Market Updates
ChainUp Investment Smart Beta Crypto Investor Memorandum 2023
19 Jan 2024

I. Market Dynamics: Peaks and Valleys, Building Momentum

2022 proved to be a challenging year for all participants in the cryptocurrency industry, marked by various significant events such as the Luna, FTX, and 3Arrows flash crashes. Low trading volumes and tightening regulations, coupled with a narrative vacuum, pushed the entire market into a bearish phase. In early 2023, decreasing inflation indicators in the United States confirmed the effectiveness of a tightening monetary policy. The market anticipated a potential easing of monetary policy within the year, leading to a rebound in various risk assets, including cryptocurrency.

The first quarter witnessed a substantial rebound in the cryptocurrency market, led by Bitcoin, resulting in a significant 47.10%[1] increase in the overall market capitalization. However, the macro-outlook did not provide substantial positive indicators, and the cryptocurrency market lacked the momentum to sustain the upward trend, leading to a quick correction. Mid-year, the market experienced panic selling following the SEC's lawsuit against Binance, exerting pressure on prices and prompting capital outflows. Despite a decrease in market capitalization by 27.70%[2] compared to the beginning of the year, optimism returned with the submission of a Bitcoin spot ETF application to the SEC by one of the world's largest asset management companies, BlackRock.

In the later part of the third quarter, the entire market reached a nadir in the bearish phase, with historically low trading volumes, volatility, and open interest. Despite some SocialFi projects gaining attention, the bearish sentiment persisted, resulting in a 35.78%[3] decrease in market capitalization from the beginning of the year. Just as the industry seemed to see no end to the prolonged bear market, a false news report about the approval of a Bitcoin spot ETF led to a single-day market surge and subsequent consolidation. In the fourth quarter, as news surrounding the Bitcoin spot ETF continued to unfold and gain credibility, it influenced the overall market direction. Following Grayscale's victory over the SEC, investor confidence strengthened, with Bitcoin long-term holder addresses and quantities reaching historic highs. By the end of 2023, the total market capitalization of the cryptocurrency market had risen by 109.97%[4], and stable coin market capitalization reached a new all-time high, with a yearly circulation increase of $4.98 billion[5].

II. Upholding Investment Principles

The cryptocurrency market, known for its high volatility, experienced significant fluctuations in 2023, challenging fund management. Grateful for the trust and support of investors, the fund successfully navigated market opportunities, achieving absolute positive returns for the year. Importantly, even in a high-risk, high-volatility market, the fund exhibited excellent risk-adjusted returns compared to benchmark, validating the effectiveness of its models and strategies – true Smart Beta. Reviewing the year's investment and trading operations, our unique investment and trading style emerged from unwavering adherence to several key principles, garnering effective positive feedback:

a. Consistently Seeking Fundamentally Sound, Sustainably Growing Assets

Despite the FOMO-driven nature of the cryptocurrency industry, where multiple "get-rich-quick" myths are created, we adhered to the practice of identifying high-quality assets with strong fundamentals, sustainable growth, solid technical foundations, real on-chain activities, and vibrant ecosystems. Leveraging our group's technological development capabilities, we designed and developed a comprehensive industry-wide target data monitoring dashboard, enhancing research efficiency quantitatively. By quantifying and concretely assessing investment targets across the entire industry and various sectors, we selected blue-chip assets with lower inflation, higher growth, and fair valuations, ensuring resilience in the fund portfolio even during short-term market volatility. We firmly believe that our professional expertise in fundamental research is the solid foundation for creating sustained returns for investors.

While filtering for fundamental strengths is crucial, it is not the entirety of our investment decision making process. Building on the foundation of blue-chip assets, we narrowed our investment focus further by considering community discussions, project development prospects, market trends, and short-term high-growth potential. Finally, through technical analysis, we pinpointed investment portfolio assets. Building on a foundation of strong fundamentals, we capitalized on short-term market hotspots or events without compromising asset quality.

b. Long-Term Valuation-Based Mean Reversion Strategy on Trustworthy Assets

In terms of specific trading strategies, we recognize the substantial returns achievable through market FOMO or trend strategies. However, we believe that our strategy is more optimal. After thorough filtration and selection of quality assets based on fundamentals, events, and technical momentum, we have a reliable basis for assessing the underlying value of our target assets. Consequently, during times when short-term price trends are influenced by market sentiment and deviate from intrinsic development valuations, we use a mean reversion framework to increase positions in these assets, maintaining a higher margin of safety. Conversely, when market sentiment overheats and deviates significantly from the fundamentals, we gradually reduce positions, implementing a dynamic strategy to trim peaks and fill valleys, realizing profits in a timely manner and avoiding paper losses.

