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Where the market initially corrected after the announced interest rate hikes by the Federal Reserve (Fed) and the European Central Bank (ECB), we saw a further decline in the second half due to uncertainty after the bankruptcy of one of the biggest cryptocurrency Hedge Funds Three Arrows Capital (3AC).
The beginning of the month was known for its persistent high inflation and the monetary policy that followed it. On June 9, the ECB announced it will start increasing its interest rate in July. The day after, the inflation number of the US came in at 8.6%, 0.3% higher as expected by many economists. Because the numbers beat the expectations, economists were no longer expecting a rate hike of 0.5% but prepared for a 0.75% rate hike. This resulted in a risk-off movement and a correction for the cryptocurrency market. On June 15th, the Fed confirmed the rate hike of 0.75%. You can read more about these events in our market update of June.
Whereas at the beginning of the month turmoil was caused by liquidity issues at centralized crypto lending and staking platform Celcius, it was Three Arrow Capital that led the turmoil in the second half of the month. 3AC had built a well known reputation within the cryptocurrency market with its investments in large projects such as Avalanche, Polkadot, Solana, Ethereum and Terra. They were also very active in the Decentralized Finance and Gaming & NFTs segments. However, 3AC was also known for its higher risk and (too) optimistic investments. This has also led to its downfall.
The problems for 3AC started with the fall of Terra Luna. A few months ago, the fund bought 10.9 million LUNA, an investment of $559.6 million. After the collapse of the network, this investment dropped to a value of merely a few hundred dollars. Because these investments were made with borrowed money, the extreme loss of the Luna investment caused severe problems for the hedge fund. To make up for the losses and repay the loan, the fund is rumored to have entered several leveraged positions However, due to the falling market, these quickly approached the margin call. This caused these positions to be liquidated, which in turn resulted in further selling pressure on the market.
On June 29, the judge ruled that the hedge fund had to liquidate all its positions, and a few days later, on July 1st, Three Arrows Capital officially filed for bankruptcy. The correction caused by the liquidation of the last positions and the bankruptcy of 3AC had a severe impact on other centralized cryptocurrency protocols. For example, borrowing and lending protocols Celsius and BlockFi both ceased its withdrawals. Cryptocurrency exchange FTX eventually provided a helping hend by offering BlockFi a credit of $250M. Canadian cryptocurrency broker Voyager Digital is also facing liquidity problems now that they have announced that 3AC has defaulted on its $650M loan.
However, the fall also presents opportunities for new parties. Whereas J.P. Morgan helped several banks in the past during periods of financial crisis, this time Goldman Sachs seems to step in. For example, several sources indicate that the Wall Street bank wants to raise $2 billion to take over Celcius' positions.
Recent events in the market reflect the immaturity of the market and especially that of some individual parties. While this is causing downward movement at the moment, it ultimately separates the wheat from the chaff. The foundation becomes stronger and the market learns from this, after which it can rebuild.
The downwards movement in June has also led to a decline of the Hodl Funds. The Hodl.nl Consensus Fund, the Hodl.nl Genesis Fund and the Hodl.nl Oracle Fund ended respectively at a Net Asset Value (NAV) of €2,24, €2,24 and €0,27.
Lately, we often receive the question: How does Hodl handle their investments in a difficult market? Therefore, we would like to share some insights into this area. As explained in our investment strategy, our funds are structured in a traditional bottom-up strategy. Our portfolio consists of 3 layers: foundation, floor and top. The foundation consists of well-established cryptocurrencies with proven technology, the floor consists of cryptocurrencies with a technological application and/or recognized team and the top consists of more speculative cryptocurrencies with expected high growth potential.
In a downward market, altcoins usually fall a lot more than Bitcoin (BTC). For this reason, the share of BTC in our portfolio increases percentage-wise. By strategically scaling in, we convert these BTC with a dollar-cost-average strategy into proven cryptocurrencies that strengthen the foundation layer. This makes the foundation stronger, which also optimizes the risk profile during the current market situation. This also improves our average purchase price, making it beneficial in the long run. Our analysts are closely monitoring the market to determine when the positions in the floor and the top layer need to be scaled in for optimal results.
Bitcoin, the first and best-known cryptocurrency, was conceived in 2008 to reduce dependence on the policies of (central) banks in our financial system. The decentralized aspect of the blockchain and the possibility of self-storage gave the user more independence. The rapid rise of cryptocurrencies and the need to be able to trade them led to the creation of central exchanges (exchanges) that helped lower the entry barrier by offering low transaction costs and secure storage. In doing so, a piece of the original idea disappeared, where crypto was once intended to put the management of wealth back in the hands of the individual. As an alternative, the decentralized exchange emerged. This leaves the funds in the individual's control when trading as there is direct trading with the counterparty without the intervention of third parties. These decentralized exchanges trade on the basis of Smart Contracts and are characterized by less liquidity that creates differences between the expected and actual price at which the transaction is executed. These differences are referred to as slippage.
Curve Finance envisions solving this problem with its decentralized exchange, as it is optimized to keep slippage low.
Read more about Curve Finance.
In this blog series on investing in cryptocurrency, we dive deeper into topics such as the evolution of our money, the origins of cryptocurrencies, the various applications of this new technology and the underlying differences.
In the sixth chapter we went deeper into the analysis of cryptocurrencies. This consisted of topics such as the use-case, tokenomics and its ecosystem. In chapter 7 we will dive deeper into the different methods of cryptocurrency investing, whereas in the final chapter we will introduce you to the unique strategue of the Hodl Funds.
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