Sigil - H2 2021 letter to investors
We are pleased to address you with a letter summarizing Sigil fund results of the second half of 2021. We have previously approached you on a quarterly basis and we plan to return to such frequency for the foreseeable future.
Looking back, much has happened at Sigil over the past six months. We would like to update you on the highlights of the past period.
- Sigil has launched its third fund cell under the regulated Sigil fund umbrella, the VC fund Zee Prime II. Although Sigil and Zee Prime are separate entities, we have always collaborated very closely on research topics. Launching a regulated VC fund together was the next logical step in our cooperation. Due to high investor demand the maximum fund size of $35 million was quickly oversubscribed. If you didn't manage to get an allocation in Zee Prime II, please stay tuned and let us know about your interest for the future Zee Prime III fund.
- The number of investors has increased significantly. Marta Wyrobek and Martin Bartuska, who joined our team full time in the first half of 2021 to support our investor relations activities, have helped us maintain the level of service we provide to our investors.
- The Sigil team attended events in Portugal, Switzerland, and Gibraltar. It was in Gibraltar where our CEO, Pavel Stehno, held a panel about regulated crypto funds and a keynote speech about NFT gaming which were both well received.
- You've certainly noticed the boom in popularity of NFTs and blockchain powered games led by Axie Infinity. The gaming industry is bigger than the global music and film entertainment industries combined and represents a significant growth opportunity. Sigil invested in this segment early on, particularly in the Aurory and Parallel games.
- At the intersection of DeFi and Gaming Sigil team helped to incubate ParagonsDAO which launched a smart contract powered by Olympus Pro allowing NFT holders for the first time in history to bond their NFT cards in exchange for the ERC-20 token. A significant milestone for the NFT infrastructure. Sigil Core fund will receive approximately $1m worth of PDT founder tokens for free as a result of our early involvement.
- The bull run continued for most of the year, especially for Layer 1s and crypto majors. In H2 2021 Sigil Core achieved a performance of +153.31% NET vs EUR, +76.42% vs BTC. Solana and Terra were the main drivers of our performance during this period. Sigil Core ended the year with a performance of +539.87% vs EUR, +278.05% vs BTC. This is the third year in a row that Sigil Core has outperformed the market benchmark of regulated cryptocurrencies by approximately double. Sigil Stable, our second cell launched in May, recorded a performance of +15.08% in the H2 2021 being on track to overperform the expected net gain of approximately 20% p.a. All performance numbers in this article and tables are net gains after the fund fees.
Sigil Core Net Performance vs EUR H2 2021
Sigil Stable Net Performance vs EUR H2 2021
Market Commentary 2021
2021 was an extremely eventful year.
Due to high gas fees on Ethereum, we have seen a rise of alternative smart contract platforms. This trend was led by Solana (SOL), Terra (LUNA) and Avalanche (AVAX), forming a “Solunavax” narrative and cementing themselves firmly in top 10 crypto assets (if we discount stablecoins). Together with some other alternative smart contract platforms (such as Polygon and Fantom), these assets vastly outperformed the rest of the liquid crypto assets.
Sigil was firmly positioned in SOL and LUNA the whole year, riding this trend. By the end of the year we rebalanced some of our profits into AVAX, since we believe its modular subnet architecture and couple of upcoming catalysts (games and DeFi projects being released on Avalanche and creating their own subnets) could be drivers for Avalanche ecosystem into 2022.
Solana on the other hand seems to struggle with fast pace of it's adoption, with validators not being able to scale their infrastructure fast enough and a bug in the system causing delays in block producing and transactions times.
Terra ecosystem is growing rapidly, however the risk of deleveraging (which is inherent to it's UST stablecoin mechanism) is keeping investors on their toes. Throughout Q4 we employed partial hedging and option vault strategies to slightly decrease our bloated LUNA exposure and earn additional yield.
The Ethereum ecosystem was slowed down by high gas fees, pricing many users out. However introduction of EIP 1559 meant increased value accrual for ETH due to burning introduced by the merge.
Between 5000 and 15000 ETH is being burned every day after EIP1559, creating deflationary pressure on ETH supply (source: https://watchtheburn.com/insights).
Despite successful launches of Arbitrum and Optimism rollups, Layer 2 adoption of the Ethereum ecosystem kept lagging behind. However, we keep a large position in ETH in expectation of Proof of Stake merge as well as increased adoption of L2s. While it's still in the realm of speculation, it's possible existing optimistic rollups will release their own tokens and incentivize capital rotation into their ecosystems. There is also chance that new technologically superior ZK rollups (such as ZkSync) will enter the stage in 2022, disrupting the current blockchain scalability landscape.
One of the bigger surprises for us was blue chip DeFi assets massively underperforming almost anything else, to the point of some of them being regarded “undervalued” by many traditional financial metrics.
Yearn.finance and MakerDAO are both DeFi projects with solid protocol revenues and P/E that would satisfy many traditional value investors. Sigil keeps exposure in both given these fundamentals, expecting tokenomics revamp and other catalysts in 2022. (Source: https://www.tokenterminal.com/)
We have, however, witnessed the rise of so called “DeFi 2.0” projects, which for the most part did not bring massive technological innovations, but rather different tokenomics and meme driven narratives that catered to risk hungry crypto native degens.
Exception was OlympusDAO, a project that attempts to bootstrap a new, free floating reserve currency of DeFi. It gained so much traction and hype that it became the most forked DeFi project of 2021. So called OHM forks became infamous as short term zero sum games, as the vast majority of them did not have the same long term goal. OlympusDAO itself did not escape its own boom and bust cycle, but keeps being one of the most active DeFi projects. We invested in OlympusDAO quite early, while ignoring the forks and keeping our position going forward.
OlympusDAO captured the attention of not only speculators, but developers as well (source).
One of the big surprises of 2021 was an emerging popularity of Non Fungible Tokens, mostly in the form of “profile picture” collectible series, play to earn gaming items and generative crypto native art. We believe NFTs will be one of the biggest gateways for retail consumers and brands to enter crypto. We bet on this trend investing in few NFT infrastructure projects. We were also able to capitalize on it actively engaging in trading NFTs, most notably through the highly anticipated NFT collectible card game Parallel.
NFTs are capturing the attention of mainstream media and retail users throughout 2021. This is not without controversy, as many lack understanding and try to push back against NFTs for “consuming energy”, which is a very misguided narrative.
In 2022 we can expect markets to get under more pressure because of macro uncertainty and tapering. We don't claim to have any edge trading around macro events.
Despite the expected volatility and reversion to the mean after last year's extreme performance. We remain cautiously bullish while repositioning our portfolio from assets we found overvalued towards those that we deem either undervalued or primed for increased adoption. We believe crypto is still one of the most important secular trends of the next decade.
Apart from themes mentioned earlier, we are increasingly positioning ourselves into Cosmos IBC ecosystem, where we see the pieces finally falling together and interoperability working reasonably well from user perspective. Last year we saw limits of monolithic blockchains, thus modular blockchain architecture may be the next step in crypto evolution.
Thank you for your ongoing trust in Sigil fund.
With best wishes,
Fiskantes, CIO of Sigil PCC Limited
Pavel Stehno, CEO of Sigil PCC Limited