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CHAINLOGIC FUND DISCUSSION AND PERFORMANCE UPDATE

Synchronicity Investors and Friends,

As you may have heard, one of the largest offshore cryptocurrency exchanges, FTX, and its hedge fund affiliate, Alameda, appear to have become insolvent. This has been revealed in a very short time period – more or less starting Sunday. In response, another offshore cryptocurrency exchange behemoth, Binance, initially offered to buy FTX to attempt to make customers whole but backed away when they realized the size of the shortfall.

Reports have come out over the last 24 hours indicating that the hole may be $8B with immediate solvency needs around $4B. There are rumors of a potential planned capital raise and of other large cryptocurrency players putting together a rescue type of consortium. This will continue to be a very fluid situation as news comes out – particularly over the next few weeks – and will likely continue to cause more volatility (possibly in both directions). After a long year of negative price movement and bad news, this may seem like a small consolation, but it is very important to point out that no underlying cryptocurrency failed here. This was a centralized offshore corporation that was built to help bring more liquidity to cryptocurrency coins. And, unfortunately, it appears that they essentially committed fraud by misappropriating client deposits – or at the very least misrepresenting what was going on behind the scenes. There are already laws on the books for dealing with this kind of misconduct.

We can all turn on CNBC and see the negative take on the situation – it is a very unfortunate thing to happen. The glass-half-full view here is that this event will a) likely bring clarity of regulation (although it may sting in the short- to medium-term) and b) may be the washout that was needed to start recovering from this one-year bear market we have endured. To be clear, we are not suggesting that we have seen the bottom. We expect more volatility over the coming weeks (both directions).

ChainLogic was built to deal with a young asset class that goes through incredible periods of both growth and bust. This asset class is still very young, and the associated volatility is why the size of investment should be small for most people. To enjoy the periods of spectacular growth, we have to endure time frames of aggressive price weakness.

  • ChainLogic does not have (and has not had) an FTX.com account and therefore has no assets at FTX.com

  • ChainLogic has no exposure to the FTT token (the Fund did own a small 30bps position of FTT earlier in the year [held the in the Fund's Copper custodial account] that was sold in June)

  • ChainLogic’s focus from the beginning is to hold as few assets on centralized exchanges as possible because of this very risk (and hack risk)

  • ChainLogic is currently (as of 10:15am ET 2022/11/10, BTC currently around $17,700) around -8% MTD vs BTC at -13%, ETH at -15%, GBTC -21% and altcoins anywhere from -10 to -35%

  • ChainLogic has ~41%* net long exposure below $19k BTC

  • Below ~$12k BTC that would drop to 30%, below $10k BTC net long exposure would drop to ~20%

  • Last night at 11pm ET when BTC was closer to $16,300:

  • ChainLogic was roughly -12.25% MTD vs BTC at -20%, ETH at -25%, GBTC -27% and altcoins anywhere from -15 to -45%

  • November put protection from the Fund kicks in strongly below $18.5k BTC

  • Above $19k BTC, ChainLogic has ~70% net long exposure

  • Above $21.5k BTC, ChainLogic has ~115% net long exposure

  • ChainLogic is a regulated^ Fund and gives Fund data to NFA on a quarterly and annual basis and is also subject to 115-day cycle audits every three years unlike most of our competitors (we have been through 2 NFA cycle audits)

  • ChainLogic is a long-biased Fund that attempts to manage risk and use multiple strategies to structure asymmetric risk-reward scenarios when possible – we have done and are continuing to do what we say we do

  • We have heard rumors that other Funds have material exposure to FTX - AGAIN, this is why our best-practices for security and custody include NOT exposing Fund capital unnecessarily to exchange and/or hack risks.

  • There is also pressure on Solana as large holdings of SOL were custodied at FTX – ChainLogic had a 10bp position in SOL at the end of October (pre-calamity) which is now roughly 5bp.

If you are a current ChainLogic LP, we do value your investment and are happy that you have been riding out the storm with us to date. Please call Brandon or me with any questions.

If you are a prospective ChainLogic LP, or a person or group that has been looking into how to enter the space – we would love to speak with you and take you through our philosophy, process, and trades. Please reach out to Brandon or me directly:

bupward@synchronicityinvestments.com

bfluegel@synchronicityinvestments.com

I think the next few weeks may continue to be volatile as more information surfaces around what was really going on at FTX.

