Vikara April 2024 Update: Welcome to your Orwellian future

We have decided not to publish our investor update in April because Australia’s eSafety commission has clearly articulated that any content that is not supported by the Australian Government will not be tolerated and there will be consequences for non-compliance. We have no choice but to comply.  

While we can joke about it now, freedom of speech is being curtailed. The US FISA and Australian governments eSafety commission enables unelected government employees to pry through your computer, its files, and any online services you use without your permission or a search warrant.

You may think that you are boring, and your data is not what the government is looking for, but it is. Arguing that you don’t care about the right to privacy because you have nothing to hide is no different than saying you don’t care about free speech because you have nothing to say.

It saddens us that kids will never know a world where privacy is a basic human right. Between the surveillance cameras on every corner, to the legalization of total transparency on the internet, privacy and free speech are sacrifices the majority still seem happy to compromise on. 

Collecting data on every citizen has so many potential negative destinations. It is not that we believe the governments intend to use this data for evil, it is just that they are building the infrastructure that can entrap us all without laying out the governance structures needed to ensure it will not. 

Is it any surprise that digital assets are technology non grata? The argument that these rules are required for safety is a joke. The government does not need to access photos of my family on my hard drive to keep me safe. Yet, they are now allowed to without a warrant. 

What is still misunderstood within digital assets is that Bitcoin is only half of the story. It is designed to help create financial sovereignty, while Web3 is all about creating digital sovereignty. While these two may seem different, you cant have one without the other. 

You may have a sovereign asset to use, but if your internet connection is linked to your government ID and your central bank digital currency, will you be able to use your Bitcoin? It may seem far fetched, but this has been proposed in Australia, the US, Canada and the UK in the past month. 

Figure 1 – Trust us, what could possibly go wrong? 

Source: The New York Times

Macro

It is worth starting our macro commentary with a simple image of the four pages that define the longest running democracy that the world has ever seen: The US constitution (Figure 2).

Figure 2 – The US Constitution

Source: Uknown

Almost every aspect of it talks to the specific rights, freedoms and obligations that the government needs to afford its citizens. It is written with the backdrop that governance of people is a privelage, not a right. Compare this to the 185,000 pages in the Code of Federal Regulations today. 

Compare this to the internet, which is one of the largest economies in the world, with its constitution dictated by unelected officials outside of the view of the public. It is illegal for them to open your physical mail, but legal to read every email you send and receive. 

The amount of US Treasuries that “the internet” now holds is greater than many of the largest countries in the world. This is expected to grow exponentially in the short term, as the tokenization of real world assets enables ownership of any asset (Chart 1).

Chart 1 – Holdings of US treasuries

Source: DeFiLama, US Department of Treasury

While many internet users remain unaware as its rules of engagement are being shaped outside of the view of the public eye, it is obvious that government overeach will accelerate until people resist. Sadly, the number of people resisting the totalitarian rules being enforced remains small.

This leads us to the Bitcoin halving, which happened this month. Its supply is now only increasing at one percent per annum for the next four years (Chart 2). This is in the context of the number of users on the internet that is still rising >1.5% per year even after 34 years of growth. 

Chart 2 – Annualized supply issuance of Bitcoin (2011-2024)

Source: Deutsche Bank, Hashlabs, TheDailyShot

There is an ever increasing demand with falling supply. At the same time, governments are destroying people’s purchasing power in real time as reckless monetary policy is seen for what it is. Gold prices in Japanese Yen show this. Holding yen is a quick path to ruin (Chart 3). 

Chart 3 – Japanese Yen in Gold terms (2000-2024)

Source: Tradingview

What is happening in Japan today is no different to what happened in Zimbabwe in the early 2000s. The only difference is scale of the
y-axis in chart 4. Just because Japan is a larger economy, doesn’t mean it wont suffer the same fate. 

Chart 4 – Zimbabwe Dollar versus the US exchange rate (2001-2009)

Source: David Greguska

While it feels more stable for those holding US dollars, Euros, or British pounds, this too is a relative façade due to inflation eroding purchasing power over the past three years. At the end of the day, purchasing power in all fiat currencies is eroding, some faster than others (Chart 5). 

