blog
15Nov 2022

Last Week And The Road Ahead For Crypto

by Henrik Andersson

What Happened

Last week was devastating for the crypto markets as one of the largest exchanges, FTX, declared bankruptcy and halted the majority of customer withdrawals. A synopsis of the sequence of events can be accessed here.

Our Actions

In times like this, we think it is important to communicate as transparently as possible. Last week’s newsletter talked about our exposure to FTX/Alameda. Investors also received an update detailing the exposure of each fund. From a portfolio risk perspective, our immediate response was to close our only other existing under-collateralised lending position to safeguard against any contagion.

We have also reached out to the projects we have invested in. In short, they have very little if any FTX/Alameda exposure. A reason for that is that many of them have a ‘crypto native’ approach to treasury management – like us, they trust decentralised protocols more than centralised entities.

Crypto Regulation

Given the past week’s events there will undoubtedly be increasing calls for more regulation of the crypto industry. History has shown us that regulation itself can’t protect us against fraud. Our approach is instead to minimise exposure to counterparty risk. In that regard we, and many others (like Sequioa, Temasek and countless others) saw FTX/Alameda as a trustworthy player in the crypto industry – which, needless to say, didn’t turn out to be the case.

While FTX entities were regulated under the law of their specific jurisdiction, these regulations and regulators failed to protect FTX customers. It is hard to find an industry more regulated than finance. Despite this, financial firms have caused great harm to both taxpayers and customers over time. While we do like to see regulation around safe keeping of crypto assets for exchanges, crypto actually solves this trust problem!

Source: Token Terminal

Crypto uniquely is the only technology where you don’t have to trust a counterparty. On-chain and immutable contracts can’t be manipulated by humans, thus removing the need for regulation. A core innovation with crypto is to remove the need for trust, not having to trust central banks to inflate the currency, not having to trust an exchange with custody of your funds. The vast majority of failures we have seen recently are with centralised parties. There will always be an element of trust in dealing with these entities.

 

Founder and CEO of Avalanche (AVAX)

Outlook

In the aftermath of FTX/Alameda, we expect greater adoption of decentralised exchanges. As many of you know, Apollo has been ‘pounding the table’ for decentralised exchanges and derivatives for a long time and has invested in the likes of Uniswap, Curve, dydx, GMX, Perp.fi, Synthetix, Lyra and many others. We expect them to do increasingly well as a result of FTX’s failures.

We are at an interesting time from a macro perspective. Sentiment had hit a low when multiple factors suddenly changed in the favour of the brave; the latest inflation data came in lower than expected, and it seems reasonable to assume that inflation has already peaked. China is revising its Covid restrictions, which brings hope that mass lockdowns are coming to an end, thirdly with Russia retreating from Kherson, Ukraine has now won back 50% of the territory that Russia took at the start of the war.

If it weren’t for the events of the last week, crypto would have undoubtedly led this leg up in global markets. Instead, now we are likely to face short-term pressure as any contagion is being worked out. While it currently looks like this month’s returns will be negative for crypto markets and 3 of our 4 funds we have what we believe is a conservative positioning but is also ready to deploy more aggressively for when the market turns.

As always, please reach out directly to me or the team if you have any questions or if there is anything you like to discuss.

Henrik Andersson

Henrik is the Chief Investment Officer at Apollo Capital. Henrik actively manages both of the Apollo Capital investment funds; the Apollo Capital Fund and the Apollo Capital Opportunities Fund. Henrik's expertise in traditional financial markets comes from spending a decade on Wall Street as a vice president in institutional equity sales. His exceptional understanding of DeFi comes from co-founding two successful DeFi protocols, mStable and dHEDGE.