Bitcoin - a Macro Perspective

As of late, one of Bitcoin’s properties in particular, its scarcity, is increasingly coming into the limelight. Unlike Gold, we know Bitcoin’s supply coming to the market. Gold is an asset of limited supply but its supply curve looks distinctly different than Bitcoin’s:

Schematic view of the supply curve of Bitcoin and Gold.

Schematic view of the supply curve of Bitcoin and Gold.

In fact while more and more Gold is found every year, less and less Bitcoin will be mined over time. While we don’t know the amount of Gold in the universe, anyone running the Bitcoin software can verify that no more than 21 million bitcoins will ever be created. This is what we mean when we say Bitcoin is a hard asset, it is hard to create, and it will only get harder.

Right now the world is going through a global easing cycle, meaning that as central banks are cutting rates around the globe, more fiat currency is printed. This will likely create an increased demand for hard, scarce assets that can’t be inflated such as Gold, land, real estate and Bitcoin. 

A record amount of debt is currently trading at negative interest rates. While Albert Einstein has been quoted as saying “the power of compound interest the most powerful force in the universe”, the bond market will have to learn the power of negatively compounding interest.

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Gold and Bitcoin might be attractive as the world is entering a new wave of global easing as they will never pay a negative interest rate. However, importantly, Bitcoin is also gaining another quality that Gold has — that of being a risk-off asset. 

I believe there are behavioural learning cycles that the market goes through to find these risk-off assets. Japanese Yen is well known to be a risk-off asset despite Japan having one of the highest (public-)debt levels to GDP in the world. However, every time that there is a flight to safety the Yen will appreciate in value, and because it has done that in the past investors know it is likely to behave the same way next time. This learning pattern after awhile becomes self fulfilling. I believe the same thing is happening to Bitcoin at the moment.

This is what happened when President Trump threatened to increase Chinese tariffs last week:

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A trade war means lower growth, thus the yield on US 10 year government bonds (US10Y) went down. Lower growth means lower demand for oil, thus crude oil (WTI) fell. Stocks, S&P 500 (SPX), fell dramatically. Gold traded up and Bitcoin traded up the most. The Japanese Yen (JPY) is not in the graph above, but the Yen strengthen as well.

Today’s (Aug 5, 2019) big macro story is that the Chinese is warming up to the idea of using the Yuan as a weapon in the trade war with the US. The Chinese Yuan reached a level against the USD not seen in over a decade:

Aug 5 global macro turmoil.

Aug 5 global macro turmoil.

Again Bitcoin (and other crypto assets) is the high beta risk-off asset. Gold and JPY are also higher but not to the same extent.

To conclude;

  1. Bitcoin is a hard asset, in fact much ‘harder’ in terms of scarcity than Gold as the supply has a strict cap at 21 million.

  2. More macro driven cycles like the above examples and the market will have taught investors that Bitcoin should be among gold and JPY as a risk-off asset.

We believe the global macro climate with easing and a flight to risk-off assets is a good backdrop to being in crypto assets in the short to medium term and wouldn’t be surprised if we wake up to more headlines like the below in the coming months.

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Henrik Andersson is the Chief Investment Officer at Apollo Capital . Based in Melbourne, Australia Apollo Capital invests in the crypto assets that are powering the next generation of computing infrastructure. For more information, please see apollocap.io.

Crypto Breaking Out

Bitcoin got known by its creator, Satoshi Nakamoto, first publishing the white paper on The Cryptography Mailing List on October 31, 2008.

Bitcoin white paper available at bitcoin.org/bitcoin.pdf

Bitcoin white paper available at bitcoin.org/bitcoin.pdf

The network launched on January 3, 2009. At the time, it was just a very small group of cryptographers that knew about Bitcoin. 

Nine months later in November 2009, Bitcoin reached outside mailing lists and private emails as Satoshi created the Bitcointalk.org forum . The BitcoinTalk forum became the go-to place for discussion in relation to Bitcoin and also crypto in general and it remains popular to this day.

Bitcoin still wasn’t worth much if anything. In fact, it wasn’t until May 2010 that the first real-world transaction took place. The value of Bitcoin was then less than $0.01. 

