Coinbase in daily volumes at times.

While not all decentralized exchanges successfully capture value for token holders, two stand out lately.

Users of Bancor did just shy of $40mm worth of trading volume on the decentralized exchange in October of 2020. Mere 5 months later, Bancor surpasses $3bn in trading volume in the month of April.

5% of the trading fees of Bancor are used to permanently reduce the supply of BNT. This new structure was introduced in the beginning of April and has already locked up $1mm of BNTs supply forever. Annualized this is close to $12mm, which would cause an annual deflation of around 1%, not taking further growth into account.

Sushiswap another popular decentralized exchange does as much as $1bn in trading volume a day, surpassing the likes of Kraken on some days. Sushi distributes .05% of all trading volume to Sushi token holders who stake the token. In April for example, Sushi did $11.5bn in trading volume, leading to $5.765mm in profit for Sushi token holders that were staking their tokens (only 31% of all holders, multiplying earnings for those staking by about 3x). Annualized we are looking at $70mm in earnings, which at a $4bn market cap leads to a 57 PE ratio. Considering that just 31% of sushi token holders are staking their tokens, this means that the adjusted PE ratio is 17.7.

Final Thoughts:

A few things should become vastly evident:

DeFi is incredibly real, with earth shattering profits and growth

DeFi is very very very far from being in a bubble

Several DeFi protocols are quite literally a steal with PE ratios half of that of the S&P 500 (which is deemed a conservative investment)

DeFi presents the rare opportunity of being allocated to both value and growth at the same time

You are likely under-allocated DeFi and real digital assets (and hopefully not exposed to the popularized trash that is Doge, Shiba, Safemoon, XRP, ADA and so forth)

The Digital Asset market has matured a lot over the last 12 months, and it is time we start looking at individual sectors therein, rather than continuing the outdated trends of bundling them all up under misnomers like ‘crypto currencies’ or ‘alt coins’. DeFi presents a generational opportunity, only comparable to Bitcoin itself, and we are still unbelievably early. Single commercial banks hold over 100x the assets that the biggest DeFi protocols holds, so we have not even scratched the surface of what’s possible. And instead of fancy skyscrapers and million dollar bonuses, the value accrued by DeFi goes right back to the token holders.

In the News:

May 20th: English - The Pomp Podcast

May 11th: German - Block52 Podcast

May 7th German -FAZ (Frankfurter Allgemeine Zeitung): Krypto-Welle beherrscht die Blockchain

April 22nd: English - Java with Josh Podcast

TIMESTAMP 05/15 2021:

DJI - $34,382

S&P - $4,173

BTC - $48,000

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit hartmanncapital.substack.com

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To Investors and Colleagues,

Digital assets have had a banner year in the last 12 months. Not only did the emerging asset class recover swiftly from the liquidity crisis a year ago, but more importantly we saw a major shift from a narrative driven market around ‘promise’ and ‘potential’ to a market that’s slowly driven by hard fundamental factors such as total value locked, price to sales, and book-value. We are no longer just seeing Bitcoin dominate the headlines for being the world’s most desirable store of value, but are now also starting to see the DeFi and NFT space gain their first mainstream mentions.

We’re among the first firms to take a quantitative fundamentals first approach and believe it will eventually become the standard in valuing this emerging asset class, as it has been the standard in equities for decades.

In today’s market update I’ll be sharing with you why I believe this is a super cycle rather than yet another 4 year cycle, how the landscape has drastically changed over the last few years, and what headwinds and black swans we are paying attention to.

Sincerely,

Felix Hartmann, Managing Partner

What if it’s 2003? Exploring the Super Cycle

I’ve spent more time than I’d like to admit studying the past cycles of crypto assets. They work like clockwork. But one has to wonder why that is.

For 12 years we had near perfect 4 year cycles resulting from the following chain of events:

It all starts with curious innovators building cool tech.

They ship.

A paradigm shift occurs (2010: Non-sovereign internet money, 2014: Silk Road and adoption, 2017: ICOs & Smart Contracts, 2020: DeFi & NFTs).

Investors enter the market.

Price goes up.

Speculators enter the market.

Price goes parabolic.

Hype enters the market.

Price becomes grossly overvalued.

Fundamentals cannot keep up with price appreciation, investors take profits.

Price corrects.