c. Adhering to Trading Risk Management Bottom Line

As the cryptocurrency market is still in its early stages of development, with incomplete regulatory rules and frequent market manipulations, we applied our practical experience gained from traditional financial secondary market trading to the cryptocurrency market. At all times, the fund maintains liquidity positions, providing operational flexibility even during extreme market conditions in the highly volatile cryptocurrency market. With this approach, we are confident and capable of consistently creating high-quality returns for clients, especially after experiencing structural changes in the market.

III. Hot Topics and Future Outlook

1. ETH and its Ecosystem

In 2023, Ethereum experienced a 25% relative decline compared to Bitcoin, marking the second consecutive year of a downturn. This seems to replicate the market situation of 2019, when Bitcoin led the early stages of a bull cycle; subsequently, from 2020 to 2022, Ethereum saw a maximum increase of 340% relative to Bitcoin. Therefore, we anticipate a high probability of a similar relative increase in 2024. There are several reasons backup the thesis: first, following the approval of the Bitcoin spot ETF, Bloomberg ETF analysts predict a 70% chance of Ethereum spot ETF approval by the SEC in May 2024[6]; second, the Dencun upgrade is expected to be completed in the first quarter, reducing the cost of Layer 2s and introducing more on-chain transaction; third, re-staking protocol is expected to ignite the next wave of yield-bearing tokens and its ecosystem; fourth, more on-chain transactions will burn more gas fees, deflating Ethereum supply which providing a foundation for price increases.

2. Re-Staking Protocols

EigenLayer, the mainstream re-staking protocol, is potentially the largest airdrop protocol of 2024. Leveraging its Actively Validated Services (AVS), EigenLayer allow restakers to provide security for services such as data availability (DA), decentralised sequencers, cross-chain bridges, oracle etc., to earn more rewards. The liquidity-restaking-tokens will also unfold a new economic ecosystem. EigenLayer also poses a threat to other public chains; for example, EigenLayer brings shared security for Cosmos consumer chains through Ethos, challenging Cosmos Interchain Security (ICS) value proposition. Re-staking is expanding beyond Ethereum, as Bitcoin, Near, and Solana re-staking protocols are starting to capture market attention.

3. Modular Blockchain

Modular blockchain will become the prefer framework for new blockchain deployment. DA protocols have yet to prove its business model, for example the largest DA protocol, Celestia, averaging only 17,000 transactions per day, which insufficient to justify the current valuation. Besides, other modular blockchain protocols, such as Rollup-as-a-Service (RaaS), settlement layers, and liquidity layers, there hasn't been much market attention yet.

4. Bitcoin Ecosystem 

We believe BRC20 is here to stay. BRC20 is infeasible to have an efficient native infrastructure, cross-chain protocols and Bitcoin "Layer-2" will have significant development potential. This ecosystem is still in its early stage; hence the fundamentals of the project are crucial. We believe STX is a good investment direction, as the protocol is set to undergo the Nakamoto upgrade this year, improving the network performance and synchronizing network finality with Bitcoin network, laying the foundation for sBTC upgrade.

5. Parallelism Blockchains

High-performance blockchains are gradually overtaking the market share, offering a faster transaction and lower fees for a more user-friendly experience. Solana is the blue-chip project in this narrative, enabling high-performance applications which "Only Possible on Solana" (OPOS), such as MarginFi, a lending protocol with a highly efficient risk engine, and Phoenix, a fully on-chain order book. Additionally, Neon and Eclipse are mainstream protocols in modular blockchains that support Solana-virtual machines. Monad is an EVM-compatible parallel execution blockchain, while Sei and Injective are EVM-compatible parallelism app-chains in the Cosmos ecosystem. Lastly, Sui and Aptos both utilize Move programming language, which also features parallel execution.