In July 2010 Bitcoin was introduced to a wider audience with an article in Slashdot. The site at that time was billing itself as ‘News for Nerds. Stuff that Matters’ — a large but limited audience. Slashdot has a big following among computer scientists and thus Bitcoin got in the public limelight for the first time. The price skyrocketed 900% to $0.08 over five days. In would go much higher, in February 2011 a Slashdot article mentioned that Bitcoin achieved ‘dollar parity’ or $1.00 — a milestone in the two year old currency. But the price rally wasn’t over. Forbes and Gawker published articles and the price of Bitcoin increased by another 30x over the coming 4 months.

In November 2011 Bitcoin would break out to an even bigger audience as this time Wired magazine was writing an article about the ‘Rise and Fall of Bitcoin’.

From 2011 Wired article: ‘The Rise and Fall of Bitcoin’.

From 2011 Wired article: ‘The Rise and Fall of Bitcoin’.

Bitcoin collapsed in value by 93% from a peak of over $29 in June 2011 to a low of $2.00 in December the same year.

At the time, no one could know for certain if Satoshi Nakamoto had unleashed an unstoppable force or if Bitcoin would slowly lose even more value and never come back.

It turned out that Slashdot, Forbes, Gawker and Wired had taken Bitcoin out from the small circle of cryptographers and computer scientist into the consciousness of a much larger audience and created an unstoppable force.

Bitcoin didn’t receive much media coverage in 2012 but the price started moving up again and as price appreciated it was going to break out to a much larger audience once again.

In March of 2013 Bitcoin hit $100 for the first time. The widely followed financial news cable network CNBC started regularly featuring Bitcoin.

CNBC in April 2013.

CNBC in April 2013.

Suddenly Bitcoin was breaking out to an audience in the hundreds of thousands. Bitcoin started increasing in price rapidly and in January 2014 reached $1,000 — another milestone.

While the online conversation was still happening on the BitcoinTalk forum that Satoshi started, the Bitcoin subreddit on Reddit had become one of the most popular places for online discussion. In the following years a large part of that conversation was moving to Twitter — what is now known as ‘Crypto Twitter’.

With the launch of Ethereum in 2015 and altcoins came a new wave of activity to the market. In 2017 the market was ready for another rally. The ICO boom slowly grew from early 2017 and by mid year it really picked up speed. The coming 6 months would see record activity media coverage and all time high prices. The crypto market had attracted attention of millions of people. Crypto had in many ways truly broken out into the mainstream.

With price, media interest slowed down in 2018. However big institutions had their eyes on the market and in 2019 Fidelity and ICE (NYSE) both announced the launch of their crypto related offerings. What really got crypto back in the spotlight however was the announcement by Facebook that they together with partners are launching a crypto currency called the Libra Coin.

Crypto was once again breaking out to a bigger audience and for the first time we had the President of the United States commenting on Bitcoin (and Libra), we had the Federal Reserve Chairman being asked about crypto in a congressional hearing and we had the treasury secretary holding a press conference about cryptocurrencies.

Federal Reserve Chairman Jerome H. Powell in July 2019.

In the last month crypto has broken into the consciousness of the President of the United States and the lawmakers around the world. Federal Reserve Chairman called Bitcoin a speculative store of value, a digital gold and some lawmakers have come out as defenders of the unstoppable force that Bitcoin and crypto represent.

Crypto is a reflection of a common belief, a network effect that grows stronger the more people joins the network. In its short 10 year history it has managed to make waves that have been felt in all corners of society around the world and no time previously has the waves been as big as in the last month. No doubt, the next leg up will bring in even more people and give even more attention to crypto.


Henrik Andersson is the Chief Investment Officer at Apollo Capital . Based in Melbourne, Australia Apollo Capital invests in the crypto assets that are powering the next generation of computing infrastructure. For more information, please see apollocap.io.

Investing in Crypto Assets: Apollo Capital vs DIY

Investors can invest in crypto assets in a number of ways. Historically, the only option has been a DIY approach. More recently, as institutions enter the market, structured investment options have appeared, including Apollo Capital.

We have analysed the advantages and disadvantages of each approach. While we won’t pretend our conclusion is not biased, we have tried to keep the analysis balanced. Hopefully this will help investors considering a DIY approach versus investing in Apollo Capital.


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Let’s start with the benefits of a DIY approach.


Save on Fees

This is the most obvious advantage to DIY investors. The Fund charges a 2% management fee and a 20% performance fee, subject to a high watermark. A DIY investor saves these fees.