Speculators panic sell.

Long leverage liquidates creating lower lows.

Team funding dries up, speed of innovation slows, and some devs quit.

Investors get disillusioned and sell.

A long valley of death forms on the chart while innovators continue to build.

Finally they ship their next release… and we start all over again.

How can we end this cycle of hype and disillusionment?

The key is to keep shipping new releases at a fast pace and not give disillusionment a chance to slip in.

And that’s exactly what we have been observing over the last 12 month.

Every single day a new feature, V2, or main-net goes live. Every single day there is new genuine reason to be excited about the digital asset space, and every single day there is more and more hard fundamental value backing up the seemingly lofty valuation numbers.

The question I started asking myself and my team is: What if it’s 2003?

After the dot-com bubble burst and tech experienced a long bear market similar to the digital asset bear market of 2018-2020, dot-com has been in one continuous bull market super cycle.

Just like digital assets currently developing at a break neck pace, so did the tech giants over the past 2 decades. And while tech experienced occasional 30-50% deleveraging and corrections, anyone with a long enough time horizon made life changing money.

While we stay conscious of some of the headwinds that could invite such a 30-50% pull back (explored in part 3), we firmly believe that anyone with a > 5-year time horizon should take an honest assessment of their digital asset allocation. It is most likely too small if we consider the perspective that digital assets are an evolution of most traditional asset classes. In fact I am willing to wager 1 BTC that the digital asset space will be larger than the Nasdaq by 2025.

Playing a super-cycle requires a handful of different mindsets:

Betting on teams that build to last

Not getting caught up in the hype of the day but doubling down on sound theses

Putting traction and value driven analysis before promise and potential

Ensuring teams have the drive, desire, and the financial resources to last a decade

Trading a super-cycle on the other hand requires mainly one thing:

Managing risk above all else as we will be given countless thematic rallies to trade.

Now that we know what a super cycle could look and feel like, let’s explore who will be some of the players partaking in it.

Digital Asset Thematic Sectors

The biggest misnomer this industry has not seemed to be able to shake off is the term ‘Crypto Currency’. What started as an innocent summary until no later than 2014, has become a fairly ignorant classification as perhaps less than 5% of all digital assets are meant to be a form of currency or money.

So before we get into what thematic sectors we are exploring, let’s quickly redefine what asset classes exist within Digital Assets.

Crypto Monies: From digital gold like Bitcoin to the dozens of algorithmic stable-coins we have a few serious players aiming to take a bite out of both gold’s market cap as well as M2. Arguably the two players are approaching it in opposite ways. Bitcoin is a store of value first and foremost and a medium of exchange second. Most algorithmic stable-coins are media of exchange first and foremost and stores of value second depending on their rebasing mechanism.

Crypto Commodities: While BTC is purely money, ETH is closer to being a crypto commodity. In fact that’s how the team framed it when they first ICO’d and the CFTC agrees. Ethereum in a way functions like oil in the real world. You pay a ‘gas fee’ (yes that is what it is actually called) anytime you do a transaction on the Ethereum blockchain. And with a future proposed upgrade titled EIP-1559, some of those gas fees will actually be burned and destroyed (similarly to how oil is used up). Many base layer protocols that offer smart contract infrastructure for Layer 2 protocols and dApps use a crypto commodity model.

Non-Fungible Tokens: All the craze in 2021, NFTs have been around for several years and represent all unique values on the blockchain, whether that is art, collectibles, or even digital plots of land within virtual worlds.

Pass-Through Tokens: As most projects are fully decentralized and have no central entity behind them, many projects have started passing governance rights as well as earnings of a network on to token holders. This is the sub-category of digital assets we focus on in particular. These tokens, giving you ownership of a network are incredibly powerful as they have real value and growth as part of their token structure.

Within the pass-through token landscape there are countless thematic sectors we are paying close attention to as we find they will be the focus in the next few years. In each scenario, we find that owning the infrastructure will be the most valuable asset:

DeFi - Decentralized Finance: DeFi provides the infrastructure that enables every single financial service to be offered as freely and borderless as Bitcoin. Already today you can swap, lend, borrow, insure, and even utilize advanced financial products like perps, options, tranches, and more all without a middleman via the countless decentralized finance products that now bank over $43 billion in assets.

dWeb - Decentralized Internet Infrastructure: What good is DeFi if it’s all built on AWS? dWeb is an emerging sector we are paying close attention to that aims to decentralize the entire internet infrastructure, from connectivity, to DNS, VPNs, browsers, storage, hosting, encoding and more. The idea is to own unstoppable infrastructure that enables decentralized technologies to become immortal like Bitcoin.