Ben

*Non-beta adj, meaning this does not quantify that coins other than bitcoin may be more volatile (in either direction)

^Synchronicity Futures, LLC IS A MEMBER OF NFA AND IS SUBJECT TO NFA'S REGULATORY OVERSIGHT AND EXAMINATIONS. HOWEVER, YOU SHOULD BE AWARE THAT NFA DOES NOT HAVE REGULATORY OVERSIGHT AUTHORITY OVER UNDERLYING OR SPOT VIRTUAL CURRENCY PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY EXCHANGES, CUSTODIANS OR MARKETS.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

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  • Ben Upward



  • After significant outperformance on the downside in June, ChainLogic Fund# produced a very strong up-month in July.

  • Highlights

  • June’s outperformance was led by favorable capital allocation within the Fund leading to advantageous overall exposure levels, and a good mixture of holdings.

  • July’s strength was led by a) a new event-driven position in Ethereum Classic centered around potential miner re-allocation in front of Ethereum’s move from Proof-of-Work (PoW) to Proof-of-Stake (PoS), b) strong alt performance and c) bitcoin futures options providing additional risk-managed upside exposure.

  • The Fund also guarded against a final washout event with a very small investment in a large number of OTM July BTC puts.

  • YTD ChainLogic is outperforming BTC by a large margin with just 59% of the overall volatility and only 1/3rd of the downside volatility.


  • Synchronicity has onboarded its first RIA to our digital asset separately managed account (SMA) platform.

  • If you are an RIA (or individual accredited investor) looking for professionally managed digital asset coin and/or public equity strategies in separately managed account form, please contact us.

  • Advisors can bill on assets, have transactions flow into their accounting system, and have experts manage, trade, monitor, and provide education for this new asset class.


  • Ask about Synchronicity’s traditional income and growth strategy.


  • The Synchronicity Bitcoin Managed Futures and Options Program#^ is -6.08% YTD through July vs bitcoin -48.57%, contact us for more information.


…………………………………………………


  • Outlook:


  • Despite the recent strong short-term performance, our general sense is that digital asset participants are not prepared for a rapid increase in price. That said, we strongly believe that a long-term view is a sensible way to approach this volatile asset class. Given BTC sold off from ~$69k to ~$17k and prices are hovering around $24k at the time of this writing, another trip down below $20k would not be surprising at all and not particularly significant when looked at on a longer time frame. (We built ChainLogic in an effort to minimize market timing worry.)

  • The digital market’s correlation to tech stocks is still high. Given equities are rising, there are less complaints. As we’ve said many times, over a long period the best outcome (in our opinion) is non-correlation, not negative correlation – the market already has VIX products.

  • In our opinion, if rates resume their upward trajectory, eventually debt service will either cause the government to default in some way or force the Fed to ease. If the Fed eases before that (or stops raising), monetary conditions would still be loose by most historical standards and fiat purchasing power would likely decline. This is why we prefer to use the term fiat currency destruction (instead of terms like inflation/deflation which can get confusing). We feel that money will flow into BTC (and select other fixed/limited-supply digital assets) as governments and central banks continue to destroy their fiat currencies.


…………………………………………………


  • Featured Charts:


  • ETH vs BTC (Binance exchange data) Daily chart

  • Will Ethereum’s merge to Proof-of-Stake continue to fuel gains vs bitcoin?


  • BTC vs CPI, M2, and the Fed Balance Sheet Weekly chart on 4 different time frames:

  • On all but the shorter term period displayed, bitcoin has in fact protected for inflation.

  • Maybe BTC leads inflation/deflation?

  • (chart legend on the upper left labels the lines, look all the way over to the right to see the percentage moves, look at the bottom of the chart for the time period)

  • Source via tradingview.com, CPI (BLS), M2 and Fed Balance Sheet (US Federal Reserve)

















*This is a best-efforts estimate only in regard to July 2022 performance and the effect that it has on the other periods listed above. The ‘ChainLogic Fund’ net estimate was added to actual client performance (which is then pro-forma’d to 2 and 20 fees by the Fund’s admin based on a $100k account) through the end of June that was produced by the Fund’s Third-Party Administrator and accountant. This snapshot was taken at 5pm ET on July 31st. Individual Partner returns may differ from the aggregate pro-forma returns listed above based on subscription/redemption timing and other factors including whether investors have sidepocket exposure. Past performance is not necessarily indicative of future results.

#QEP only

^Program is currently being run inside of ChainLogic Fund and has not yet been funded on a traditional managed futures separate account basis – see fact sheet and or deck for full explanation/detail.


PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

This e-mail is intended for QEP's only.

Synchronicity is registered with the NFA as a 4.7 exempt CTA.

THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY AND NOT AN OFFER TO SELL.

THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER SIGNIFICANT ASPECTS OF THE CRYPTOCURRENCY INTEREST MARKETS. YOU SHOULD THEREFORE REQUEST A COPY OF THE PRIVATE PLACEMENT MEMORANDUM AND LIMITED PARTNER AGREEMENT AND CAREFULLY STUDY CRYPTOCURRENCY INTEREST TRADING BEFORE YOU INVEST, INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT INCLUDED IN THE AFOREMENTIONED DOCUMENTS.


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  • Ben Upward

CHAINLOGIC FUND DISCUSSION AND PERFORMANCE


Here is what we have been doing in ChainLogic Fund in 2022 and, more specifically, through May and the 1st half of June (scroll down for performance):


  • The Fund has kept its net-long (non-beta adjusted) exposure on the conservative side through most of this year.

  • The Fund then typically looks to layer in puts based on a combination of different technical factors, macro, implied volatility, and expiration. The goal here is to use these puts to automatically lower exposure during times of market dislocation.

  • In addition, most months during 2022, ChainLogic has added call exposure to position for any potential snap-back rallies.

  • The Fund recently completed (this week) tax loss harvesting across our stock and spot cryptocurrency buckets.

  • ChainLogic had almost zero (~20bp) exposure to LUNA - and in fact we were able to go in post-crash and spend ~15bp to buy up what are now referred to as Luna Classic (LUNC) in order to receive the air drop of new LUNA tokens.

  • ChainLogic is currently outperforming BTC (and other coins) by a large margin MTD in June (see below).

  • On a net exposure (non-beta adjusted) basis the Fund has raised its exposure from 30 to 42% in the last 24-48 hours.

  • If BTC falls below ~$20k between now and the end of expiration next week, Fund exposure will drop to 0% and the portfolio may potentially* start to make money back as prices go lower.

  • If, on the other hand, prices rise from current levels (around ~$22k at the time of this writing at ~4pm ET on Tuesday, June 14th), the Fund will keep participating at ~42% up to $28-29k at which point exposure will jump to 70.5%. At ~$33k 95%, at $35k (BTC would be up 10% for the month of June at this level) 145%. (These exposure increases are based on long call positions, not structural leverage).

  • In sum, ChainLogic is fully* hedged below $20k, is outperforming BTC and other coins in June and YTD with less volatility, and has the chance to outperform on the upside if the market snaps back to positive for the month.



*This is a best-efforts estimate only in regard to June 2022 performance and the effect that it has on the other periods listed above. The ‘ChainLogic Fund’ net estimate was added to actual client performance (which is then pro-forma’d to 2 and 20 fees by the Fund’s admin based on a $100k account) through the end of April that was produced by the Fund’s Third Party Administrator and accountant. This snapshot was taken at 12:42pm ET on June 14th. Given that the month is not over, this will likely change. Individual Partner returns may differ from the aggregate pro-forma returns listed above based on subscription/redemption timing and other factors including whether investors have sidepocket exposure. Past performance is not necessarily indicative of future results.



MARKET DISCUSSION


  • CPI staying over 8% - inflation hasn't gone away

  • Not surprisingly then, most commodities continue higher or are hanging out near recent highs

  • Fed is still in a tightening cycle

  • The US Treasury market continues to sprint ahead of the Fed selling bonds and pushing rates higher

  • US Dollar Index at multi-year highs (i.e. 'strong-dollar')

  • Mortgage applications down, housing starting to feel some pricing weakness

  • QT and raising rates have sent stock indexes (particularly growth indices) lower into bear territory

  • Crypto specific risks/narratives

  • Terra stable coin collapse caused forced BTC selling in May starting around the $34-35k price level - some big Fund managers have exposure

  • BlockFi reported to raise money at a lower valuation than the previous round - a 'down round'

  • Coinbase, Crypto.com, BlockFi announce layoffs (source, CoinDesk Daily Node email 6/14/2022)

  • Celsius pauses client redemptions over this past weekend believed to be partly due to the asset-liability mismatch of their ETH staking-as-a-service partnership with Lido - Celsius is said to have over $10B in assets

  • MicroStrategy (MSTR) is thought to potentially need to post additional margin (they have taken out loans against some of their BTC and raised debt at the corporate level to fund BTC purchases) to back its bitcoin holdings at the ~$21k BTCUSD level according to their CFO in their most recent earnings call. MSTR owns over 100,000 bitcoins. The CEO Michael Saylor came out in the last 24-hours to calm fears saying that "...MicroStrategy has enough bitcoin to put as collateral to fund the loan all the way down to a BTC price of $3,562. Were bitcoin to drop below that price point, the company intends to further collateralize with other assets." It is unclear at this time how the market will interpret this information.

