global macro trends and cryptocurrencies · in this report, the element group digital asset...

ELEMENT DIGITAL ASSET MANAGEMENT

Global Macro Trends and Cryptocurrencies

Q2 2018

Executive summary In this report, the Element Group Digital Asset Management Team analyzes global macro trends-such as stock market corrections and market volatility, as well as industry-specific issues, such as decision fatigue, bitcoin ETFs, crypto futures, and price dispersion, and looks at their impact on the current cryptocurrency market. The objective of this report is to highlight global macro trends and to hypothesize on whether or not they have a measured effect on the digital asset space. While the insights contained within this report are only applicable to the current state of this nascent and emerging market, they introduce an important framework which can be used for future analysis. As the market consolidates, it becomes vital to introduce analytical standards, and Element Group is excited to pioneer this approach.

About Element Group

Table of Contents

Introduction

The unprecedented territory of a stock market correction

Short term speculators and the point of exhaustion Bitcoin ETFs: the holy grail of the crypto world

Bitcoin volatility for the institutional investor

Futures and their effect on the price of bitcoin

Price dispersion between large and small caps

Bitcoin in competition with other financial assets Bitcoin and changes in macroeconomic conditions Geopolitical risks: looking back to look forward

Historical precedent for geopolitical risk on trends The British exit from the EU The US election of Trump

Traditional media: fact versus fiction

Disclosures

Introduction What can happen to cryptocurrencies if the stock market crashes? If interest rates move higher than expected, will this affect how crypto companies make business decisions? What about if the US enters a legiti-mate trade war with China? What about if the US enters into a real war? These are just a sampling of the ques-tions we ask and debate amongst ourselves every single day.

We theorize and model various macro risk scenarios to the best of our ability in order to ensure we protect against any and all possible downside risk shocks to our own portfolio. However, we’ve found that this is an exceptionally difficult exercise to conduct. The nascency of this marketplace coupled with the sheer number of factors that affect the price of a digital asset at any given point in time makes it nearly impossible to predict exactly what will happen in the face of heightened macro risk.

That being said, we do believe that developing a logical thesis is a key staple in any risk management strategy. We also believe in sharing this information and encouraging debate with like-minded parties. And that is why in our latest quarterly thought piece labeled “Global Macro Trends and Cryptocurrencies”, we share some of our findings that came about from examining the relationships between facets of the traditional macro world and the digital asset world. For the sake of brevity, we’ve structured this piece in a similar fashion to our weekly notes and illustrate our thoughts on this topic using individual anecdotes.

A stock market correction is unprecedented territory for cryptocurrencies

Bitcoin has never experienced a recession. It has never seen a full market cycle. The genesis of this world came about at the end of the last

stock market correction in 2009. Since the start of 2010, the S&P 500 has rallied 140% in steady fashion year over year. Much of this price

action can be attributed to the proliferation of passive fund vehicles that ended up attracting hundreds of billions in investor inflows. There

was a clear preference of these passive vehicles given their relatively cheap cost structure and outperformance over traditional and more

expensive alpha vehicles (i.e., hedge funds). Investors, retail and institutional alike, have moved more and more money into ETFs and index

funds because simply put, they were the best performers. In that time period, the price of bitcoin has seen three major corrections (2013,

2014 and 2018). These corrections were the result of specific catalysts confined to the cryptocurrency world. These corrections had

nothing to do with what was happening in the outside world. While it remains completely a matter of speculation as to what will happen to

the price of bitcoin in the face of a true stock market correction, one thing is for sure - this is brand new territory for digital assets and the

resulting price move could very well be a binary event.

Bitcoin and S&P 500

Source: Element proprietary analytics

We’ve reached the point of exhaustion for short term speculators

In this past quarter, the price of bitcoin rallied from $6,800 at the end of March to nearly $10,000 in May but then fell back down to $6,800

at the end of June. In that time frame, there were many mini bull and bear markets. Market participants experienced quite a few head fakes

as well as brief moments of euphoria and sometimes tension. And even though the market quarter over quarter didn’t do much, the sheer

amount of independent data points available for anyone to consume continued rising. There was so much noise. There is so much noise.

