Short strategy helped Multicoin Capital post solid 2018 results


The Block can reveal exclusively that Multicoin Capital, the crypto hedge fund founded in 2017 by Kyle Samani and Tushar Jain, held up well in a brutal 2018 crypto market. According to the “Multicoin Capital 2018 Annual Letter,” a document that The Block received, Multicoin’s performance beat the relevant indexes:

The Fund’s inception was October 1, 2017. Since inception, the Fund has returned 67.5%. This compares to Bitcoin, which returned -13.7%, and the Hold 10 Index, which returned -25.6% during the same period. In 2018 the Fund returned -32.9%, while Bitcoin and the Hold 10 Index returned -73.6% and -79.2%, respectively.

Multicoin Capital 2018 Annual Letter from The Block

Multicoin breaks down their 2018 activity into “Our Biggest Wins” and “Our Biggest Losses”

“The biggest wins” included:

  1. A belief that midcap market assets would fall relative to Bitcoin
  2. Largely sitting out March and November 2018 when the crypto markets fell
  3. Utilizing a short strategy by developing counterparty relationships that are unavailable to most investors: “We successfully used short positions to: (1) take on short positions in highly overvalued assets; and (2) manage our portfolio’s net exposure and beta.”
  4. Shorting $LTC, $ETC and $XRP: “These assets declined 29.7%, 74.3%, and 60.9% respectively over the time frames we held short positions.”
  5. Keeping enough of the portfolio in liquid assets to avoid turning into something resembling a VC fund
  6. Investments into new protocols: “We were able to lead early-stage investments in some amazing protocols: The Graph, SKALE, and Solana, and participate in a dozen more (alphabetically): Algorand, Bakkt, Coda, Dfinity, Hedera Hashgraph, Kadena, Keep, Mobilecoin, Rightmesh, Spring, Starkware, and Tari.”
  7. Employee (5 to 13) and infrastructure growth.

“The biggest losses” included:

  1. Multicoin’s EOS thesis did not play out as they expected. They foresaw EOS offering a different and in some ways better developer and user experience than Ethereum. In addition, they expected early EOS apps to attract more users and usage than early Ethereum apps. According to Multicoin, both of these theses played out. However, they also expected Ethereum’s blockchain to hit capacity, causing increased latency and higher transaction fees, followed by developer complaints and a flight of capital and talent. While Multicoin views EOS as having succeeded in differentiation and usage, the expected Ethereum bottleneck and capital + talent flight did not materialize
  2. Not putting on large enough positions on trades where they had conviction such as the $ETC short after listing on Coinbase
  3. Not enough bearishness: “We didn’t appreciate how much ‘leverage’ was in the system that needed to be unwound, and as a result weren’t bearish enough throughout 2018.”

Next, Multicoin looks ahead to 2019 with the following 11 trends being in focus:

  1. Take advantage of the selling pressure faced by most cryptocurrencies either due to miner-related selling or sales out of bloated treasuries. According to Multicoin: “At some point, demand for fundamentally worthless assets like LTC and XRP will dry up, and when combined with perpetual selling pressure we expect to see prices of these assets collapse.”
  2. Short assets such as LTC that still have a very high unsophisticated retail base, particularly as new sophisticated investors such as a16z crypto and Paradigm enter the markets with more analytically-minded strategies
  3. Prepare for an increase in 51% attacks on proof of work networks outside of $BTC and $ETH
  4. Trade on volatile assets until we hit the ultimate bottom of the bear market (the recent bounce of $ETH from $83 to $161 then back down 26% in ~ a month’s time being one such example.)
  5. Better execution due to better infrastructure including “custody, prime brokerage, lending and margin, derivatives, OTC desks, dark pools” and more
  6. The growth of the open/decentralized finance movement (DeFi), including Augur, Maker, Compound, Dharma and decentralized exchange volume, especially as Binance rolls theirs out
  7. Meaningful Layer 2 traction in 2019, including Lightning Network on Bitcoin and Raiden, Celer and SKALE on Ethereum
  8. New smart contract platforms will come to market with success being impacted via legitimization by fiat-coin ($USDC, $GUSD) issuers: “The issuers of fiat-coins are seen as trusted arbiters of which smart contract platforms are safe enough to use.”
  9. Significantly more layoffs at companies and projects sitting on large treasuries
  10. Clearer guidance from the SEC on what is *not* a security, while enforcement action picks up. However, Multicoin does not expect “heavy handed retroactive enforcement actions” for teams that acted in good faith and made best efforts at compliance
  11. More startups like Veil and Figure that launch to leverage blockchain technology and build meaningful businesses on top of decentralized protocols

In Closing

Multicoin Capital closed out their 2018 Annual Letter with a very upbeat and ambitious message:

Decentralized systems allow for more freedom and innovation than centralized institutions in the same way that capitalism allows for more innovation than centrally planned economies. The freedom to tinker and try new ideas creates a vast new design space for permissionless innovation.

Blockchain technology is the perfect design space for permissionless innovation in the financial system. The status quo financial system is a closed, centrally planned system with many barriers to entry, governed by dated, byzantine rules and ideas. The opportunity cost of the legacy financial system is the stifling of innovation. Blockchain technology will reshape the global financial system in a profound way. The decentralization of our institutions will pave the way for innovation that will create $100T of value.

The value of this information, especially on the eve of its distribution, is limited but it does show solid prognosticative footwork by the Multicoin team and a mild lack of operational security around releases. As we move into 2019 it should be interesting to see when and where these sorts of things leak – and what, ultimately, they will say about today’s bear market.

The post Short strategy helped Multicoin Capital post solid 2018 results appeared first on The Block.

Short strategy helped Multicoin Capital post solid 2018 results written by John Biggs @ January 25, 2019 John Biggs

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