What’s Bad for Crypto May Be Good for Crypto Traders

Cryptocurrency valuations have at least one thing in common with a long fly ball to center field: They’re going, going, gone.

The sentiment applies across the digital assets board, extending to spot assets, the cost of putting on overlying derivatives trades, stakes in startups and structured products. And the list goes on. And on. And on.

The next time Aaron Judge of the New York Yankees smashes a fastball over Fenway’s towering Green Monster, Red Sox fans are going to be up in arms — what else is new?

For institutional cryptocurrency traders and the allocators that back them, though, the MLB analogy equates to an entirely different outcome than the irate Bostonians. There’s abundant opportunity this quarter and beyond to rake in substantial sums out of all the carnage, provided one has the capability, plus the connections, to sell the correct kind of strategy to seeders and limited partners.

Market participants told Blockworks that — by and large — there’s no shortage of silver linings, ones that smack the never-ending depressive sentiment squarely across the face. This analysis also relies on previous Blockworks reporting.

That’s not to say raising capital in this environment is an easy feat these days.

Digital asset’s epic, at times almost unfathomable, beating in 2022 backed crypto natives — and Wall Street’s top traders who have at least dabbled in the sector — into the tightest of corners. Success stories in the fourth quarter, at least in terms of performance and known notable capital raises, were hard to come by.

Untold billions of capital, especially Wall Street dollars, were still hanging in the yearend balance.

The metric is difficult to quantify, but every source arrived at the same general conclusion on the market’s rollercoaster-like volatility: There are virtually endless and lingering opportunities to derive alpha via strategies that are tailor-made for all the financial insanity.

But those opportunities are likely fleeting.

Turning the (finance) corner

From a macro perspective, the corner, in more ways than one, is already turning — or has already turned — for the better.

Even if viewpoints on what’s to come vary, vary a whole lot.

The S&P 500 and the NASDAQ have clawed back 2022 losses in a big way, inflation has cooled, and the Federal Reserve has not been ramping up interest rates as aggressively.

The relative bullishness has extended to the world of Web3, albeit to a more measured extent.

Case in point: Altcoins have taken off.

The industry’s cumulative market cap clocked in at $754 billion on Jan. 1, according to TradingView data, far from its bull market standing in the trillions.

It’s now hovering around the $1 trillion mark, equating to a 25% recovery in a little more than a month’s time — handily outpacing the NASDAQ’s own bounce back of about 15%, as well as the S&P 500’s approximately 8% rebound from 2022’s worst showing since 2008.

Longtime traditional finance players with sway have taken note. Cambridge Associates, in one example, has not stopped the institutional allocation adviser’s developing push into digital asset due diligence. Hedge fund multi-billionaire Steve Cohen’s Point72 has pushed onward in the same (buy-side) fashion, not to mention Cohen’s nascent and progressing proprietary trading firm that started taking shape last year.

Brevan Howard Digital — the largest crypto hedge fund launch on record at the time — is said to have dipped a bit in terms of the performance of its core strategy from time to time in 2022. Its more recent showing isn’t known.

The entity at the time represented one of the largest one-time commitments to digital assets by a traditional investment manager. It was heralded as a mammoth indicator of the seriousness of the world’s top macro investors taking the Web3 plunge.

The affiliate of the long-time multi-strategy manager cut some underperformers toward year-end 2022. Like so many of its peers did — or are in the process of doing now.

For many institutions, though, it’s been more of a pump-the-brakes effort, in many cases, not a get-us-out-of-here moment.

Attractive valuations are a big reason why.

Jeff Reed, global head of sales for crypto market maker Liquidity One, told Blockworks that “valuations across the board” from blue-chips like bitcoin and ether to stakes in sector startups, are “extremely attractive at this point” in the cycle.

“It really just comes down to what kind of experience you had [in the fourth quarter and in 2023 so far] — and how much dry powder you now have available,” Reed said.

Added Reed in an interview last week: “All the signs I’ve been seeing over the last three weeks are extremely positive.”