Investment Approach

The investment strategy of the Fund may not be suitable for every investor. The Fund’s strategy offers exposure to broad crypto markets, including large liquid crypto assets, newer projects and a third bucket called opportunistic trading. An investor may prefer greater exposure to other parts of crypto markets. For example, an investor may prefer a portfolio dedicated to ICOs and new projects.


DIY Advantages

Many DIY investors simply prefer doing it themselves. Many investors like having control and flexibility of trading crypto in their own way. Typically these investors are heavily involved in monitoring crypto markets.


Trust

Trust is a big issue in crypto. Crypto assets are a major technological breakthrough in removing the need for a trusted third party as intermediaries. For example, Bitcoin removes the need for a trusted intermediary to move money from one person to another. Some investors may question the need to place trust in a Fund when they can hold crypto assets themselves. Some investors may question the trustworthiness of Apollo to hold crypto assets on behalf of our investors. I understand where these concerns come from. If I were objectively analysing a crypto Fund where I didn’t personally know the key executives involved, I would have the same concerns. 

At Apollo, we try to do more than simply say ‘trust us.’ Contrary to the typical hedge fund, we are deliberately transparent with our operations and analysis of crypto markets. We release a weekly newsletter, monthly performance, quarterly market analysis, regular Webinar updates and we readily make ourselves available to investors and those wanting to learn more about crypto assets. We are publicly verifiable and we have staked our personal and professional reputations on Apollo Capital. We realise trust needs to be earned and that’s what we seek to accomplish. And we understand this may not be enough for some people that prefer to DIY.

The market infrastructure for investing in crypto will eventually mature to the point where this no longer becomes an issue. Just as investors don’t think twice about the level of trust or security involved in an equities Fund, we are confident crypto investments will mature to the same point. In time, we will see more crypto Funds with sophisticated and segregated approaches to custody, as well as a range of other crypto investment products like ETFs, indexed funds and listed derivatives. We like to think Apollo is helping pioneer the maturation of the asset class.

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Now to the advantages of investing in Apollo. 

Rather than make this a blatant sales pitch, we’ll highlight some of the advantages of investing in the Fund that investors may not have considered.

Trading & Execution

Trading crypto assets starts by opening accounts at trusted crypto exchanges. First and foremost, this involves knowledge of the more reputable exchanges and avoiding those that are less trustworthy. Investors will need to pass AML/KYC checks for each exchange, transfer fiat currency and transfer crypto assets to cold storage once assets are purchased. To construct a diversified portfolio, investors will require accounts on various exchanges and will need to track crypto assets as they are transferred. 

Unlike equities, trading crypto is not as simple as opening one brokerage account and gaining access to half the world’s listed securities.

Security

Securing crypto assets is very difficult. While we mentioned above that trust in Apollo or our custody processes might be an impediment for some investors, we can easily flip this and say our security processes are almost certainly stronger than a DIY investor’s. All crypto investors (us included!) should not leave crypto assets on exchanges. Investors will need to source, configure and use a suitable cold storage device. Cold storage devices typically only offer support to a limited range of crypto assets, so multiple solutions will be needed for a diversified portfolio. Lastly, DIY investors should consider a disaster recovery plan. If they are hit by the proverbial bus or if something goes wrong, are their assets recoverable, including by their estate? In December last year, one of Canada’s largest crypto exchanges went down with $190m in customers’ funds due to the death of the founder and CEO. He was the only one with access to the assets. 

Storing and securing crypto assets is complex and technical. Investors must invest a great deal of time and energy to securing their assets properly. 

Reporting & Tax

Reporting and accounting for crypto transaction is straightforward for a simple portfolio of Bitcoin and Ethereum. Trading a range of crypto assets is significantly more difficult, like trading a range of foreign currencies. Transactions from one currency to another, to another and back to the original all must be reported and accounted. Crypto is far more complicated as trades are usually into Bitcoin or Ethereum, then into another asset, then into another asset and back to Bitcoin or Ethereum and maybe back in to Australian Dollars. Unfortunately, investors cannot simply declare gains or losses back into Australia Dollars. Every trade must be accounted for with a corresponding gain or loss.

There is an economies of scale benefit to investing in Apollo. Our third party administrator performs these calculations for the benefit of all investors. 

