Under the Hood - May 2022 - Crypto Autopilot
“If it bleeds, it leads”. And that’s why Crypto’s back on TV
This was a bad month for crypto prices and a very bad month for the prospect of decentralized stablecoins. But the Crypto Autopilot showed a lot of resilience and navigated the turbulent waters like a real champ.
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The OSOM Crypto Autopilot € performance was -20.61% while the Bitcoin performance was -4.03%. That's in a market that lost between 25 and 35% in €, depending on how you slice it. TRX, BNB, MKR, and GALA offered the best support.
The Autopilot holds: MKR: 30.2%; TRX: 30.1%; BNB: 30.1%; KLAY: 8.2%; GALA: 1.2%; BTC: 0.1%
In this month's recap of crypto news, we look a lot at the LUNA death spiral. That leads us to look at why in crypto it's better to have a robot manage your portfolio actively than going with Index Funds. We also look at developments in the Polygon ecosystem and a new protocol by OpenSea. We close with a look at European crypto regulations (MICA) and take the pulse of the Ethereum merge.
For the future, we keep our eyes on much of the same, MICA and the merge, but also Terra 2.0 and Axie Infinity building a more open ecosystem.
And for the details, read below ⬇️ If you don't want to read it 👀, we can deliver it to your ears in a couple of days! 🎶 Just sign up for the podcast. We also have it on Youtube if you don't have a podcast app.
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🔬Markets: “If it bleeds, it leads”. And that’s why Crypto’s back on TV
April was the month of uncertainties and doubts around war, inflation, rising interest rates, stagflation, and misguided regulations. May was the same, but squared, as it saw the addition of the collapse of a Top 10 crypto project and 2 top 10 crypto assets (LUNA and UST). UST had been marketed as an "algorithmic" stablecoin and had worked fine for a few years which had led many people to view it as an alternative to a USD savings account (which paid 19.4% interest) so its downfall was particularly hard on people who thought that their money was safe. This is unusual in crypto since most people are usually aware that it is volatile and behave more or less accordingly. In this instance a lot of people seem to have been taken off-guard, having thought that their assets were relatively safe.
Many of those people have had their finances very severely impacted by the collapse of UST and that has prompted regulators to want to pay even more attention to what is marketed as a "stablecoin". When it comes to regulations, that intention is not misguided.
Did that suddenly turn us, at OSOM, into pessimists? Not quite. We are actually working on a new blog article that details why we remain bullish on the space. It will focus on the similarities with the development of "Web1" (and if you can't wait you can see what Marc Andreesen said on Bankless), the impact of EIP1559 and "the merge" for Ethereum, Decentralized Identities and decentralized social networks (check out Lens), Polygon's business development (👀 Instagram NFTs), developers behavior in "bear markets", the gartner hype cycle & crypto price cycles, development in Web3 user experience, and the influx of risk capital (this is just the latest).
Sure, bear markets aren't fun, but in March of 2020 a Bitcoin was around $5000, Ethereum was around $120 and the total market cap of Crypto was about 8 times smaller. So it's important to distinguish between what happens in the short term and what happens in the long term (A16Z also put out "the state of Crypto" if you want their opinion).
1/ The Global Market Capitalisation of Crypto is keeping on the trend of April and is lower by nearly 26% than at the beginning of the month. The index of the top 200 assets without stablecoins further contracted by almost 30%.
Despite a rebound in the last 2 days of May, Bitcoin closed the month with another loss, slightly worse than in April, of -17.20% at €29,616.64
2/ If we exclude Bitcoin from our calculations and focus on the total value of crypto excluding BTC lost 31.38%. If we take the Top200 crypto assets without Bitcoin and stablecoins, the contraction is 37.29%.
The bottom line is that the market capitalisation of crypto assets is down somewhere between 25 to 35% depending on how you like to look at it.
3/ The OSOM Crypto Autopilot did better than the market, but obviously can't completely go against it either. This month the € performance was -20.61% while the Bitcoin performance was -4.03%.
Since 26 September 2019, that's a 588.24 %performance in € and 75.31% in BTC. That's 105.43% and 23.31% annualized, respectively.
🤿 Autopilot Deep-Dive
💰 What are the holdings in the Autopilot Exactly?