It’s become exceedingly difficult to stay on top of everything and maintain both wide breadth and depth of knowledge base in this world.

Even the most seasoned financial professionals don’t have the bandwidth to devote 100 percent of their conscious capacity to look at an

investment. Yet in this world, given its unique structure as a 24/7/365 asset class that remains open source for anyone to speculate and

trade in, trying to stay on top of everything is an occupational hazard of the industry. The retail investor that has been forced to perpetually

adjust their decisions in response to the market has likely lost the patience to continue making rational decisions. This investor has likely

entered into a period of extreme decision fatigue. Wikipedia defines this phenomenon as the “deteriorating quality of decisions made by an

individual after a long session of decision making”. And though the psychology behind decision fatigue is usually used to correlate behav-

iors of participants in an economic system, some of the common effects have made their way into this world. One such effect is a reduced

ability to make trade-offs. This is when an ordinarily sensible person is so mentally depleted, they become reluctant to make similarly

sensible choices. We’ve seen evidence of this behavior across various social media channels where a retail investor has become so mental-

ly tired with the number of new ICOs coming to market that they become incredibly vulnerable to sales and marketing tactics that would

otherwise not have worked. It’s almost as if this person has just given up trying to do any more analysis or investment diligence. The

long-term implications of this change of behavior can be theorized and debated for months. We, however, choose to view this decision

fatigue as a possible signal that the irrational exuberance is coming to an end and that the market fundamentals are now shaping up to a

point that will see rational speculation drive price action in a more orderly manner.

Reddit Daily Comment Volume on Cryptocurrency-Related Subreddits

Reddit comment volume is down sharply from the peak reached in December and still trending downwards.


To be notified about all future reports, research publications and blog posts from the team, please subscribe to our website at: www.elementgroup.com 2

About the authors In their weekly and quarterly notes, the Element Digital Asset Management team dives deep into the current state of cryptocurrency markets and their impact on the world to provide unique insights and commentary. Thejas Nalval is Director of Portfolio Management and Kevin Lu is Director of Quantitative Research at Element Group.

Thejas [email protected]

Kevin [email protected]

Element Group is a full-service investment bank for the digital asset capital markets that delivers advisory, asset management, OTC trading, and technology solutions in an integrative manner. Element executes token sales and ICOs, supporting market-leading transactions for technology-oriented companies which build platforms and protocols. In addition to offering integrative services for businesses operating within the digital asset space, Element delivers thought leadership and proprietary research. Element Group offers securities in the U.S. through Tangent Capital Partners, LLC, a registered broker dealer with the SEC and a member of FINRA and SIPC.


Table of Contents

Introduction









Disclosures















Bitcoin and S&P 500

























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Table of Contents

Introduction









Disclosures















Bitcoin and S&P 500


























The bitcoin ETF is absolutely the holy grail of the cryptocurrency world There’s no shortage in the list of catalysts being floated around that will take bitcoin from its current prices to new all-time highs. It seems as though everyone is now talking about the need for a qualified custodian, for more transparent regulation and for a more investor-friendly investment vehicle such as an ETF. While we firmly agree that these do represent meaningful catalysts, we think the impact an actual physical-backed bitcoin ETF will bring to the price of the asset is immense and has not yet been fully priced in. We underscored ‘physi-cal-backed’ because, in our view, it is this specific type of ETF that will have the most direct effect on the exchange-listed price of bitcoin. The reason for that is simply because the NAV for this product will be a direct function of the price (likely struck from CoinMarketCap) and therefore primary dealers and market makers that intend to offer liquidity in this type of ETF will need to accumulate a significant amount of bitcoin inventory to hedge their books accordingly. Translation? Before marginal investors buy ETFs, dealers will need to buy bitcoin in large quantities and hold it. This event in itself should do well to drive the price higher out of the gates.