Alpha

The biggest and yet most overlooked advantage to investing in Apollo is Alpha. As well as our expertise in crypto assets, we have two people constantly monitoring crypto markets. This is very hard for a DIY investor. While we admit that effort does not always equal results, over the 18 months we have been operating, net of fees, we have outperformed our benchmarks C20 ( an index Fund) and the Eurekahedge Cryptocurrency Hedge Fund Index (an index of our peers).

One key advantage we have over DIY investors is access. Our growing size and network in crypto communities means we have access to investment opportunities that many DIY crypto investors wouldn’t have even heard about, let alone gain access to. 

Fatigue

Lastly, it should be mentioned that a number of seasoned DIY crypto investors are tired of following crypto markets. Crypto markets are fast paced, evolving quickly and it takes a great deal of energy to keep up. While we know a number of investors that have retired from fatigue, we can’t get enough of crypto markets, we love it!

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Whether it’s through the Apollo Capital Fund or a DIY investment approach, the most important issue is that all investors consider an investment in crypto assets. Crypto assets are a groundbreaking technology with enormous return potential that show little correlation to traditional assets.

Investors would be foolish to ignore them.


Our Thoughts on Libra

Last week we saw the biggest announcement in crypto since the Bitcoin Whitepaper. We are clearly not trying to downplay the enormity of this announcement - it is huge. A consortium of companies, led by Facebook, introduced the world to Libra - a cryptocurrency backed by a reserve of fiat currencies and government bonds.

As your trusted source on everything crypto, we have cut through the noise to distill the possible implications of the Libra announcement. While the project is not without concerns, we think it will be an enormous boost for crypto assets.

Let’s start with some of the positives.

Exposure

Slowly but surely, more and more people are coming into crypto. We regularly monitor metrics like transaction count and unique addresses, where increasing numbers suggest more people are using crypto assets. With Libra, this is set to accelerate, rapidly. The Libra Association includes companies like Uber, Stripe, Booking.com, Visa, Spotify and of course Facebook. The number of users connected to these members has been estimated at over 4 billion. In comparison, the number of blockchain wallets worldwide has been estimated at 35 million. Libra will serve as an on-ramp to crypto assets. Users might start with Libra and as they become familiar with wallets and crypto transactions, migrate to other crypto assets. We are not suggesting that every Facebook user will use Libra or migrate to other crypto assets, but when you compare 4 billion to 35 million, there only needs to be a tiny conversion rate to make a colossal impact.

Ambition

The Libra Association has enormous ambition. In practical terms, the goal is to send money as simply as we send a message - instantly and borderless. This will allow users to easily send, receive and store money - a “simple global currency and financial infrastructure that empowers billions of people.” The Whitepaper cites ambition to help the 1.7 billion people in the world that are still unbanked. Financial exclusion breeds poverty, which breeds civil unrest and in extreme cases, terrorism and war. Libra believes that “global, open, instant, and low-cost movement of money will create immense economic opportunity and more commerce across the world.”

How is Libra better placed to achieve this than existing crypto assets, including Bitcoin?

There are a few reasons why Bitcoin has been slow to be adopted as a Medium of Exchange. First, it is volatile. Second, user adoption has been slow - it is hard to use Bitcoin if your friends and network do not use Bitcoin. Lastly, there is a lack of infrastructure that allows users to pay with and merchants to accept crypto payments. Merchants need additional infrastructure to receive Bitcoin payments and to convert receipts into fiat currency. While there are a number of companies trying to solve this problem, they are all middlemen charging middleman rates, up to 3% either to the customer or the merchant. Why pay with crypto if the fees are higher than existing options like Mastercard or Visa?

The members of the Libra Association can attract the adoption necessary to build the infrastructure. It is a problem of economies of scale. The Libra Association is raising funds to tackle this infrastructure problem and in our view, will be much more likely to succeed than any existing crypto asset or middleman.

Credibility

JP Morgan, Fidelity, Yale, Harvard, New York Stock Exchange, Goldman Sachs and now Facebook, Uber, Mastercard, Visa and Vodafone. These are just some of the names that are now actively involved in crypto assets. The addition of the Libra Association founding members adds more credibility to crypto. This is having a direct effect on investors We are seeing this first hand as we talk to potential investors that take comfort from their involvement.