The Metaverse - the Decentralized Social Fabric of the Internet: The Metaverse while sounding quite abstract is incredibly interesting. Whether its gaming, virtual realities, digital identity or NFT platforms, the Metaverse encompasses the digital world from the angel that it is a reality of its own. When you realize that virtual realities will eventually be of the economic size of nation states, it’s a no-brainer to own the infrastructure that enables the Metaverse.

DAOs - Decentralized Autonomous Organizations: DAOs are like global, borderless, and decentralized LLC/corporations. In a globalizing world, I’d be happy to bet that by 2030 there will be more DAOs than LLCs. And that by 2024 the average startup will launch as a DAO (either instead of or as well as through an LLC). So much of the trust issues like share ownership and company bank accounts can be solved via tokenization and multi-sig wallets. We are paying close attention to the protocols that will enable this transformation and usher in the age of DAOs.

Privacy Infrastructure: If you ever used DeFi, the first thing you will realize is how awesome it is, the second thing you may notice may be the high gas fees on Ethereum, but the third thing that most are not paying attention to just yet, is how transparent they are. On-chain analytics make you publicly auditable. That’s great for a publicly traded company, but you wouldn’t want your bank statements to be on google updating real time. We are exploring both natively private blockchains as well as tools that can bring privacy to existing chains.

With these 5 themes in mind, we see an avalanche of investing opportunities awaiting us in the coming years.

Risks, Headwinds, and Black Swans

As the famous saying goes, “The most dangerous words in finance are ‘this time is different’”

While I am excited for the future and think that abundance is in store for the digital asset space, it’s always important to pause, reflect, and ask oneself what the blindspots may be.

While there are a few, that I will briefly address, I genuinely do not see the risk of nation state bans. This is a thought experiment I’ve gone through several times, and 10/10 times it ends with the loser being not the digital asset space, but the nation attempting to ban it. Nobody has ever successfully banned digital assets, many have tried. And the ones that do try to ban digital assets only fall further behind in relevance and economic power as tech talent leaves their country for a more forward looking home. Innovate or die.

In terms of genuine risk we are actively monitoring, here is what we are paying attention to:

Rising interest rates and overall tightening fiscal policy leading to a risk-off market environment. The Fed’s tone has started to shift, but there seems to be no intention of the current administration to do anything but provide more stimulus.

New widespread financial regulations. In the aftermath of Archegos meltdown, Melvin Capital fiasco, and the entire GME saga is likely going to lead to some form of overhaul in the financial sector that is still unclear. While a risk, this is also an opportunity, as over-regulation of equities is only going to make digital assets more interesting.

Negative Skew Tail Risk. Whenever there is a crowded trade that is guaranteed, something is bound to go wrong. The famous Grayscale arbitrage is one of them. The short version is following: Institutions had the ability to buy GBTC at NAV and then market sell on brokerages after a lockup where it was trading at a significant premium. This premium existed for years and everyone assumed it would always be there. What followed is several crypto institutions doing this trade synthetically via leading lending platforms, utilized leverage to play this ‘guaranteed’ trade. GBTC is now not trading at a premium but rather a double digit discount. This situation could still end poorly for a few firms in the space and we are actively monitoring the ripple effects, whether that is a lender filing for bankruptcy or a major fund failing, being forced to unwind a massive book of positions with limited liquidity. Either way we are monitoring the situation actively given the fact that Grayscale makes up over 3 percent of Bitcoins market cap.

Final Thoughts:

While the market has been on an incredible rise, and individual sub-sectors such as digital monies and the Metaverse could use some cooling off, we find that the space has likely entered a super cycle in which money will rotate within, while new allocators are joining the space daily. All risks currently assessed may lead to short term pain at most, but the market as a whole continues to be healthy and growing. Teams are working overtime to ship new product in what has become an incredibly competitive space, and capital is flowing into the markets like never before from smart and institutional money.