As we enter into the last month of the first half of 2022, the hodlings are as follows. : MKR: 30.2%; TRX: 30.1%; BNB: 30.1%; KLAY: 8.2%; GALA: 1.2%; BTC: 0.1%
✍️ Interesting Crypto Autopilot Moves in May 2022
It would be shorter to talk about the non-interesting moves the Autopilot made in May because this month will probably go down in quantitative investing history as a textbook example of why you should let machines manage investments. And we are preparing follow-ups on the topic for exactly that reason. But let's take a quick look at what happened already.
The major event of the month was the Terra/Luna death spiral, which happened in roughly 6 days. We've talked a lot about the fact that we liked what Terra was trying to achieve, their billions in reserve to protect UST, the Anchor Protocol, and it has done a lot to contribute to the Autopilot performance in the past. But this month it spiraled down to death in just a couple of days. 50 billion dollars of value vanished after a "run on the bank" style event. Luckily, as if it felt it coming, the Autopilot had sold almost all of its LUNA position before the collapse.
The Crypto Autopilot is often compared to "index investing" strategies, but we had argued that in crypto merely going with an index is unwise (whereas we do think it's a pretty good buy-and-hold strategy for the traditional markets). For 2 reasons: the largest assets are by no means a guarantee of quality (DOGE is a Top 10 asset, SHIBA is 16th), and that "tail risk" events are quite likely even with large assets because the market is so young.
We've seen the "tail risk" materialized in the past with Ripple being sued by the S.E.C. and we saw it this month again with Luna going from a Top 10 asset to being virtually worthless. And the consequences are dire. It can easily be seen by looking at 3 different index solutions sold to investors:
A tokenized smart index fund, the Crypto20, which rebalances weekly, lost 40% of its value over May as its LUNA position (about 60'000 LUNA) went from being worth about € 5 million to 0.
Similarly, the Exchange Traded Product (ETP) - which trades on the traditional stock markets(!) - 21Shares Crypto Basket Index "HODL", which rebalances monthly, lost 32% of its value, mostly due to its LUNA position.
The ALTS ETP, also from 21Shares and which rebalances quarterly had almost 20% of Terra going into May, and lost about-46.36% over the month.
When an asset can die in 6 days, rebalancing even weekly exposes investors to very serious risks. Rebalancing quarterly feels borderline irresponsible.
Needless to say, Terra "classic" - now called LUNC - was removed from the investable universe. The new Terra Chain's token (LUNA) was not added to the universe as it currently ranks 2806th in the crypto market caps.
Given the market conditions, feeling like diversification is of the utmost importance in turbulent times, the "maximum weight" an asset can have in the portfolio was moved back to 30%.
Indeed, with the current conditions, a lot of assets are moving in the same direction and so the possibilities for quantitative diversification are very limited, which leads to the Crypto Autopilot algorithm to concentrate positions. After the LUNA death spiral, that led to a portfolio holding 40% of BNB, 40% of TRON, 18.3% of Maker, and 1.3% of GALA. Moving the maximum threshold ensures a little more diversification even if, as you can see above, with 6 positions the portfolio is - compared to earlier versions - quite concentrated.
The immediate effect of changing the threshold was that the algorithm took a larger position in Bitcoin - of about 30% of the portfolio on May 30 - but it changed it for BNB soon after.
🏎️ What are the coins driving the performance?
In this month of May 2022, LUNA obviously pulled the BTC performance in the undesirable direction. But not nearly as much as it could have had the algorithm not divested its position before the crash.
The asset with the “worst” impact on the BTC performance was KLAY. Which, seeing as though it lost around 42% of its value in € over the month, is not surprising. So LUNA, which lost 100% of its value - as the Autopilot divested in time - is only the second-worst performer in the Autopilot portfolio this month. ATOM, XRP, and NEAR which were also held throughout the month did not help positively but didn’t have much of an impact either.
The assets that contributed the most positively to the performance against Bitcoin are - in this order - TRX, BNB, MKR and GALA. TRX is up 31.75% in € in the markets this month following the launch of a stablecoin modeled after, of all things, Terra.
📅 Crypto News & Happenings in May - Month in Review
1/ Terra dies May 12, new Terra 2.0 is born May 28.
Terra had the dream of bringing decentralized and censorship-resistant algorithmic stablecoins to the world and innovated by building on an entirely new Layer-1 blockchain (if you missed our Luna explainers, read this and/or listen to that, you'll see how enthusiastic we were). They had 1.5 billion dollars in Bitcoin to back it up.
It failed spectacularly.