Another reason why the launch of an ETF is a significant event is that of the distribution network built in with this product. This is a vehicle that can in a very seamless manner be simultaneously targeted towards individu-al investors, financial advisors, insurance companies, model strategists and online platforms. It is a product that has a minimal learning curve for traditional investors. It is a product that RIAs will likely be very comfortable buying in a model portfolio, despite the higher risk attributes of the underlying assets. There’s evidence already where traditional long-only investment advisors obtain exposure in risky products like leveraged ETFs or inverse ETFs as they would in a traditional blue-chip stock. We believe that once a bitcoin ETF is launched, we will see a wave of traditional investors that were otherwise reluctant to hold BTC buy the ETF with little pushback. And as a result, the price of bitcoin should respond in kind.

As historical precedent for this event, we look at the launch of another popular ETF that gave investors access to an otherwise hard to access asset class - gold. Outside of buying and hoarding physical gold bullions (which is logistically difficult), investors could now buy a tracking vehicle for their favorite precious metal. SPDR Gold Shares ETF (GLD) launched on 11/18/2004. The price of gold proceeded to quintuple in the next decade, as illustrated in the visual below (note: we’re not assigning direct causality, just making a friendly observation).

Bitcoin is in competition with other financial assets It is helpful to revisit how we got here. After the global financial crisis, central banks in almost all countries coor-dinated to aggressively ease monetary policy by cutting nominal interest rates to zero in an attempt to support economic growth, provided large amounts of liquidity to financial institutions to prevent any financial contagion and began large-scale quantitative easing measures to further reduce long-term interest rates. At the same time, investors became much more risk-averse and indiscriminately sold risky assets. The net effect of these events made the real return on cash negative and pushed the risk premium of risky assets relative to cash higher.

As stimulative monetary policy started to have an effect and the economic recovery began, investors began to move capital back along the risk curve -- into risky assets such as equities, bonds, and real estate. This has generally continued uninterrupted since 2009 as the low real return on cash (which has been negative) encour-aged investors to seek out more risk. Since the financial crisis, the returns of risky assets have experienced one of the best performing periods in the entire history of the world.

As a reminder, the mechanics of asset valuation are straightforward. The price of any financial asset is the present value of its future cash flows. Elementary economic theory states that if real interest rates are low, the present value of risky assets is high. And if you look at equity valuation ratios such as the cyclically adjusted price-to-earnings ratio for equities across most countries, they are at the high end of the historical range. Real yields are low or negative across most countries and are also low relative to historical averages. An alternative way of thinking about this is that risky assets are somewhat substitutes for each other and in competition with each other. If the real return on cash or government bonds is low, other risky assets should increase in price such that their future return will also be low.

The unfortunate conclusion that can be reached is that the future returns of almost all risky assets will be low. This follows from the observation that in the long-run, the cash flows of financial assets are determined by productivity growth, demographic trends, and changes in the demand for saving or spending. These things are slow moving and independent of monetary policy. Since financial assets have had one of the best-realized returns of any period in the history of the world, it follows that the future return of financial assets will be low since we are now paying high prices for the same future cash flows.

What does this mean for cryptocurrencies? Given the extreme volatility of this asset class (which can reach levels of over 100 percent annualized), we can place cryptocurrencies at the extreme end of the risk curve -- past bonds, equities, real estate, and the existing alternative asset classes. The economic environment and easy monetary policy of the recent past have undoubtedly contributed to capital flows into the space and have played a part in fueling the historical bubbles in bitcoin's price.

This does not mean that the future return of cryptocurrencies will necessarily be low, however. Since cryptocur-rencies are not yet a full-fledged legitimate asset class and institutional investors are only in the very beginning stages of entering, the future returns can still be quite high as there is a lot of capital still waiting to enter. Even if risk aversion increases and investors shift capital to safer assets on the risk curve (cash and bonds), there is very little institutional capital to shift in the first place. Since all asset classes are substitutes and in competition

with each other, the low future return of traditional asset classes should provide incentive to continue to increase their allocation in the space. Until cryptocurrencies reach full mainstream adoption by institutional investors, the exponential growth can continue.