If you still think crypto is nothing more than magical internet money, it’s time to wake up.

User Experience

The user experience associated with many crypto assets is still poor. Facebook, Uber and eBay all know a thing or two about user experience. They also know that user experience can be the difference in creating and distributing a successful product. Libra will be seamless, beautiful, easy to use. Our grandparents will be able to use, send, store and receive crypto assets as easily as they can receive a text message.

Collaboration with Regulators

The Libra Association is actively talking with regulators. As regulators develop a better understanding of crypto assets, we see this as a step forward in the push for widespread crypto regulation.


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While there are a number of positives about Libra, there are a few concerns.

Privacy

Facebook and privacy. Two words that by themselves evoke mixed responses. When put together, the response is uniformly negative. Facebook has a terrible track record when it comes to privacy. Facebook already has control of vast amounts of our personal data, allowing it to provide a wonderful service to marketers around the world. It is unclear whether it is using Libra to go after our financial data. The cynicists argue that Libra is an attempt to capture our financial data and use this data to Facebook’s advantage. By combining our personal and financial data, Facebook will make even more money from marketers looking to target their advertising. The optimists focus on Facebook’s global inclusionary mission, described above. The Libra Whitepaper is short on detail. It proclaims it will “evaluate new techniques that enhance privacy in the blockchain while considering concerns of practicality, scalability, and regulatory impact.” We retain a healthy skepticism and put the burden of proof on Libra to convince us that transactions and financial data will remain private.

Centralisation

Libra is centralised, not decentralised. Decentralisation is a fundamental property of valuable crypto assets. The most valuable crypto assets are decentralised. While it is an improvement over fiat currency that Libra is not centralised in one actor’s hands, it is not the same as being truly decentralised. Libra will start as a permissioned blockchain and start transferring to a permissionless, decentralised blockchain within five years. We won’t hold our breath.

When there’s someone in charge, an interested party – a policymaker, a banker, a regulator, a shareholder – can lean on them to make changes.

Michael J Casey, CoinDesk

Reserve

Libra will be backed by a reserve of fiat currencies and short-term treasury bonds. “The assets behind Libra are the major difference between it and many existing cryptocurrencies that lack such intrinsic value.” While we see it as an improvement that Libra is not backed by one fiat currency, rather a basket, let’s not pretend they have intrinsic value. A major reason for the introduction and development of crypto assets was in retaliation to the devaluing of fiat currencies globally, which still persists today. An appreciation for crypto assets often starts by realising that fiat currencies do not have any intrinsic value. The claim that the Libra has intrinsic value is nothing more than marketing spiel.

Marketing Speak

In addition to the intrinsic value claim mentioned above, there is clearly a degree of marketing freedom within the Libra Whitepaper. Another example is the promise of pseudonymous transactions and anti-money laundering compliance. These are intrinsically opposed. The Libra Association is trying to appease regulators who require AML compliance and crypto purists who value privacy. The presence of marketing speak, like these examples, makes us question the veracity of other claims in the paper.

The Lord of the Coins

Will this be the “One Coin to Rule them All?”

A potential negative is Libra could squash a wide range of other crypto assets. Will Bitcoin lose its appeal as users take a preference to Libra?

We have previously discussed how we divide crypto assets into key verticals - money, privacy, smart contracts, decentralised finance, Web 3.0. It is impossible to optimise crypto, including Libra, across all of these verticals.

Libra poses the greatest threat to the money vertical, specifically as a Medium of Exchange and stablecoins. We do not think Bitcoin will be challenged as “digital gold,” a decentralised, censorship resistant, deflationary, store of value. We do think the Medium of Exchange crypto assets (eg: Litecoin, Bitcoin SV) will be challenged. We think users will prefer Libra over alternatives as it is likely to be accepted more widely and easier to use. Libra will also challenge stablecoins. Tether, USDC, Pax Coin, Gemini, DAI all stand to be tested as Libra enters the market as an alternative stablecoin.

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From a humble whitepaper released to a small mailing list in 2008, to one of the largest technology companies in the world releasing its own version, it is clear crypto assets have come a long way in the last ten years.

We at Apollo Capital are very excited to see the developments over the next ten years.