Chart 5 – Inflation across major economies (YoY%) (2020-2024)

Source: US Bureau of Labor Statistics, Eurostat, UK Office for National Statistics, S&P Global

The Big Mac Index shows the erosion of purchasing power. Interestingly, the Big Mac Index and US house prices have both risen ~2.5x since the year 2000, but that’s because both are move valuable today instead of the purchasing power of the dollar declining. Right? 

Chart 6 – Big mac index versus US CPI (2012-2023)

Source: Federal Reserve Bank of St. Louis, The Economist, US Bureau of Labor Statistics (via Haver analytics) 

But what is the solution? Governments created the need for citizens to hold capital in any other asset than the fiat they chose to detroy. Canada is increasing capital gains tax (CGT), the US wants to tax unrealized CGT, and Australia wants to abolish negative gearing while increasing CGT.

Figure 3 – Solving a problem or creating a new one?

Source: X.com, Unknown

Seriosly?!! Instead of trying to fix the cause, its about trying to tax the symptom. It is no surprise. Thankfully, noone is buying it. Take a look at the divergence between gold prices and US Real yields (Chart 7). There is no other way to read this chart other than we have crossed a point of no return. 

Chart 7 – Gold prices versus US real yields (2006-2024)

Source: @BurggrabenH

This is where digital assets come into play. A place where most of the civil liberties afforded by the US constitution to its citizens (which are a cornerstone of it’s success) are trying to be established online. This is what Vikara is invested in.

It is no surprise that the unelected officials want to prevent Web3. The FBI calls it money so it can arrest users for money laundering, the IRS calls it property so it can tax capital gains, the SEC calls it a security so it can sue new issuers, the CFTC calls it a commodity so it can’t be used as a currency.

Even the Dow Jones to Gold ratio can feel the uncertainty of the overreach. How can one keep assets invested in a place where unrealized gains might be taxed? Surely it is better to own physical property that can be kept out of reach of the prying eyes of the government (Chart 8).

Chart 8 – Dow-Gold Ratio (2004-2024)

Source: @graddhybpc

Gold is hard to carry and much easier to confiscate, which brings us back to digital assets. Are you starting to work out why privacy is important yet? If they can monitor all of your conversations, if they can read every text, email, view your photos, how will you ever protect your property? 

Moving on to more traditional macro, there are three things we want to highlight. China property remains an unmitigated disaster (Chart 9), and while many don’t believe China will need to devalue its currency, we do as it soaks up the litany of bad debts that are plaguing a recovery.

Chart 9 – China property growth (2005-2024)

Source: Topdown Charts, LSEG, NBS

We remain of the view that a resurgence in US inflation is temporary, and it will roll heading into the back half of the year, with most of this based on a view that China will need to export its deflation for years to come (Chart 10). 

Chart 10 – Inflation declines after post WWII and post covid bubbles

Source: Elaine Garzarelli; @carlquintanilla

The geopolitical power struggle is intensifying. There is no better chart to highlight this than the sudden and exponential rise in CNY payments moving across the SWIFT network (Chart 11).  

Chart 11 – Share of payments vis SWIFT in CNY (2011-2024)

Source: TheDailyShot

Forgive our cynicism but it was timely to read a headline from the Wall Street Journal telling us this is now the plan (Figure 4). The US is threatening China with the failed threat it used against Russia. 

Figure 4 – US Targeting Chinese Banks

Source: Wall Street Journal

As governments continue to print their way to prosperity, the people are left to deal with inflation. The Fed pivot that was a certainty earlier in the year is now far less certain. Look at the falling probabilities of a rate cut during 2024 (Chart 12). Whoops, sorry main street, more money is needed.

Chart 12 – When will the Fed cut rates?

Source: Chicago Mercantile Exchange, Bianco Research LLC

In closing, there are a lot of moving parts to the macro right now and while many are focused on the minutia of the day-to-day volatility in markets, we are very focused on where the puck is moving. 

We continue to believe that markets will go higher from here and so far this year is playing out just like over election years (Chart 13). 

Chart 13 – How the S&P500 performs after previous big starts to election years 

Source: Carson Investment Research, Factset, @ryandetrick – election years >5% in Q1 (’56, ’64, ’72, ’76, ’12)

Digital Assets

Digital asset headlines in April were dominated by Bitcoin halving #4 and Solana congestion issues, although there was plenty of action elsewhere.