Source: http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

A corollary effect to this event is the phenomenon that investors will not only buy bitcoin exposure through this vehicle but that they will likely be willing to pay above market rates for that conve-nience. To help illustrate that, we turn to the image to the right. It is a price vs NAV graph of what has been a very real way for an institution to get expo-sure to bitcoin using a structured product - GBTC (Bitcoin Investment Trust). This is an investment vehicle that has allowed accredited investors to obtain bitcoin exposure in a format they are more familiar with. However, because of how this prod-uct is structured, it has frequently traded at a significant premium to the NAV of its underlying. At press time, GBTC is trading at roughly 50% above the value of bitcoin. This is down from its peak earlier this year when it was trading at over 2x the price of bitcoin. Simply put - investors will pay for access if it's easy for them to obtain it.

Source: https://grayscale.co/bitcoin-invest-ment-trust/#market-performance









Bitcoin volatility is beginning to evolve into something an institutional investor that deals with commodities may become more comfortable with Given its nascency as an asset class, cryptocurrencies are usually given a pass when criticized for its high implied volatility of returns. The fact of the matter is that any asset that is capable of producing such significant returns in a relatively short amount time will be volatile and should be accepted as volatile by anyone that truly understands the relationship between risk and reward. However hyper-volatile assets are generally too rich for the blood of a traditional institutional investor, like an RIA, pension or endowment. This is true even for the faction of institutions that have a higher risk tolerance and may wish to invest in an asset that isn’t as battle-tested as a more reliable large-cap blue-chip stock. We’re talking mainly about the commodity asset class. Within this category, maintaining exposure in any area of the supply chain usually brings with it consider-able volatility. For instance, we look at the historical annualized volatility of two ETFs that are used to gain expo-sure to smaller exploration companies in search of gold and silver deposits: GDXJ (VanEck Vectors Junior Gold Miners ETF) and SILJ (ETFMG Prime Junior Silver ETF). According to Morningstar’s database, the 3-year trailing volatility of GDXJ is 43% and 56% for SILJ. That is a considerable amount of price risk, however, there is a segment of institutional investors that use these ETFs for tactical exposure purposes and are willing to stom-ach this vol. We, therefore, believe the decreasing levels of bitcoin volatility (evidenced in the below graphic) should bode well for the asset class the more it resembles listed alternatives.

Bitcoin Rolling Volatility (30 days)Current volatility has fallen below the historical average and is approaching levels not seen for over a year.










Futures have 100% had an effect on the price of bitcoin The impact of bitcoin futures on the underlying price of bitcoin is turning out to be a polarizing topic. We believe there’s ample argument for both sides. Those blaming bitcoin’s weak price action on futures aren’t entirely wrong. The long bitcoin/short bitcoin futures basis trade has been a very profitable one for those that could stomach the margin costs and knew when to optimally enter and exit each position. Coincidently, we’ve observed that there is, in fact, a subtle weakness in price leading up to and during the ‘expiration phase’ or the latter half of the month. The graphic below illustrates this phenomenon at a very high level. It is a visualized representation of bitcoin’s average daily price moves normalized to the middle of each month for 2018.

Bitcoin Average Daily Price Move(Normalized to middleof each month)


However, we believe that those saying bitcoin futures volumes are too insignificant to have an effect on the asset itself aren’t entirely wrong either. To help with that statement, we can observe the average daily volumes of CME bitcoin futures versus the CME S&P 500 E-mini futures. A rough calculation taken from data on the CME website indicates that year to date, the former has averaged $90M per day in trading volume while the latter has average daily volume in the hundreds of billions. The S&P 500 represents a mature industry that is drastically more liquid than bitcoin but the numbers should help put this argument into some context how early in the game we are with futures.