Volatility, Opportunity & Position Sizing

Our edge at Apollo Capital is our experience in both traditional financial markets and crypto markets. On a daily basis, Henrik and I draw upon our experience from traditional markets to construct a portfolio of crypto assets. Combined with our knowledge of crypto assets, we are the best in the country, if not further afield, at managing a crypto portfolio.

While I don’t pretend to know as much about crypto or financial markets as Henrik, my experience* is different and has undoubtedly shaped the way I approach crypto funds management.  I thought it timely to share a few thoughts on investing in crypto, in particular volatility, opportunity & position sizing.

(*for more information on my background, please feel free to visit my LinkedIn page.)

1. Volatility

A number of traditional financial ratios and models use volatility as a measure of risk. Modern Portfolio Theory (MPT), developed by Harry Markowitz in 1952, is used to optimise portfolios based on their expected returns and observed risk. The standard deviation of an asset’s returns is used as standardised measure of risk. MPT, CAPM, Sharpe Ratio, Sortino Ratios, nearly every ratio I have come across uses volatility as a unit of risk.

The general theory is that the more volatile the asset, the higher the standard deviation of returns, the riskier the asset. The words volatile and risky have almost become interchangeable in financial markets.

If we put crypto through these models, I suspect the models would spontaneously combust. Crypto is extremely volatile. I usually check crypto prices a couple of times a day and it is common to see 24hr price swings of greater than 10%. Imagine if that were the case in equity markets! Throughout the 16 months since inception, the Apollo Capital Fund has already delivered monthly returns ranging from +45% to -34%.

In Berkshire Hathaway's 2007 annual meeting, Warren Buffett said the following about volatility and risk:

“It's nice, it's mathematical, and wrong. Volatility is not risk. Those who have written about risk don't know how to measure risk. Past volatility does not measure risk. When farm prices crashed, [farm price] volatility went up, but a farm priced at $600 per acre that was formerly $2,000 per acre isn't riskier because it's more volatile.”

Instead, Buffett prefers the dictionary definition of risk: “risk is the possibility of loss or injury.”

Why is crypto risky?

It is clear that investing in crypto is risky: there is a possibility of loss (hopefully not injury!) and that possibility exists because crypto is young and the future is uncertain. Any groundbreaking technology is going to be met by opposing camps of skepticism and fervour. Crypto is a complex topic and it’s future is anything but clear. It is easy to forget, but many people thought the same about internet stocks in the mid 90s - they were risky investments.

Why is crypto volatile?

Crypto is volatile for two reasons: it is risky and prices are retail driven.

Crypto prices are predominantly retail driven. Retail investors are more easily caught up in the waves of greed and fear that drive financial markets, especially crypto markets. While the equities that represented the internet hysteria were certainly volatile, they were not as retail driven as crypto markets. Crypto assets are more accessible to the world’s population than equities on listed stock exchanges and equity markets are largely driven by institutional capital.

The distinction between risk and volatility is important:

“Crypto is not risky because it is volatile. Crypto is volatile because it is risky”

Once we accept this important distinction, the solution to deal with the risk is clear: position sizing.

Position sizing refers to allocation of capital to a particular investment in the context of the overall portfolio. For us as managers of the Fund, we discuss the size of positions such as Bitcoin and Ethereum. Do we invest 10%, 20% or 40% of the portfolio in Bitcoin? For the individual investor, position sizing refers to the amount of capital allocated to crypto relative to the overall portfolio.

Although we do not provide advice to investors in the Fund, we certainly do not advocate investing 50% of a portfolio in crypto, it’s too risky. The possibility of loss is too great and the consequences of any loss too severe. Many of the greatest thinkers in crypto suggest allocating an amount of capital that the investor is prepared to lose. Studies of institutional investors in crypto suggest starting allocations of 0.2% to 0.3%. Crypto is risky and for any investment in crypto there is a possibility of loss of capital.

2. Opportunity

I used to work at a funds management company that managed more than $500m of client funds in Australian equities. My former boss, a veteran investor with more than 30 years experience across a range of markets, taught me a number of lessons about investing. One of the key lessons that stuck with me is “the best returns often come from the ones you feel uneasy about.” I didn’t realise it at the time, but I now understand why.

“Risk creates opportunity”

When a company’s future is uncertain, when the risk feels high, other investors often reach similar conclusions, many choosing to avoid that risk by either selling or not investing. Risk can create opportunities to buy assets that are cheap. It is the job of the investor to discern from risky opportunities that are worth investing in, compared to those that are doomed to fail.