FTX? Moving on

Crypto traders of all ilks are really, really sick of talking about the saga revolving around FTX’s collapse in the fourth quarter. They’re also very much dealing with the aftershocks, in terms of volatility and liquidity (or lack thereof, given funds stuck on the bankrupt exchange in some cases).

“People got really spooked by FTX,” Reed said. “They wanted to let that play out and see what was going to happen and re-adjust. The more conservative [investors] that may be coming into crypto for the first time, they’re doing more due diligence. They’re taking more time before they invest their capital.”

Armando Aguilar, co-founder of venture startup Aztlan Capital — which focuses on Latin American blockchain plays — told Blockworks that “a lot of people started relatively cash heavy” in 2022’s fourth quarter as the market took (yet another) dive.

Seed rounds raised in the last couple of months of last year, Aguilar spotted at the time, were clocking in around the $5 million (or less) valuation mark, typically on lower multiples — with net check sizes of less than a million dollars.

More recently, Aguilar said he’s picking up on “quite a few deals that are now [around] the $10 million to $25 million mark.”

Recent examples sourced from previous Blockworks’ reporting fitting that bill:

Block Joy, a Web3 infrastructure-focused startup, landed a Series A round of $12 million
Digital assets security specialist Hypernative locked in a $9 million seed raise led by IBM’s venture arm
Another crypto infrastructure provider, Spatial Labs, snagged $10 million in a round with Marcy Venture Partners, a firm affiliated with Jay-Z

The number of bets venture capitalists are taking on crypto startups of late has been up from the same period a year ago — though the individual check sizes have been down.

Companies raising rounds last week took in a cumulative $185 million, per DeFiLama data. That’s a far cry from the $578 million startups raked in over the same seven days in 2022.

But, according to the same data providers, 20 entities took in capital this time around. Just three did the same in 2022, including FTX…

There’s a recent and building appetite for risk assets, according to Aguilar, who attributed the sentiment shift to macro factors — including the Federal Reserve showing signs of cooling its quantitative tightening measures, inflation metrics dropping from near-historic 2022 highs, and top technology stocks booming.

Coinbase has boomed even more.

Consider that Meta’s stock had its floor fall out in 2022, dropping more than 40% at one point. Still, the share price of the social media giant — now focused on metaverse initiatives — was down roughly 17% over the last 12 months through Tuesday afternoon in New York.

That’s because it was up about 55% in the five or so weeks since 2023 began alone.

Traders and analysts alike pay close attention to correlations between tech stocks and spot cryptoassets which, in turn, inform the valuations of crypto startups over the long haul. In other words, what’s good for Big Tech is often good for crypto getting big.

Venture, spot, NFTs…

NFT markets haven’t been immune to the market’s shifting winds.

Sasha Fleyshman — a portfolio manager for the established and digital assets-focused investment manager Arca’s actively managed NFT vehicle — told Blockworks that the fourth quarter’s digital collectibles downturn was likewise driven by “the actual macro deteriorating” over the last six to 12 months.

Arca’s NFT strategy takes a longer-term time horizon and imposes a corresponding lockup on the capital of its limited partners. Fleyshman, who is a crypto veteran, said the bullish buildup to the dropoff in some ways was reminiscent of the initial coin offering (ICO) era in 2017 — “where everything was getting funded” and “everyone was excited, [because] things were rocketing higher.”

Well-documented liquidity complications circa last fall, at least in part, triggered the “rapid fall,” which Fleyshman compared to an elevator rising and falling. But in a faster fashion.

Sounds a lot like Disney World’s Tower of Terror.

There was, for sure and at the time, a “level of despair” among big-money allocators, according to Joe Marenda, Cambridge Associates’ global head of crypto investing.

And it was a deep despair, the Cambridge partner told Blockworks, with a bleaker outlook than last year’s preceding down periods. But things are looking up.

“People were like, ‘Oh, boy, this is gonna’ be a bad one,’” Marenda said. “That was very similar to what the crypto winter’s bottom in the last round felt like, where people were beginning to question [if] they should go back to Big Tech, go back to traditional finance…I feel like we’re past that now. So, I feel like we’re past the bottom.”

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