Above are the narratives and projects that we believe are worth monitoring in 2024. Please note that this is not investment advice. Finally, we would like to summarize our outlook on the overall market for 2024 from a macro perspective. The approval of the Bitcoin spot ETF will introduce billion dollars of capital increment. The Bitcoin network is expected to enter the next halving cycle in April, further reducing the Bitcoin inflation rate. As economic growth slows, inflation data will continue to decrease, and the Federal Reserve is expected to change its monetary policy direction by mid-year at the earliest. The year 2024 will be the U.S. presidential election, potentially leading to more economic stimulus policies and changes in investor risk preferences. In conclusion, we believe that the cryptocurrency industry is entering into a new chapter, we look forward to witnessing the development together with our investors.

 

* ChainUp Investments Limited, a compliant crypto asset management platform under ChainUp Group, was approved by the Group's Board of Directors in April 2023 to establish an offshore cryptocurrency SPC fund company and has successfully landed two funds. Among them, Smart Beta is the first fund that has successfully launched. With the help of the Group's research technology and development strength, Smart Beta leverages on our independent designed monitoring panel for the cryptocurrency industry, aiming to screen the blue-chips in each sector and capture the of the cyclical development in the industry. Since its establishment three quarters ago, it has seized market opportunities in a timely manner and created positive absolute returns for investors.

 

Disclaimer

This presentation provides general background information about ChainUp investments Limited (the “Company”)  Smart Beta offering as of the presentation date. The information provided is a summary and may not be complete. The Company is a BVI registered approved Investment Manager entity. The presentation does not contain all material information necessary for investors or potential investors to make investment decisions. It should not be considered advice or a recommendation to hold, purchase, or sell any units of Smart Beta, securities or other financial instruments. The presentation does not take into account any investor's particular objectives, financial situation, or needs. By attending or reading the presentation, the recipient agrees that it is for information purposes only, and the contents should not be relied on in connection with any offer or invitation to purchase or subscribe for, underwrite, or dispose of any units of Smart Beta. You should be aware that the value of digital assets/tokens may fluctuate greatly. You should invest only if you are prepared to accept the risk of losing all of the money you put into such digital assets/tokens. 

The presentation is confidential and proprietary to the Company, and no part of it or its subject matter may be reproduced, redistributed, passed on, or divulged to any other person or published in whole or in part for any purpose without the Company's prior written consent. If received in error, the presentation must be returned immediately. The presentation may be restricted by law and not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to local law or regulation. The presentation contains forward-looking statements that involve known and unknown risks, uncertainties, and other important factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such statements. These statements may include the words “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “project”, “will”, “may”, “targeting” and similar expressions as well as statements other than statements of historical facts including, without limitation, those regarding the financial position, business strategy, plans, targets and objectives of the management of the Company for future operations (including development plans and objectives). Such forward‐looking statements involve known and unknown risks, uncertainties and other important factors which may affect the Company's ability to implement and achieve the economic and monetary policies, budgetary plans, fiscal guidelines and other development benchmarks set out in such forward‐looking statements and which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward‐looking statements. 

 

The Company does not guarantee the accuracy or completeness of any information in the presentation and makes no representation or warranty, express or implied, as to its fairness, accuracy, or completeness. The presentation may include projections, valuations, and statistical analyses that are based on subjective assessments and assumptions and historical information that may not accurately predict future performance. Any financial data in the presentation is for information purposes only and may not be relied on for entering into any transaction. No representation is made as to the reasonableness of the assumptions made in the presentation or the accuracy or completeness of any modeling, scenario analysis, or back-testing. None of the Company, its advisers, connected persons, or any other person accepts any liability whatsoever for any direct or consequential loss arising from the use of the presentation or its contents. Nothing in the presentation excludes any liability for fraudulent misrepresentation. Any investor or prospective investor should consult its own counsel and advisers as to all legal, tax, regulatory, financial, and related matters concerning an investment in or a disposal of securities of the Company and as to their suitability for the investor or prospective investor. The Company reserves the right to amend or replace the information contained herein, in part or entirely, at any time, and undertakes no obligation to provide the recipient with access to the amended information or to notify the recipient thereof.

 
[1] Data sourced from CoinMarketCap, calculated by ChainUp Investment.
[2] Data sourced from CoinMarketCap, calculated by ChainUp Investment.
[3] Data sourced from CoinMarketCap, calculated by ChainUp Investment.
[4] Data sourced from CoinMarketCap, calculated by ChainUp Investment.
[5] Data sourced from TradingView.
[6] Based on Bloomberg Senior ETF Analyst, Eric Balchunas during a podcast interview, https://www.theblock.co/post/271874/ethereum-etf-approval-may-ether-price-surge

 

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