I see similar circumstances to crypto assets. There are numerous reasons why crypto assets may not succeed. Investing in crypto is risky. This creates opportunity. One of the main reasons for this uncertainty is a lack of understanding. The vast majority of people have not or will not spend a little time trying to understand crypto. This is a missed opportunity to learn about a technology with enormous disruptive and innovative potential.

This creates opportunity for those that have a keener understanding of crypto. It is interesting at this point to stop and consider, “how much do I need to understand to make an investment in crypto?” An investor doesn’t need a comprehensive understanding of the intricacies of crypto assets to make an investment. Just as we don’t need to understand the code behind Google’s search algorithms, we don’t need to understand the of code that powers the Bitcoin network. A more relevant understanding is the power of Google’s search algorithms to its users, the power of the Bitcoin network to its users and why both are better than the alternatives.

“Investors need to understand the three forces driving crypto innovation.”

First, it is a groundbreaking technology. We have written at length how crypto removes the need for trusted intermediaries and the resulting waves of disruptive innovation. Second, it has attracted huge amounts of capital. Third, the world’s best computer software engineers are flocking to work on challenging crypto projects. Understanding the power of innovation that is likely to come from these forces is more important than knowing the details of the Ethereum code.

For those that see the potential, for those that read Apollo Capital’s weekly newsletter and understand why crypto shows promise, investing a small amount in crypto is obvious. Investors realise the inherent risks in these investments, but they accept these risks and in doing so, give themselves a chance of capturing the upside.

Again, we come back to position sizing. The future of crypto is uncertain and accordingly, it makes most sense to only invest a small percentage of the portfolio in crypto assets. Despite working in crypto and understanding crypto assets better than most, I only have a small percentage of my net worth in crypto. I have a far, far greater percentage in my house, despite having greater conviction in crypto than the property market in Australia.


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An unfounded fear of volatility and a lack of understanding is causing the majority of investors to miss out on the crypto opportunity. Many are waiting to understand crypto in full, or for there to be greater understanding from their peers and the media. They are missing the point. By the time this happens, the market capitalisation of crypto assets will be in the trillions.

Once crypto becomes mainstream and well understood, the opportunity will be long gone, leaving many investors to regret the omission of a small allocation in their portfolio.

**please note this article does not constitute financial advice. My thoughts are my own.


Investment Thesis Refresh

In a fast moving field like crypto assets we believe in the merit of having an investment thesis that is not set in stone but is updated as the market evolves. Crypto assets are based on a breakthrough technology. Far from all applications have been explored yet and some known applications have unknown market potential.

Irrespective of our final destination, Apollo Capital’s mission is clear:

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Let’s unpack this sentence. We are:

1. “Investing in the crypto assets that are powering the next generation of computing infrastructure”

This is a new generation of computing. Specifically this new type of computing is replacing trusted third-parties with software. We can now do ownership and transfer of value (money, collectibles), participation and execution of smart contracts solely based on open source software not associated with a company or organisation. Software is both replacing rent seeking middlemen and enabling completely new use cases.

2. “Investing in the crypto assets that are powering the next generation of computing infrastructure

We think it makes sense as investors to focus on infrastructure investments when the potential applications are not yet clear. By investing in infrastructure we are exposed to any possible application being built on top of that ecosystem’s critical infrastructure. 

Not only do we believe infrastructure is a good starting point at the beginning of a new paradigm, our thesis is that most of the value will be captured in the lower parts of this new technology stack, specifically in what is known as base layer 1 Blockchains and Middleware:

Source: Apollo Capital

Source: Apollo Capital

Base layer 1 blockchains are their own chains like Bitcoin or Ethereum while middleware typically are smart contract protocols being built on top of one or multiple blockchains. 

Our portfolio is balanced between layer 1 and middleware.

3. “Investing in the crypto assets that are powering the next generation of computing infrastructure”

Our investment thesis is that Blockchains and certain Middleware are enabled by crypto assets, these are critical for this new software system. These crypto assets are where the majority of value is captured in this new paradigm. Another way of putting it — crypto assets are the fuel for this new type of software.