It is hard to overstate the number of people, projects, and startups who got crushed in the process. The implosion of this US$ 50B ecosystem took down LUNA and UST but had ripple effects which led to the erasure of $693B from crypto's market capitalization from May 5 to May 12.
Many people had turned to UST and Anchor as an alternative to a savings account since it was "marketed" (often by Fintech Startups) as a safe asset and protocol. Many people are on the verge of financial ruin and since mid-May Crypto Twitter, Crypto Reddit, and Facebook Crypto groups had projects and individuals pin the suicide hotline numbers to the top of the pages.
In the wake of this debacle, regulators are moving to accelerate the pace of the regulation of stablecoins.
Meanwhile, in crypto, most seem to agree that we will likely have highly regulated stablecoins (and USDC, the most regulated of all USD Stables seem to have benefited currently) in the future but that if you want to live a censorship-resistant and decentralized life you will have to settle for volatile assets. But the volatility you can expect is better than the stability you can't rely on.
An interesting indicator of this trend is that the former head of the Facebook Libra/Diem project - David Marcus - launched a company to work on using the Bitcoin Lightning Network for payments.
Besides the stablecoins (UST chief amongst them), Terra had actually managed to build a very user-friendly and technologically interesting Layer-1 blockchain. They had managed to gather a fairly large number of developers and, not wanting to "throw the baby with the bathwater", people from the ecosystem rallied, discussed in forums, and decided to spin up a new chain through governance.
So from the ruins then quickly emerged the new chain, Terra 2.0. This new chain is not a Fork but an entirely new chain that has no stablecoins and its token-holders are those who held LUNA and UST before except TerraForm Labs, the South Korean company that had given birth to Terra (1.0) in the first place. It's an entirely community-owned chain with no clear steward.
Many have speculated in the past that a large part of the value of any crypto assets is the value of its community. Properly valuing community has been very elusive. Maybe Terra 2.0 will finally give rise to a "natural experiment" in valuing communities.
2️/ Even if you would be forgiven for thinking that the collapse of Terra was the only thing to happen in May, it wasn't.
Where Terra had a horrible month, Polygon had an amazing one, mostly bringing Web2 to companies to Web3. Last month they were helping Twitter pay creators with USDC, this month Polygon is working with Instagram on NFTs. Then they did eBay's first NFT drop. Then the largest stablecoin - USDT - announced it was coming to Polygon. In total, they had about 10 cool things launching this month, and their blogging team can't even keep up.
3️/ For NFTs, there was one major announcement this month (and it's not the fact that most of them are currently very illiquid, even if that is also true): OpenSea, the #1 NFT marketplace released a protocol for NFT marketplaces called "Seaport". Atareh.eth did a good analysis in a Twitter thread so we will be copying the most interesting bits of the argument. Here is why it's important:
Right now, Opensea is a marketplace platform (like Facebook). The platform offers the service of letting you buy and sell NFTs. Opensea (the company) controls the platform 100% - so any changes to the code (such as accepting $APE) are centralized. In contrast, protocols are like "standards". The one we're all familiar with is Email, which uses SMTP, or Simple Mail Transfer Protocol. It's the standard protocol for sending emails across the Internet - every email client from Google to Yahoo uses it. The big thing that protocols let you do is "transfer" your account - or interoperability. If you don't like using Yahoo because you think their layout is ugly and you're getting too much spam, you can always port it to Gmail and use their client instead. So Opensea is helping decentralize the buying/selling/trading of NFTs by launching the Seaport protocol. Anyone can build an NFT marketplace using the protocol because it's decentralized and open source. In the coming years, we should expect to see way more marketplaces being built. More competition = better + faster innovation I think this is the NFTs "Uniswap moment". What happened after Uniswap? DeFi Summer. Perhaps there's another NFT summer on the horizon soon enough...
4/ When April ended we said we would be watching for a couple of things: MICA, the Merge, and KAVA.
So, first, what happens in the EU with the "Markets In Crypto Assets (MICA) Regulation"? It was a little underwhelming because one of the main actors got COVID and so they couldn't meet as scheduled.
There are currently still some disagreements between the council, the commission, and the parliament (on important topics that should be discussed calmly) and while all the politicians and technocrats are still adamant that they intend to wrap things up before the end of June (and the French presidency of the EU) the sentiment from the industry participants engaging in those discussions is that it will likely have to be decided under the next presidency.
The Ethereum merge and its move to proof of stake: it looks like it is still slated for August, and Ethereum will have its dress rehearsal with one if its "testnet" should happen on June 8. If all goes well, they will transition two other testnets before transitioning Ethereum for good.
