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