- Centralised Exchanges
- Crypto Asset Volatility
- Crypto Correlations
- Crypto Governance
- Crypto in the Portfolio
- Crypto Valuations
- Investment Highlight
- Security and Privacy
- Social Media Influence
- Stable Coins
- Traditional Finance and Crypto
- Web 3.0
Our Learnings & Portfolio Updates
by Marc Woodward
Apollo Capital’s long strategy funds continue to be conservatively positioned, with ‘market neutral’ and cash positions being towards the upper bound of our target allocation. We expect that the crypto market will continue to face downward pressure in the short term as the fallout from the collapse of FTX and the potential bankruptcy of Genesis continues to unfold.
DeFi Still Strong
The easy-to-use centralised platforms like Celsius, BlockFi, and FTX have become very popular over the past several years. However, their sudden failures in 2022 have clearly destroyed trust and will drive users toward self-custody of assets and decentralised platforms for trading and yield. This will pave the way for Decentralised Finance (DeFi) protocols to become the favoured method of transacting and earning.
These 14-Day Return figures demonstrate that market participants are buying decentralised derivative tokens like GMX and DYDX in anticipation of the future shift to decentralised and non-custodial trading venues. While the fallout from FTX and others is far from over, we view these assets holding their value as a significant leading indicator to a more positive market environment.
Centralised exchanges like Binance, Coinbase, and FTX have historically dominated crypto trading volume. However, the leading decentralised exchange, Uniswap, has recently become the second-largest exchange for Ethereum, beating out Coinbase.
Solana (SOL) was a core position in Apollo’s Alternative Layer 1 Blockchain portfolio due to its strong developer activity, significant VC funding and high Total Value Locked (TVL) that cemented it as a top smart contract platform across most metrics. Nonetheless, we were monitoring the position very closely this year due to repeated network outages and relatively centralised governance.
We decided to divest from Solana due to:
- Continued network outages, resulting in the chain being unusable for DeFi.
- Recognition that developers were not continuing to choose the chain and preferred to focus on upcoming chains like Aptos and Sui. This view was cemented when speaking to developers during the Token2049 conference.
- Significant investments into the chains mentioned above, including by large Solana investors, signalled a significant increase in the competitive environment.
Apollo Capital successfully exited Solana positions during September at prices of approximately US$30 and an ecosystem TVL of US$1.3B. Today, Solana’s price sits at US$11, and TVL has collapsed to just US$290M. In hindsight, we can also see that FTX and Alameda were massive drivers of Solana’s success in 2021 and its recent demise in 2022.
Over crypto’s lifecycle, we have seen many centralised exchanges fail. FTX will, unfortunately, be another addition to the list. However, the damage will be much greater due to its sizeable associated ecosystem of crypto assets, subsidiary businesses, creditors, and investment funds. These counterparties, along with their customers, have all been catastrophically affected. The newly appointed CEO, John Jay Ray III, who worked on Enron’s bankruptcy, has described the situation by saying he has ‘never seen such a complete failure’ and ‘absence of trustworthy financial information.
The effects on the FTX counterparties are coming to light as they scramble to gauge their total exposure and losses from the collapse. Lending platform, BlockFi, which recently got bailed out from the Terra/Luna contagion by FTX, is now expected to declare bankruptcy. Singaporean sovereign wealth fund Temasek is amongst many investment funds suffering from the fallout, with its US$275 million FTX stake now being written down to zero. It is important to note that Temasek “took approximately eight months” to due diligence its investment into FTX as per their recent statement.
With FTX down, the market is now fearful of the solvency of its biggest lenders. Genesis, known as the ‘Bank of Crypto’, is the largest crypto lender and is a subsidiary of Digital Currency Group (DCG). The past week has seen withdrawals on the platform halted, and rumours of its insolvency have spread.
A complete failure of Genesis could have downstream ramifications, with some associated entities already feeling the squeeze. Gemini Earn, a crypto lending product from the centralised exchange Gemini, once offered depositors 8%. Due to liquidity issues from its exposure to Genesis, it has now been forced to pause redemptions for all depositors.
A company that also sits under DCG is Grayscale. Grayscale’s Bitcoin Trust, a product that offers bitcoin exposure through a listed trust structure, is now trading at its lowest level below net asset value at a 45.2% discount.
FTX Counterparties Visualised
Where to from here?
Despite all of the tremendous innovation and adoption over the last few years, crypto assets are a nascent technology and will continue to be volatile and cyclical, driven somewhat by investor sentiment, the macro environment, and market liquidity. And while it will take some time to restore confidence in the space, we remain steadfast in our long-term investment thesis, especially in the area of Decentralised Finance, which will benefit from the ongoing debacle with many centralised organisations.
The Apollo Capital Funds will remain conservatively positioned with high levels of cash over the short term. We are actively engaging with our portfolio of early-stage projects to see where we can help them navigate these troubled waters, and are evaluating new and existing projects in order to deploy fresh capital opportunistically.