Last night, June 13, BTC briefly traded below $21k putting it in the same price range we last saw in December of 2020 (which was an all-time high then). At $21k, BTC is down roughly $48k from its high of ~$69k in November of last year - or down roughly 69.5% from that peak. Ethereum is down even more (on a % basis) from its November 2021 peak.

.................................................................


MARKET TECHNICALS


We like to use momentum structure (in this case the difference between the BTC price and BTC's 200day simple moving average) to put some of these moves into perspective vs prior periods.


You can see in the chart below that the last 2 times BTC experienced levels south of -40% (dark green dashed line) below its 200-day moving average were the end of Crypto Winter (December 2018) and very briefly in March of 2020.



We did get one brief foray below -50% (solid pink line) all the way down to -61% (solid orange line) back in January of 2015. As of today's writing, the 200-day moving average sits at $40,491 on BitStamp (via TradingView.com) - here are the key levels:

  • -40% below the 200d MA = $24,294

  • -44% below the 200d MA = $22,674

  • -50% below the 200d MA = $20,245

  • -61% below the 200d MA = $15,791



This is just one of our charts/indicators and one small piece of analysis and gauging probabilities. This study has been helpful throughout the years - but like any technical reading, new highs and lows can occur - given the macro backdrop and the potentially unresolved and opaque situations at MicroStrategy and Celsius, we very well could see the -50% breached if BTC heads decidedly below $20k. That said, if that were to occur, we would expect it to be a low probability that those sub -50% readings could persist for more than a short period of time.



Here is one more chart of BTCUSD from BitStamp exchange via TradingView.com with the 1st panel below the price showing flat lows (short horizontal green line) in 14-day RSI momentum vs lower lows in price (short declining red line) from May 12th through the present. This isn't a huge divergence but still counts for now as slightly bullish. The other 2 bottom panels of momentum indicators show deeply oversold conditions but there are no momentum divergences yet. This evidence would suggest that after some relief we may well need one more trip down to lows from last night (at which point some divergences might show up).



.................................................................


GOING FORWARD


Tuesday (June 14th) and going forward for the remainder of June:

Tomorrow is the Fed meeting where they are expected to hike rates by 75 bps. The market reaction to the Fed's decision may determine where cryptocurrencies are heading in the short-term if the correlation between the Nasdaq and crypto remains very high. We believe the stock market and cryptocurrencies will experience a snap-back rally very soon here. If this bounce is to be sustainable, we will need to see evidence of both technical and narrative improvement for both markets in the face of inflation, slowing growth, and QT. That said, we will also be on the lookout for a de-linking, or a falling correlation between technology stocks and digital assets. Finally, back to the current market, any move below $20,000 in Bitcoin could see a flush to roughly the $16,800 - $17,500 area or lower. We remain cautious and vigilant over the coming months and have positioned the portfolio accordingly.


Catalysts?

Everything feels bearish right now. Sentiment seems very bleak. We've outlined the headwinds. Potential bullish catalysts may be:

  • Some action by the Fed and/or fiscal stimulus in front of mid-term elections that allows for a relief rally (we grant the current narrative of the Fed being between a rock and a hard place makes this difficult to envision).

  • A drop in commodity prices

  • A sell-off in the Dollar Index

  • Clarity and/or resolution of the MicroStrategy and Celsius situations

  • Higher digital asset prices (and maybe also a potential de-coupling from a weak tech market)

News/Happenings:

  • ​The entire cryptocurrency market now has a market capitalization of $912B (as of 6/14 via TradingView.com) — less than half of the $2.9 trillion it was worth in November 2021.

  • Bitcoin reached a low of $20,816 and for Ethereum, $1074 according to Coinbase via TradingView.com.

Insights:​

  • We are seeing a combination of headline risk (Inflation, Russia, China, Growth Concerns, etc.) and the underlying consequences of a Federal Reserve that has continued to be dangerously behind the curve on inflation while government spending and debt has spiraled essentially out of control.

  • The mix of assets and trading options we have put together in the fund we believe help us not only from an investment diversification standpoint, but also on an operational diversification level.



* If beta-exposure is higher-than expected then the beta-adjusted net exposure may be higher (and may mean the portfolio is not fully hedged). There is no guarantee that positioning will not change after the writing of this post.

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