We are finally witnessing some meaningful price dispersion This is something we predicted at the start of 2018 to materialize at some point in the year. We observed the excessive correlation amongst what looked like every cryptocurrency in the top 50. We stated why this is a bad thing for the evolution of any market, especially one as young as this. We attributed that level of correlation to the relative homogeneity of the investor community at the time and the manner in which they consume data points (everyone did what everyone else did). We believe that the correction of 2018 has changed that reality and for the better. The investor base is a bit more differentiated and the manner in which they consume infor-mation and make trading decisions now has some nuance. We also think the participants taking risks in small cap names are now different than those that are more ‘risk averse’ holding bitcoin or ether.

In any case, we now see a dispersion of returns between cryptocurrencies of different market caps. The way we choose to visualize this information is by using choosing traditional definitions of what makes up a large cap, mid cap, and small cap asset. The chart to the right breaks this down, along with the performance variance year to date (as of July 23, 2018).

To further illustrate this observation, we refer to the graph below of quarterly indexed returns for the top 50 coins. We highlight a few of the more noteworthy large caps to prove our point that dispersion has in fact returned to this market in a very big way. We posit that is a good thing for this marketplace and we expect to see this dispersion continue to play out even further through the end of the year.

Indexed Returns of the Top 50 CoinContrary to the popular narrative, there is the high degree of dispersion amongst returns between coins.










Category

Large CapMid CapSmall Cap

MarketCapitalization

$10B - $200B$2B - $10B<$2B

% Change(Year to date)

- 42%- 34%- 39%








Bitcoin is not sensitive to changes in macroeconomic conditions The U.S. is reaching the late stage of the economic cycle with little to no slack remaining in the labor market, consistent yet moderate economic growth, and some signs of acceleration in wage growth that could push inflation higher than the central bank's targets. The Fed has started on the path to monetary policy normaliza-tion by raising interest rates. Other developed world countries are facing similar economic conditions but just earlier in the cycle. Investors are anticipating a shift in the market environment, and we may shortly experience an environment in which cryptocurrencies have never traded in before.

Since bitcoin has never existed through an entire economic cycle, it makes it difficult to know what will happen to cryptocurrencies in a market environment of higher inflation or higher interest rates. But we can examine bitcoin's reaction to changes in what's priced in to growth or inflation by looking at the timing of key macroeco-nomic indicators. For example, although for all of bitcoin's existence inflation has run below the Fed's target of 2 percent, looking at a macroeconomic data release that shows inflation accelerating faster than expected may give us some clues in how bitcoin responds.

The U.S. employment report that is released on the first Friday of every month is top of mind for most market participants because the degree of slack remaining in the labor market and timing of wage growth acceleration are a key determinant of the future path of U.S. monetary policy. For most releases, there are slight differences between what the raw data is telling us and what is priced in by market participants. Right at 8:30 am EST when the report is released, we typically see movements in all the major asset classes, including equities, bond yields, gold, and the U.S. dollar because all assets are impacted by changes in growth, inflation, and monetary policy.

We have been closely monitoring bitcoin’s reaction to key macroeconomic data releases and have found abso-lutely zero reaction. This indicates that bitcoin and cryptocurrencies aren't currently sensitive to changes in macroeconomic conditions or the future path of monetary policy. There are two possible explanations for this empirical observation:

a. Cryptocurrencies are fundamentally a new type of asset class and prices are impacted by a completely different set of factors compared to traditional assets.

b. Institutional investors like pension funds, endowments, and sovereign wealth funds still do not have any allocation to the space which explains the lack of market reaction.

Of the two explanations, we believe the second is more likely. Logically, if bitcoin is seen as a store-of-value similar to gold, it should be sensitive to changes in real yields -- higher inflation is good for bitcoin because it increases the desire of investors to preserve wealth, and lower nominal yields reduce the opportunity cost of holding an asset that doesn't produce cash flows. So at some point in the future, perhaps once enough institu-tional capital has entered the space, we should begin to see bitcoin react to macroeconomic data releases like other risky assets.









