DAiM Issue 38 - What are long-term holders doing?

1. Overview
2. Politics of Crypto
3. Babylon
4. ETH Selling - Bullish or bearish?
5. Managed Portfolio

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1. Overview - Bitcoin and crypto stuck to the familiar summer script of uninspiring action. We’re still waiting for bitcoin to reclaim its all-time high, achieved almost six months ago. Fortunately, good news is on the horizon. First, it seems like rate cuts are coming in September. Jerome Powell made it clear a rate cut was coming after the next meeting, citing inflation coming down and a strong labor market. Lower rates and, in turn, looser monetary conditions are good for risk assets and crypto. There is some political uncertainty to deal with, but as we will show, the fall months tend to be great for bitcoin. In TradFi, bitcoin and ethereum spot ETFs continue to see mostly positive inflows (excluding Grayscale). Structurally, the market remains sound, and it’s a matter of time before demand begins to meaningfully surpass supply. We think that will happen in Q4, and new all-time highs should be here by year-end. Long-term holders are showing they believe the price will go up too, adding half a million units of Bitcoin throughout the summer.

   

2. Politics of Crypto - Polymarket currently has Donald Trump as a slight favorite over Kamala Harris. If you aren’t familiar with it, Polymarket is a platform that runs prediction markets where eligible participants can bet on a wide range of events and outcomes. While individuals have been able to place their bets on various sites and apps for some time now, what sets Polymarket apart is that it is entirely decentralized and runs on blockchain. Its prediction market is built on Polygon, a protocol that makes transactions and processing faster on Ethereum. Most won’t even realize this. For a while, skeptics have asked, “When will we see real-world use cases for crypto?” Well, here we have an excellent use case. More and more people are looking at Polymarket to see predictive data because they know it is uninfluenced by its operators. It is fully decentralized, the perfect tool for letting market participants decide how they think events will play out. On Polymarket, anyone with some ether or USDC can create a market for an event and see if others will vote on the available outcomes. The people voting then use their crypto to vote on the outcome. Absolutely perfect! And it will only get better as more people use it.
3. Babylon - Staking has made its way to bitcoin. ​​Babylon Bitcoin Staking is rolling out its service that allows bitcoin holders to use their stack of bitcoin to help secure other Proof of Stake networks. Essentially, a user locks their bitcoin in a protocol and is given an equivalent number of units for another token. That token is then used to stake on the native chain to help secure that chain’s network and accrue the staking rewards. This allows bitcoin holders to earn some extra yield, something that is not possible in a proof of work chain without performing intensive mining operations. While the idea of extra yield sounds nice from an investment standpoint, this is a protocol we would avoid using for the time being. We see three main issues right now.First, you have to send your bitcoin to a third-party address, so you lose custody of it. If Babylon is acting in good faith, and we have no reason to believe they aren’t, the risk to your assets is low. But you are going from no risk to low risk when you give up control like this. If the yield compensated for the additional risk is high enough, it might be worth it. But also remember, if it seems too good to be true, it likely is.This brings us to our second point of caution, which is that the yield is not paid in bitcoin but rather the native PoS tokens for which the bitcoin will be exchanged. Those tokens will be staked on the network, and their equivalent value will then be converted back to BTC and rewarded to the Babylon protocol users. Throughout crypto’s short history, these altcoin, affectionately called sh*tcoins, have not held their value relative to bitcoin. Over time, the rewards will bleed value relative to bitcoin while you voluntarily give up your bitcoin sovereignty by using the protocol. “Not your keys, not your crypto” is very important, especially with bitcoin. To us, a yield paid in an altcoin is not worth allowing access to your bitcoin.

   Third is the risk of impairment. Staking assets runs the risk of slashing where not only can your rewards be slashed, but also the assets you have staked. You could, in theory, get back less bitcoin than you staked. Slashing is extremely rare, and stakers must maliciously attack a network to lose their staked assets. But again, this is something you will have little to no control over since you are staking through a third party and not directly.

   As with any new protocol in crypto, it’s best to wait and let it be battle-tested before risking your holdings. At DAiM, we test new products and investment opportunities using our personal assets before allowing our clients to participate in these new offerings. For now, we are staying away from bitcoin staking. From day one, we’ve focused on reducing risk, and our experience and due diligence have protected clients' assets over time. There are a wealth of currently available strategies that we think add value for clients. So, if you want to stake PoS tokens, borrow, or utilize option strategies, contact us.

    

4. ETH Selling - Bullish or bearish? The Ethereum Foundation just recently sent 35,000 ETH to Kraken to be sold. The interpretation of this differs amongst crypto optimists and pessimists. Officially the Ethereum Foundation (EF) is selling ETH as part of its treasury management activities. While it would be nice to send ETH to all counterparties as a method of payment for services rendered, some entities still prefer fiat. In that case, the Foundation is simply swapping to a more palatable medium of exchange. Crypto pessimists disagree with the ETH party line and see this as a capitulation of sorts, pointing to the November 2021 sale when the EF sold 20,000 ETH for about $100,000,000. While the amount of ETH sold is relatively small to EFs overall holdings, some people think this transfer signifies a local top and the foundation's feelings that we’re in for a prolonged chop in price. Other more upbeat observers point to the EF selling 100,000 ETH in December 2020 as a sign of hope. After that sale, Ethereum rallied 6x from $635 to $4,182 in just five months. Crypto is tribal, so one’s overall feelings toward Ethereum probably influence the view on this sale. If you like Solana, you probably think that this is a bad sign. If you like Ethereum, you probably think the market is ready to rally. The transparent nature of these networks can lead to overreactions to events that are simply the ordinary course of business. Crypto is volatile, so a steep sell-off or blistering rally are likely scenarios.
5. Managed Portfolio - If you have been following our letters, but are not yet a client, we encourage you to give us a call to see how we can improve your returns. Steve Kurz of Galaxy Digital recently said, “Active management becomes part of the conversation, and your differentiation isn’t on fees or total cost of ownership, it’s now on what strategies are you creating, what alpha are you generating — and that’s when we know we’ve actually achieved something in terms of it becoming an asset class.”Since 2018, our managed Model Portfolio has outperformed bitcoin, Bitwise 10, and GBTC.

   

How DAiM benefits clients

1. Model Portfolio: Our meticulously managed portfolio has consistently outperformed the simple strategy of buying and holding bitcoin alone by more than 456% since inception on 5/31/2018.
2. Wealth Management: As a licensed Registered Investment Advisor (RIA), we cater to clients with diverse financial needs, including Trust accounts, brokerage accounts, and IRAs. Our services encompass comprehensive tax strategies and audits to optimize your financial outcomes.
3. Tailored Solutions for Various Investors:
   • Individual Professionals: Busy individuals like doctors who lack the time to stay updated on market trends.
   • Altcoin Exposure in Retirement: Investors seeking exposure to alternative coins within their retirement accounts.
   • Intergenerational Wealth Planning: Large families aiming to create and manage intergenerational wealth, including gifting in bitcoin across multiple generations.
   • Simplified Management: Investors overwhelmed by the complexities of managing multiple wallets and decentralized exchanges (DEXes), finding it challenging to track or rebalance their assets promptly.
4. Enhanced Support and Communication: We understand the frustrations of navigating communication with crypto exchanges. At DAiM, we provide easy access to expert guidance, ensuring seamless communication for our clients.

Curious to Learn More About Investing with DAiM? Contact us now.