Letter to shareholders, Q1 2020
As always, we are on track with our quarterly newsletter. We will recap past year and post our outlook for 2020.
Except this time we will focus much less on the past performance, and more on the pressing matters of present and future in relation to covid-19 pandemia and its impact on asset classes.
Sigil performance in 2019
Numbers speak for themselves, in 2019 we gained 67,61% net performance vs EUR.
But in light of recent global events we need to focus much more on the current situation.
Global pandemic and subsequent crisis
Outbreak of COVID 19 is now declared a global pandemic by WHO. The confirmed number of infected people and fatality rates are still relatively modest, but the exponential growth is quite scary. At this moment full containment is not realistic.
As people worldwide are waking up to the threat, markets react with a sharp plunge – we see unprecedented sell offs across the board.
S&P 500 price decline is much sharper than in the previous two crises. We don’t see many reasons to believe in a quick recovery. Source: TheBlock
Incoming pandemic is disrupting not only health-care but also the economy in a broad range of segments. Travel and tourism alone is estimated at $9 trillion globally. The closures of borders and restrictions on export are jeopardising the supply chain. Such a fast previously unimaginable shock perfectly fits the definition of a Black Swan event.
What does this mean for crypto?
Crypto was often lauded as an uncorrelated asset, or hedge against economic crisis. This is certainly true when it comes to local monetary crises, hyperinflation or other failures of local policymakers, such as in Venezuela, Argentina, Iran… Crypto currencies provide an alternative monetary policy or a voluntary way out for citizens of these distressed nations.
Could we realistically expect that crypto will be also a good hedge in case of a global pandemic and subsequent economic shocks or in the extreme scenario where the bubble of everything pops?
The truth is unfolding quickly: in the scenario of global sell offs crypto behaves as a risk-on volatile asset, that investors sell in panic flight to safe havens, liquidity or to cover liquidations like anything else.
What we did to protect your investment
Strategy of Sigil doesn’t rely on timing the market. Our mandate is to provide the best fundamental crypto allocation with a long term investment horizon. Thus we usually try to be fully allocated in crypto assets with only a very small fiat reserve.
But in the face of Black Swan event like this we wanted to act and try to protect investor’s funds in the possible tail risk scenario. Over the weekend we were watching events unfold and Monday morning our Investment Committee had an emergency call and decided to go defensive on Monday 9 March.
We assessed the situation and acknowledged we are entering a period of high uncertainty and volatility, which drastically changes our risk:reward outlook for immediate future. We proposed following changes to our portfolio structure to mitigate the downside:
- Immediately decrease the size of our altcoin positions by 50%.
- Create a liquidity reserve in EUR.
- Buy a basket of USD stablecoins and lend them out for 5 – 15% APR. Cash and fixed yield is a king in the expected market turbulence.
- Avoid stablecoin DAI, which is vulnerable to a possible Ethereum loss of value and related downward spiral and potentially other structural weaknesses – this turned out to be the right call, since MakerDAO incurred losses due to network congestion.
- Overall we exited 25% of the portfolio to crypto stable coins / fiat equivalents on Monday 9 March and decided to reconsider further steps on Wednesday and Friday.
- During Wednesday 11 March we further liquidated another 5% part of our portfolio, decreasing the size of BTC and ETH positions.
- Before the sell-off happened on Thursday 12 March 30% of our portfolio was already safe and yielding fixed gains.
When you read this article in hindsight, it probably feels obvious that defense was the right approach before the markets sell-off. It is always apparent in hindsight. But you’ll probably appreciate this was not a trivial decision on 9 March because:
- We acted against the common belief prevalent in the crypto community that Bitcoin is a store of value uncorrelated vs. legacy financial system. Up until last week most people believed Bitcoin and crypto will benefit from the global crisis and related inflationary environment. This may still be true in the long run, but we were concerned that the immediate panic sell-offs following the oil market crash would affect all the assets regardless of their past correlation and value proposition.
- Selling 30% of the crypto portfolio at the 1 month lows at around $8,000 per BTC was also counterintuitive especially in the year of bitcoin halving and expected crypto bull run in the next 12-24 months. We decided that facing global uncertainty, bullish crypto fundamentals such as Bitcoin halving around May 2020 do not matter in the short run.
Going defensive turned out to be the right call which protected large part of the Sigil assets. When the buying opportunities present themselves in the coming months we will be ready to deploy the cash to make some outstanding returns on the discounted crypto assets.
What to expect next?
The future in these unprecedented times is very uncertain. It is likely that all the negative effects and especially currently unknown effects of a future covid-19 pandemic events are not yet priced in.
We believe governments will create emergency support plans for health care and most affected industries. This will help soften the blow, but at the same time it will put even more debt into our legacy financial system. This debt will very likely transfer into long-term inflationary pressure as global currencies will lose buying power vs. other assets and baskets of consumer goods.
In the long-term, people will be increasingly more unable to rely on fiat money as a store of value. It will emphasize the need for an alternative “sound money” and fuel the value proposition of Bitcoin and decentralised technologies in the long-term.
We also expect Overton window widening as people realize there are many flaws in our current systems and will be more tolerant to new alternatives and innovations. We will likely see a social – digital paradigm shift. Quarantine is forcing us to digital world, to remote work, conference calls, online shopping, video games and virtual reality. This is inherently bullish for cryptocurrencies and tokens.
In the long run there are reasons to be optimistic about the value proposition of crypto and blockchain, but the short run will be volatile. We do not expect recovery to be sharp V-shape, but slower one, following the gradual recovery from the pandemic and related struggles.
What is our plan going forward?
- We are monitoring the situation and remain flexible to be able to react to variety of circumstances. In the face of high uncertainty, we will be assessing the situation on daily basis and are prepared to take further defensive measures.
- We are also ready to start buying cheap assets when the good buying opportunities present themselves after we successfully progress beyond the peak of covid-19 pandemic.
- At the times of risk we will maintain healthy cash reserves via stablecoins that we can lend for additional ROI.
- We will continue harnessing staking rewards from decentralised networks. Fixed yield and “technical dividend from blockchain networks” are a valuable cash flow in the times of uncertainty.
- We are looking at more ways to manage the tail downside risks in the future to be able to protect Sigil assets even better.
- We are discovering other market neutral ways to profit, such as conducting liquidations of under-collateralized DeFi loans and providing market neutral liquidity.
Despite the short-term negative outlook, our investment thesis and the core of our strategy remains intact. We have a long-term view and ability to manage the risk in the times of crisis. We are committed to invest in well researched fundamentally strong crypto projects. There will be lots of opportunities with discount prices in the next couple of months.
We are entering the 2020s in extremely turbulent circumstances. We will see many previously working models fail. Our experience from the last decade may no longer be valid. However, it is important to stay optimistic. Change creates opportunity and those who are preparing will be well positioned to harness it.
Blockchain and crypto today are still nascent technologies, subject to high volatility. In the coming 5 – 15 year time horizon, as the technology matures and fundamentally sound crypto projects start seeing widespread adoption, they will replace many parts of legacy financial, political and social systems, which current crisis will expose as too obsolete or fragile.
For us, this means getting ready for the biggest investment opportunities since 2009.
On behalf of Sigil Team we would like to thank our investors for trusting Sigil with their investments. We hope that you are taking precautionary measures to protect yourself and your loved ones.
With best wishes,
Fiskantes, CIO of Sigil PCC Limited
Pavel Stehno, CEO of Sigil PCC Limited
This content piece is performed by Sigil PCC Limited for information and entertainment purposes only and is not to be taken as an investment or financial advice.