To understand forward-looking impacts of geopolitical risks, first look back In October 2008, in the midst of the global financial crisis, Satoshi Nakamoto published a whitepaper describing the bitcoin protocol. The forum post that introduced the document suggested that the motives behind creating bitcoin were ideological and philosophical -- not commercial. Nakamoto introduces bitcoin by stating “The root problem with conventional currencies is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”

Although bitcoin has since evolved and attracted attention as a speculative investment, a store-of-value, or a way to pay for illicit goods and services, none of these use cases were discussed by bitcoin’s creator. Instead, the bitcoin whitepaper is, at its core, a political document that advocates a strict separation between money and the state and was created in response to the economic environment that existed at that time. The global financial crisis and the subsequent response from central banks and policymakers drew renewed attention to the fallibility of government institutions and the impact that geopolitical risk can have on asset prices. Geopoliti-cal risk refers to the danger faced by market participants that government actions, decisions, events or condi-tions might affect the return that market participants expect from their investments.

Common political decisions that can impact on financial asset prices include higher taxes, extra regulations, and enacting barriers to trade. More broadly, it can refer to economic mismanagement and policy errors, such as allowing inflation to rise too high or too quickly (thus reducing the real return of all assets) or enacting mone-tary policy that causes a recession (which hurts the return of financial assets with cash flows connected to economic growth, such as equities). Under extreme environments, geopolitical risk can include government actions that lead to confiscation or nationalization of real or financial assets, capital controls, sovereign debt defaults, and political violence such as terrorism or war.

Under times of heightened geopolitical risk, investors typically turn to safe haven assets such as gold, U.S. sovereign bonds, the U.S. dollar, Swiss franc, and Japanese yen. Investors should strongly consider bitcoin as an alternative asset that has the ability to hedge geopolitical risk in a more direct way than any existing asset class. Our view is that bitcoin (or whatever coin is the leading candidate as a store-of-value) should perform extremely well in an environment of increasing geopolitical risk. This view is based on bitcoin’s fundamental ideology and philosophy, along with its fundamental construction which does not rely on a centralized party (that could be prone to making bad decisions or policy errors) and a fixed inflation schedule and supply that is embedded in the protocol and enforced by a decentralized network of nodes and minors.









Geopolitical risk impacting the price of bitcoin has historical precedent Since bitcoin’s creation, the world has generally experienced below-average volatility in most financial assets and asset returns have been driven primarily by stimulative monetary policy and abundant liquidity by the majority of developed world central banks. Geopolitical events have had a secondary impact on asset prices. Some geopolitical risks have risen or receded gradually, making it difficult to isolate the impact of these risks on bitcoin and other cryptocurrencies which are themselves driven by a number of different forces. Therefore, we examine two distinct geopolitical events that occurred rapidly at a precise timestamp and were not priced in to the market: the United Kingdom referendum to decide whether to remain or leave the European Union and Donald Trump’s presidential election win.

a. In the weeks prior to the UK referendum vote, there was a significantly increased trading volume and bitcoin rose from around $600 to $765. Bitcoin ended up giving up the majority of its gains in the days before the vote as investors thought that Brexit was unlikely based on the latest polling numbers. During this time, gold and bitcoin were highly correlated with the implied odds that the United Kingdom would leave based on the lines on betting websites. The chart below shows Bitcoin prices with the vertical line indicating when referendum polls were closed. As results were announced, bitcoin again rose in response to the news in concert with other safe-haven assets while almost all equity markets around the world and currencies in the eurozone declined sharply. This confirmed bitcoin’s status as a safe-haven asset in the eyes of many inves-tors and demonstrated how effective a hedge it is when there is instability or uncertainty in centralized institutions.

Bitcoin Price in Responce to BrexitBitcoin increased sharply on June 23, 2016 at 22:00 BST as polls closed and results began to be announced.


b. On November 8, 2016, the United States held its presidential election and Donald Trump was elected presi-dent. In the immediate hours following the election, flight-to-safety occurred in financial markets. Investors quickly reevaluated the implications of Trump’s win and global equity markets actually rose the following day. But the precise timing of bitcoin’s move in response to the election results demonstrates bitcoin’s safe-haven properties.