However, one indicator that everything was on track for August was that the developers had not delayed the "difficulty bomb". But now they have delayed it. It doesn't necessarily mean that Ethereum 2.0 will be late (again), but it means that there won't be so much of a "burning platform" to help with the feeling of urgency.
Aside from the beauty of tech, from an investment perspective, we can't wait to see what the Ethereum Merge does to the price of ETH. Here is why:
- We ran the numbers again and we see that today there is roughly 5 million ETH created through Proof Of Work (yearly).
- And we see that in the Proof of Stake setup, there will be a little less than 1 million ETH created a year.
- We also see that since Aug 5 2021 and the implementation of "EIP 1559", ETH is being burned by transactions to an average of ~2.9M ETH per year.
- Meaning that instead of seeing an annual "net" issuance of 2.1 million ETH (=~5M-2.9M), we could see of "net" issuance that is actually negative of approximately -1.9M ETH (= ~900K-2.9M).
If the laws of supply and demand we saw in our ECON101 class are any indication, then that should do something to the price. If today there is enough demand to absorb an additional 2 million ETH a year on the market and that demand remains constant while supply evaporates, it's scientifically impossible for it not to move, or we need to rewrite economics textbooks. But that's kind of what crypto is doing anyways, so there is really no telling if, and in what direction, it will move 🤷.
Unfortunately for KAVA, not many people cared about its mainnet launch in the middle of a meltdown. But it did launch (15 days late, probably for the better). We're curious to see where it takes them because they are bridging 2 of the most interesting ecosystems together (when they are fully done with the bridge, which should be soon).
💎🙌 What Does June Have in Store for us?
Hopefully the end of the Ukraine-Russia war. And less financial ruins for people in Crypto who didn't understand what they were investing into. But more precisely, this is what we'll watch out for:
1/ We will scrutinize the Ethereum dress rehearsal on June 8. Keeping our fingers crossed.
2/ We'll keep tracking the European MICA regulation to see if they get it done or wait a little more to make sure to get it done right. We're rooting for the European Crypto industry here - and Europe's digital sovereignty - so we'd rather they do get it right so A16Z feels like it has to move its funds here, and not see European projects feel the need to move to Silicon Valley (again).
3/ Even though it's now entirely out of our investable universe, we'll keep an eye out for Terra 2.0 to see how the community does and how "community" is valued by the market.
4/ Axie Infinity is going to make Axies available to other games. It's going to be the first time (crypto) assets from a major game can be used by other games for them to be incorporated. It's the promise of NFTs, but it's the first time we see it live. We'll see if that's fun to play.
🤝 A couple things before we part
We have upgraded our wallet infrastructure so we can do more things for you in the future. What does it mean, specifically?
🚨 The wallet addresses inside OSOM have changed. Make sure to double-check if you have these addresses saved in other crypto services (like other wallets, exchanges, or mining pools).
Over time, your OSOM wallet will be interconnected with other OSOM wallets, allowing you to make cheaper (and eventually free) crypto transactions between other OSOM users.
Your crypto transactions from OSOM wallet (both to other OSOM products and 3rd party wallets) will become cheaper.
Transactions between your OSOM wallet and other OSOM products will eventually become instant.
Minimum deposit amounts to Crypto Autopilot may go down as we continue to optimize our transactional infrastructure.
With time, your OSOM wallet will start supporting a lot of new crypto assets.
DeFi Earn performance will improve while risks get reduced as we start adding new platforms and assets
We are also launching an affiliate program soon. But maybe if you look close enough 👀 you can find it already.
If after reading all this you are as convinced as we are that a lot of assets are underpriced right now and you find that you want to dollar-cost average your way into a portfolio with some crypto - #DCA 🐜 - remember that you can start from about 100€/month in the Autopilot and 30€/month in DeFi Earn. You can easily make monthly deposits into Crypto Autopilot and DeFi Earn directly from your bank account.
That’s all for this month! 👋As always, thank you for your trust. Feel free to let us know if you have any questions, ideas for how we can improve - or anything else - by replying to this email!
And as Steven Dubner always says: Take care of yourself and, if you can, someone else, too.
This is not investment advice, nor a solicitation. Crypto markets possess a high level of risk, including volatility and regulatory uncertainty. Past performance does not constitute a guarantee of future results in any way. You are solely responsible for doing your own financial, legal, tax, or investment research before taking any actions.