Verticals 

We believe that there are two broad categories of applications for open blockchains: financial applications and non-financial applications. As we map out the Potential Value Capture vs. the Maturity of certain applications we end up with this picture:

Source: Apollo Capital

Source: Apollo Capital

We are convinced that the biggest potential value capture by crypto assets on open blockchains are related to financial applications. One reason why this is the case is that blockchains are only able to secure native blockchain assets and smart contracts related to those assets. Non-native blockchain assets like identity will be hard to secure using open blockchains. Furthermore, anchoring non-native blockchain assets like identity doesn’t necessary capture a lot of value in crypto assets. In many cases non financial use cases end up anchoring information (e.g. through a hash) to a secure blockchain like Bitcoin. This can be done relatively cheaply using only a nominal amount of bitcoin.

For these reasons, financial related verticals and the crypto assets underpinning these verticals are our investment focus at Apollo Capital, specifically:

  • Store of Value

  • Privacy Coins

  • Stablecoins

  • Open Financial System

These financial verticals will create an infrastructure layer for financial primitives that are:

1. Permissionless — accessible to anyone. Just like the Internet made the world’s information accessible to everyone with a smartphone, open blockchains will make financial infrastructure available to everyone with a smartphone and an Internet connection. And just like the Internet broke down the barrier for publishing information on the Internet, anyone will be able to create financial instruments by interacting with smart contracts.

2. Trustless — not dependent on a third-party but on auditable software. Just like the information on Wikipedia is not dependent on one third-party actor but a network of contributors, the financial infrastructure of the future will not be dependent on a single vulnerable actor like a bank, state or financial institution. 

3. Censorship resistant — financial freedom. The Internet is hard to censor, in the future our financial system will be hard to censor as the Open Financial System is borderless in nature and not tethered to geographical jurisdictions. 

Once the basic layer is built, composability of these building blocks will lead to more advanced financial primitives to emerge and finally to user interfaces through web and mobile applications.

Store of Value

Bitcoin as a potential store of value and unseizable asset not relying on a government is material. Gold and offshore accounts today account for tens of trillions in value. Properties of crypto assets such as Bitcoin are on many accounts better than our current versions. In addition crypto assets are programmable which opens up new avenues for innovation not possible with a physical commodity such as gold. Store of value doesn’t exclude other use cases such as payments, but in our view volatility needs to decrease before a store of value enters the real competition for other properties of money such as medium of exchange and unit of account.

Medium of Exchange

In this category we mainly have stablecoins and privacy coins. Stablecoins suffer from a trilemma trying to optimise on scalability, stability and decentralisation. This is a hard problem to solve but where we see a lot of innovation. There is massive potential in the coming decade for stablecoins that can get this equation right. It is likely that in the very long term stablecoins will find competition from more pure crypto assets not tied to a peg once the volatility of those assets starts declining.

Privacy coins enable private transactions to take place and is an interesting and fast evolving vertical besides cryptocurrencies running an open transaction graph. As privacy coins tend to be innovative using newly developed cryptography, there is generally a higher technology risk in this vertical versus non privacy enabled coins.

Open Financial System

This is a general term referring to a new financial system being built on top of open blockchains. The first financial primitives being built include:

  • Lending — being able to earn an interest rate on assets that you already hold.

  • Credit markets — borrow against assets that you hold in your portfolio.

  • Prediction and oracles — create a trustless source of truth for events outside blockchains.

  • Derivatives — a leverage bet on an underlying asset.

  • Decentralised exchanges —blockchain based trading without giving up custody of your assets.

  • Synthetic assets — blockchain assets that can trustlessly replicate non-blockchain assets.

While many of the above primitives are still experimental in nature, it is easy to see them in the future vastly outcompete traditional solutions at least in certain categories and circumstances. As an example, taking out a loan on a blockchain can be as easy as a few clicks on a web 3 enabled browser.

Running financial services on software instead of relying on trusted financial institutions not only opens up access but could lead to substantial gains in productivity as the financial sector in many countries makes up a very substantial part of the GDP. 

Core to our thesis is that the financial infrastructure being built on open blockchains will become a common utility not unlike the Internet itself.


Henrik Andersson is the Chief Investment Officer at Apollo Capital . Based in Melbourne, Australia Apollo Capital invests in the crypto assets that are powering the next generation of computing infrastructure. For more information, please see apollocap.io.