Bitcoin Price in Responce to Donald Trump Election WinBitcoin increased sharply on November 06, 2016 at 03:00am Trump secured enough electoral votes to make him the president-elect.


Since bitcoin’s creation, the world has generally experienced prosperity with coordinated global growth, contained inflation, and declining unemployment (with a few isolated exceptions). These three economic indicators could be combined to form a sort of “misery index” faced by normal citizens. The latest data shows that the misery faced by most people in the world is currently low and below historical averages. However, populist and anti-establishment ideologies and political leaders have managed to thrive in such an environment as evidenced by political elections in recent years across both developed and emerging market countries. It is troubling that the world may be shifting to a new market environment in which growth is slower, inflation is higher, and unemployment begins to rise. When ordinary citizens begin to feel less economically secure, more extreme ideologies and political opinions may start to form and can lead to a world where impactful geopoliti-cal events occur at a greater frequency. A severe geopolitical event could be the catalyst that pushes bitcoin to full mainstream adoption.

The traditional media still does not get it (and there’s a reason why) As we continue to see more and more sensationalist headlines coming out of the traditional media sources, it’s become clear to us that now more than ever it is important to be able to separate fact from fiction. Just because a media source has a brand name and a history of being a reputable news source for the traditional financial ecosystem doesn’t mean there won’t be any noise when they report on cryptocurrencies. This isn’t a knock on media at all. They are effectively in the business of creating viral content and developing a sticky viewer base and doing this again and again and again. And in order to do that consistently and stay competitive with other media sources, it sometimes requires pushing the boundaries with a particular headline and ensur-ing the right combination or nouns and adjectives are pieced together to maximize the buzz. Often this means not necessarily reporting on the positives, such as recent success in scaling initiatives for major protocols. But more so on the negatives, such as the fact that over 800 projects that raised funding in cryptocurrencies last year are now defunct (likely because there was no real business behind the scenes and/or because they never shipped a product). All that being said, media has a role to play in the proliferation of digital assets and the even-tual network effects that will be developed over time. We recognize that. Our hope is that over time, we will see more signal from their reporting and less noise. Until then, we will relay the same thing we tell anyone that asks us a question on cryptocurrencies. Don’t listen to the FUD, always DYOR.

Portfolio Management TeamELEMENT DIGITAL ASSET MANAGEMENT


Disclosures This Commentary is for informational purposes and does not constitute investment advice, any type of recommendation or an offer to sell or a solicitation to purchase any securities from the Element Digital Funds or an entity organized, controlled, managed by or affiliated with Element Capital Group, LLC (“Element Group”). Any offer or solicitation may only be made pursuant to a confidential private offering memo-randum which will only be provided to qualified offerees for careful review prior to making an investment decision.We aim to educate, report and/or opine on certain developments relating to the digital asset market. These are our subjective views,based on information and sources we believe to be reliable as of the date we publish, but we make no representations or warranties with respect to the accuracy, correctness or completeness of our opinions or any information herein and have no undertaking to update it. Please do not rely on it.

Element Group and/or its affiliates and personnel have made investments in some of the assets or instruments discussed here, and may in the future make additional investments (long or short) in such assets or instruments without further notice.Element Group does not, here or anywhere, provide accounting, legal or tax advice, or make investment recommendations. Please do not rely on us for the foregoing. We strongly suggest that prospective investors seek independent advice with respect to any investment, financial, legal, tax, accounting or regula-tory issues discussed herein.

Certain information contained in this Commentary constitutes “forward-looking statements,” such as statements that include the words“may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “believe”. There are so many risks and uncertainties that actual events or results or the actual policies, procedures and processes of Element Group and the Element Digital Funds and the performance of the Element Digital Funds may differ materially from those reflected or contemplated in such forward-looking statements. Please do not rely on forward-looking statements. Past performance is not necessarily indicative of or a guarantee of future results.

This Commentary is confidential, is intended only for the person to whom it has been provided, and under no circumstances maybe shown, copied, transmitted or otherwise given to any person other than the authorized recipient.


global macro trends and cryptocurrencies · in this report, the element group digital asset...

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