TIMESTAMP 03/30 2021:

DJI - $33,066

S&P - $3,949

BTC - $58,658

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit hartmanncapital.substack.com

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Welcome to 2021! If you are like me and too busy to read the many newsletters you are subscribed to, I hope you enjoy the audio-track of this market update on your next drive or run.

To Investors and Colleagues,

2020 was a historic year. In all the worst of ways societally and politically, and in all the best of ways financially for anyone who was long assets and short currency.

2021 is off to yet another curious start, appearing to be the sequel that no one asked for. But like 2020, this year too is likely to offer incredible financial opportunities if identified correctly.

The balancing act of 2021 will be correctly assessing true levels of monetary devaluation. What started as year long warning cries from crypto natives and gold bugs about currency debasement has become the macro theme of 2020/1. It stands to reason that when a theme has become mainstream investment philosophy, it’s important to assess whether markets are accurately pricing in fears of debasement or are overstating them.

On one hand we saw the M2 Money Supply grow a staggering 25% in a single year validating the worst fears. On the other hand we saw companies like Tesla approach the $1 trillion mark, now standing at a frothy PE ratio of ~1,700. While I’m a big fan of Musk (in fact I bought my first TSLA shares 8 years ago at the post-split price of ~$28), these numbers should make even the greatest supporter raise an eyebrow.

Over the long term, we are likely to continue seeing the strongest store of values (Bitcoin & gold) and the most future oriented productive assets (DeFi & tech stocks) act like monetary black holes, sucking in liquidity, rising further and further as all the wealth in the world seeks a place to be parked in a time when bonds and cash are dead.

Along the road there will be shakeouts, motivated by over-leveraging (very likely), slowing or termination of monetary easing (unlikely in the near term), or regulatory intervention (whether on the digital asset front or on the taxation/capital gains front).

We find that the soundest returns will come from combining value driven investing with hyper growth assets. Such a description may be considered a unicorn, but that’s exactly what the Decentralized Finance space offers. Revenue generating decentralized networks with reasonable market caps, that are likely to unseat the largest incumbent financial institutions.

In this month’s market update we share with you the road ahead in 2021, and how the entrance of new players is likely going to affect the digital asset market in the near term.

I hope you have a happy and healthy start to 2021.

Sincerely,

Felix Hartmann, Managing Partner

The 2021 Digital Asset Roadmap

Maneuvering the Dollar Trade

Images say more than a thousand words they say. Look no further than the performance of the Dollar Index (green) versus Bitcoin (orange).

It’s no longer a secret that the historic monetary easing by the Federal Reserve has sent the strength of the US dollar spiraling down in value for the 11th month now.

The thesis has become so easy, that average retail investors are using OTM call options as their daily strategy under the presumption that ‘stocks only go up’. And if enough people subscribe to this thesis, stocks do indeed only go up! Short sellers have been taught their lesson, sitting bloodied on the sidelines, while longs are starting to deploy more and more leverage due to what appears to be a fool-proof trade. In fact as of September 43% of retail investors have stated the use of leverage, a number that has surely only climbed since.

The irony is that long term, it is indeed very likely a fool-proof trade. However the catch-22 is that the very belief of it being fool-proof makes it no longer fool-proof. As leverage overextends we are likely to see enormous shakeouts and leverage blow ups from time to time which can instill short term fear phases.

The key is to do the opposite. Avoid leverage at times when the market appears to know no way but up, and deploy size during short lived periods of fear, knowing that the macro theme of USD devaluation is not going away anytime soon. It seems obvious, yet I dare you to survey just 10 retail investors and 10 institutional investors and you are likely to find little to no dry powder. The exuberant see no challenge to their folly, and the cautious are trying to make up for missing out on the fastest recovery we’ve ever seen. Ultimately both the apes and the laggards will get punished.

The road ahead in a democrat run United States has monetary easing written all over it. The blind spot few are paying attention to however is short term over-leveraging. We expect a long term down trend for the USD, but counting out a reversion to the mean in the interim is the same as using the most dangerous words in finance: ‘this time is different’.

The (digital) Gold Rush

As the dollar embarked on its roadtrip down the highway to hell, investors across the world were scavenging for places to park their money. While Bitcoin was an unlikely thesis we accurately predicted this early in 2020, “The first big players are accumulating, not tomorrow but today. And their foresight will likely pay off, and when it does, all the vanilla equity funds out there will copy the legends and follow suit. No one wants to be first. But also no one wants to be last.”

