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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.


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  • 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.


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  • 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.

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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).



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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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  • Ben Upward

We got a great note from a very successful individual trader last month. She posited that the inability of bitcoin and digital assets to rally in the face of a) the Canadian government blocking/confiscating private fundraising efforts, b) the Russia-Ukraine conflict and the corresponding sovereign-level fiat-denominated asset seizure phenomenon (cutting Russia out of the SWIFT system), and c) a huge Miami crypto conference meant that, together with a weak looking chart, bitcoin could be heading to $30k.


She nailed it.


But now that we've hit $30k in BTCUSD, where do we go from here?


Let's leave narrative and fundamentals to the side (for today) and just concentrate on price for now. Below is a Gemini exchange BTCUSD daily semi-log chart from tradingview:


  • Top panel

  • Daily price candles - red and green

  • Current 200-day moving average as of 10am, May 11, is $45,941 - solid light green line

  • Bottom panel

  • The BTCUSD price divided by its 200-day moving average - solid blue line

  • Current level -32% - price is trading 32% below its 200-day moving average

  • Horizontal green dashed line at -40%, previous hits on that line highlighted by the vertical light blue dashed lines





  • That 40% below the 200-day moving average is within sight. Right now that level would be ($45,941 x [1-0.40]) = $27,564.

  • If you squint at the bottom middle of the chart, you can see in December of 2018 (end of Crypto Winter), we spent a few weeks below -40% - and I think we spent say ~1 day below -40% on March 12, 2020 (beginning of US lockdowns).

  • The low of those periods was a very brief -50% - right now that would translate into roughly ($45,941 x [1-0.50]) = $22,970.


This tool is a blunt indicator, not necessarily a timing trigger - it is telling us there should be significant support not too far from current levels. We value this indicator but like to consider multiple studies to build a more robust opinion.


We can look at classic support/resistance and trend lines:





We can look for any momentum divergences (using RSI vs price):




  • Top panel

  • Lower lows in price both YTD and over the past month or so (downward sloping orange arrows)

  • Bottom 2 panels

  • YTD - momentum with a positive divergence, higher lows (green dashed arrows)

  • Recently - still making lower lows (downward sloping orange arrows) - in a perfect world, we need those arrows to turn green so momentum makes higher lows across this shorter time frame

There is enough momentum divergence to make a case that conditions are there for a meaningful bounce, but we'd like to see the shorter time frame confirm that with higher lows in momentum to increase the odds that indeed a move up off these lows is possible.


...


And we are finally getting a glimmer of strength in price from the blockchain-related publicly traded equities (represented here by the BLOK ETF) relative to BTCUSD to confirm the momentum divergence we've seen on the chart below (higher lows in momentum vs lower lows in price). Some times blockchain-related equities can lead the coins. That being said, BLOK does contain some constituent stocks that do not have pure digital asset beta (and are therefore typically less volatile) - we would still like some of the former bellwethers like COIN, MARA, and even MSTR (although MSTR is a little bit in its own category as a potential target for hedge funds to short in the near-term) to find some sort of near-term support on an individual basis - this has not yet happened.





How about a simple indicator to add to the rest of our study - Bollinger Bands - a measure of standard deviation calculated around a 20-day moving average - this tool can sometimes point out when price is stretched.



  • Top panel

  • The red line is the top band representing 2 standard deviations above the 20-day moving average

  • The green line is the bottom band representing 2 standard deviations below the 20-day moving average

  • Bottom panel ('% B')

  • If the green line is above 1.0, then price is through the upper Bollinger band

  • If the green line is below 0.0, then price is below the lower Bollinger band

  • The pink dashed horizontal line shows the Monday (5/9/2022) low in % B at -28% below the lower Bollinger band

  • The vertical blue dotted lines highlight the 5 previous times price has been that far below the lower Bollinger band

  • the 1st two vertical lines on the left occurred in Q4 of 2018 after bitcoin broke down out of an incredibly tight consolidation range - in this quarter, the extreme negative %B readings actually preceded a large sell-off instead of indicating the end of one...

  • the Sep 2019 vertical line and corresponding negative %B represented a temporary, but meaningful, pause in selling

  • the final two vertical lines, March and September of 2020 resulted in tradeable bottoms

Here is a closeup of this week's negative % B reading:





Conclusion:


We are not calling a bottom - we are trying to take a fresh, analytical (non-emotional) look at price. So, narratives and on-chain metrics aside, the technical picture is showing an oversold market currently entering a price zone ($27-29k in bitcoin) that could contain fairly robust support. On a day-to-day basis, or hour-to-hour (since these are digital assets we are talking about!) basis, there could be significant under-shooting of support zones due to more forced liquidations. There are other factors to take into account that we have not gone into here (like on-chain metrics, funding rates, futures positioning, narratives/fundamentals) which will may have a large impact on the short-term picture - but the charts above suggest there are some reasons to start thinking about putting some money to work in the space if you have a long-term (years) time horizon...and a strong stomach...:)


Please do your own research, this is not investment advice.

Chart details, time stamps, etc. are in the body of the charts.


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