BlockBay Capital portfolio update December 2021

BlockBay Capital portfolio update December 2021

The BlockWealth portfolios achieved a negative return of -18% in December. The portfolio return over of 2021 lies (depending on the chosen investment strategy) between +195% and +260%.

2021 Recap

It was another good year for cryptocurrencies. Bitcoin started the year at a price of $29,000 and ended at $46,000. For Bitcoin, 2021 was the year in which companies and governments became more involved with Bitcoin. For example, Tesla has converted part of its balance sheet to Bitcoin and El Salvador has introduced Bitcoin as legal tender. Bitcoin faced challenges over the past year, such as questions about the sustainability and energy usage of Bitcoin. China added political pressure on Bitcoin as bitcoin mining was prohibited in the country. As a result, many miners have left China for the United States. This transfer caused a temporary dip in the computing power of the Bitcoin network. Bitcoin’s computing power is now back to its old levels, a sign that there is still confidence in Bitcoin by miners. In the longer term, the decrease of Chinese influence in Bitcoin mining looks positive. Finally, Bitcoin’s properties (open, global, neutral and public) means that Bitcoin has the potential to compete with local emerging market currencies. In doing so, Bitcoin takes advantage of its potential as a safe haven that protects investors from negative effects of monetary and fiscal policies.

Ethereum has performed extremely well in 2021 with its price rising from $740 to $3,750. DeFi (decentralized finance) and NFTs (digital art) have been the main drivers of the price increase. The price increase is also substantiated by increasing transaction usage, for example the transaction value on Ethereum has increased fivefold in 2021 to $3,700 billion (with an average of about $10 billion per day). Ethereum also faced challenges, the possible emergence of a new digital world (the Metaverse) and Web 3.0 will demand even more from a blockchain than the current transaction volume. Extreme usage will cause high transaction costs for users, this fact ensured that cryptocurrencies such as Cardano and Solana have performed well in the past year.

There were also plenty of developments in macro-economic areas cryptocurrencies in 2021. For example, the first Bitcoin Future ETF was launched in the United States, the ETF had a record inflow of new capital as it was extremely popular with investors. Governments are continuing to work on digital money from central banks, a trend that may be reinforced by the corona crisis. It is important to continue to follow developments with regard to stablecoins in the new year. Stablecoins are cryptocurrencies that ‘compete’ with fiat money, which is considered undesirable by governments. There were also multiple IPOs of cryptocurrency companies in the past year, a further sign of the industry’s increasing legitimacy.

Expectations 2022

The prospects for cryptocurrency in the new year cannot be seen separately from the current global economic and financial environment. The uncertainties regarding (high) inflation and (rising) interest rates are a cause for concern for central banks worldwide. The economy has been supported for years by quantitative easing programs and low interest rates. The question is how financial markets, and crypto markets in particular, will respond to changes in these factors. The trend in financial markets towards crypto companies is that even more money will become available in 2022 through IPOs and venture capital investments. Further developments can also be expected in the field of institutional adoption. As a developing country, El Salvador is partially dependent on the IMF and World Bank for debt assistance. The implications of Bitcoin’s recognition as legal tender are still unknown. If the positive effects as a result of the acceptance of Bitcoin outweigh the negative effects in a country like El Salvador, it cannot be ruled out that other countries will follow.

Looking at the cryptocurrency adoption, globally there are now 200 million users of cryptocurrencies. It should be noted that most users are purely speculators. A number of possible applications of cryptocurrencies have emerged in the past year, especially digital art. It is quite possible that the best is yet to come for the so-called NFT (non-fungible token) market. Industries such as gaming, loyalty points and esports have the potential to introduce tens of millions new users to blockchain and cryptocurrencies. It is important that it becomes easier for users to work with crypto coins and that more benefits are linked to owning a digital coin. A football club could reward its loyal fans with (digital) features if they have purchased a season ticket in the form of a token. The past year has also seen the rise of speculative memecoins in which a cryptocurrency such as Dogecoin achieved enormous returns. In May 2021, the top of Dogecoin was reached after a huge price increase of +14,500%, followed by a fall of -75%. Eventually most investors were left with a loss. It would be a positive development of legitimacy within crypto markets if these kinds of huge speculative buys no longer occur in the new year and investors opt for cryptocurrencies with more use cases.

Looking at valuations and possibilities of crypto markets, there is a high potential for positive returns. For example, the total market cap of cryptocurrencies as of December 31, 2021 was $2,200 billion, Apple’s market cap (as the most valuable company) recently surpassed $3,000 billion for the first time. There is a possibility that Bitcoin will be used more and more as a store of value worldwide, Ethereum could become the app store of Web 3.0 and the Metaverse. In addition, there are dozens of other crypto projects with technological potential to disrupt certain industries and create value for investors. The right approach in such markets is therefore to continue to allocate a small part of the liquid assets in crypto markets for the coming years. Asymmetric returns (a downside of -100% and an upside of +1,0000%) can continue to be realized despite the significant returns already achieved in the past couple of years. This requires sufficient new users of blockchain and cryptocurrencies, favorable (macro-economic) market environments and further underlying technological developments.