We’re seeing this mentality now play out in full force. No one wanted to be first for the last 3 years during the bear market, and now all the sudden, asset manager, CEO’s, and wealth managers are scrambling to get allocations just to avoid being last.

While the force of this ‘rush’ may subside from time to time, just as we saw gold leveling off despite historic levels of inflation, the cat’s out of the bag in terms of global awareness when it comes to digital gold (Bitcoin). While many avoided even touching Bitcoin after the ICO bubble burst, you now have nearly every asset manager in the world at least studying up on it, from Dalio to Marks.

This avalanche of awareness has shifted Bitcoin out of the innovator stage and into the early adopter stage.

Globally there are estimated to be 100 million Bitcoin owners based on on-chain wallets. Off-chain we see that major exchanges like Coinbase have about 35 million users. So no matter how you slice it, domestically or globally, we are either just starting to enter the early adopter phase or halfway in it.

This is great news, as it shows that we are still extremely early, both by global standards (7.8 billion), G20 (4.6 billion), or even just NATO countries (1 billion).

So while present day parabolas and out of the blue fervor may raise an eyebrow and eventually break with typical corrections around 40%, the long term could not be more bullish. Today’s correction range of $20-24k/BTC was yesterday’s overheated selling zone. The truth is most people (7.7 billion to be exact) are still not allocated to Bitcoin, and will one day need and want to be.

In other words, we haven’t even gotten started.

Finance 2.0

Remember when China built a massive 1,000 bed hospital in eight days? If you can spare a minute here’s a video:

We are currently witnessing the cypherpunks pulling off the same feat on a global scale for the entire financial system.

Since the summer of 2020, Decentralized Finance has witnessed a Cambrian Explosion that appears to know no slowing. And rightly so. While we started as investors in DeFi in early 2019, we have since become super users of Decentralized Finance ourselves.

Decentralized Finance does to finance what Bitcoin did to money.

We’ve seen the sector grow from finance primitives such as exchanges, to now complex products like options, debt tranches, insurances, and more. In the span of perhaps no more than 12 months we saw nearly every single financial product get recreated on-chain in a decentralized and interoperable way.

We continue to believe that DeFi will be the biggest sector in the near term, and will be the ‘Zero to One’ innovation of the decade, continuing the trail that Bitcoin blazed in the last decade.

The Great: DeFi has orders of magnitude of growth still ahead of itself. 100x+ unicorns will be possible in this space.

The Challenging: DeFi moves at warp speed, with new innovations and projects launching daily, keeping a team of full-timers busy 16 hours a day (good thing we’re hiring ;) ).

New Territories

With the rise of Bitcoin, Ethereum and DeFi, and the recent increase in governmental and big tech authoritarianism, it stands to reason that push back may eventually be targeted at this asset class.

As a result, we are exploring more technologies that make this sector even more anti-fragile than it already is.

You cannot ban something that is immortal. While the backend of both BTC and ETH are already unstoppable, we are exploring more sectors within decentralization that will enable every part of the Web 3.0 experience to be fully decentralized.

This means that every piece of the user interface needs to be fully distributed to create an unbannable and unregulatable internet that will not bend its knee to anyone or anything. A free internet. This is the journey that Bitcoin started and that Ethereum long term seeks to secure with the countless Web 3 infrastructure protocols built on top of it.

Final Thoughts:

While its certainly wise to be hedged for a short term mean reversion of the US Dollar, there is no doubt that Decentralized Finance and Web 3.0 infrastructure will be the most potent investment of the coming decade. The early adopters are buying and the early majority is studying. The next wave will be the biggest, and most are under allocated. While many will try to time the markets, the best way ahead is to continue building your digital asset position for the long term as we are still in the early stages of what is going to be multi-decade trend.

TIMESTAMP 01/18/2021:

DJI - $30,814

S&P - $3,768

BTC - $36,400

For questions reply via email or write me on twitter @felixohartmann

BTC: 33nf4wqwxpS6i3Zwu3toUXxirVj2gWEzi8

ETH: 0x618Ac2930aBd91a486C672f42066190532cFE850

Disclaimers:

This is not an offering. This is not financial advice. Always do your own research.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit hartmanncapital.substack.com

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