  • Franklin Templeton announced the tokenization of its US Government Fund on the Polygon ($POS) and Stellar ($XLM) blockchains that will enable peer-to-peer transfers for shares in its Franklin OnChain United States Government Money Fund (FOBXX) using the BENJI token at a 1:1 ratio.
  • Ernst & Young (EY) announced that they are launching an enterprise contract management service on Ethereum ($ETH) and Polygon that will allow clients to put contracts on a public blockchain (using Ethereum) while keeping business information private through zero-knowledge circuits (using Polygon).
  • Stepn ($GMT) and Adidas announced a collaboration with the launch of 1,000 co-branded Genesis Sneaker NFTs on Solana ($SOL). The NFTs sold for 10,000 GMT each or $2,400 at time of mint and have increased to 19.8k GMT or nearly $4,600 on April 30.
  • Layer 1 Sui ($SUI) announced an upcoming launch of a handheld gaming device that natively integrates with the Sui blockchain. 
  • Global payments company Stripe announced that they are going to begin allowing crypto payments on the platform.
  • Financial services platform Square announced that users can now convert fiat to Bitcoin using the Cash App. 
  • Morgan Stanley, with over 15,000 active brokers, is reportedly exploring the potential for its advisors to actively recommend Bitcoin ETFs versus solely on an unsolicited basis.
  • Germany’s largest federal bank, Landesbank Baden-Württemberg (LBBW), plans to offer crypto custody services to meet increasing client demand.
  • TikTok owner ByteDance announced a partnership with Mysten Labs, the developer of the Sui blockchain, to enhance web3 gaming and SocialFi offerings on Sui.
  • The UFC announced fighters will begin using tokenized gloves, with gloves containing VeChain ($VET) near-field communication (NFC) chips that record fight data and prove the authenticity of each pair on the VeChain blockchain.
  • Samsung announced the launch of a limited-edition ‘Web3 TV Bundle’ that utilizes Polygon Labs’ blockchain technology, OpenSea’s NFT marketplace, and Ledger’s secure hardware wallets. The bundle allows users to obtain NFTs through the ‘Samsung NFT Gallery TV App’ while providing rewards from blockchain projects Illuvium ($ILV), Wilder World ($WILD), and World of Women, for example.
  • Google Cloud has launched its Web3 portal, which offers resources for blockchain developers that include datasets and tutorials on creating NFTs.


While many headlines would make one think crypto is dying…again, bellwether Bitcoin is only off 13%, while altcoin benchmark Total3 (crypto ex-BTC/ETH) is down 17% (Chart 14), from their March highs. This is a story that has repeated itself the last two cycles.

Chart 14 – Total3 Index (Jan 1, 2024 – April 30, 2024)

Source: Tradingview

In 2016, BTC experienced a 30% sell-off that started 22 days before halving (Chart 15). Then post halving was rangebound for nearly four months after which huge returns ensued.

Chart 15 – BTC (2016-2017)

Source: TradingView; @CristiWeb3

In 2020, there was a 19% pre-halving drop over only 4 days followed by a sideways market for 3.5 months (Chart 16). Outrageous gains ensued with the Total3 Index up over 13x from October 2020 to November 2021.

Chart 16 – BTC (2020-2021)

Source: TradingView; @CristiWeb3

Halving number 4 occurred on 4/20. Some claim this is a left-hand cycle, meaning gains have been pulled forward with the cycle playing out over the next 12 months versus 18 months like previous cycles. Naturally no previous cycle is exactly like the next, but 2016 and 2020 were very similar with 2024 following the same path. 

Total3, as noted above, is down 17% from its March high. Again, this is very similar to previous cycles and was needed following the gains that have occurred over the past 6 months and provides a potential entry point for those that have missed this cycle so far.

Onto Solana FUD. While the Solana ecosystem exploded in March driven largely by meme coins, it has come back to earth as evidenced by both volumes (Chart 17) and fees. 

Chart 17 – Solana Network USD Volumes (Jan 1 2024 – April 28 2024)

Source: DefiLlama

This drop can be credited to the overall market but is also self-inflicted. As we highlighted in a mid-April note on LinkedIn, Solana continues to experience a multitude of issues, most notably network congestion, which inhibits the ability to transact given failed/dropped transactions or stops/slows ability to send tokens in/out or across ecosystem.

As the network seized up, volumes dropped, returning to pre-March meme mania levels, with volumes down ~75% from the peak of $4bn in mid-March and with April 28 daily volume totalling those last seen in late February (Chart 17 above). 

Even without network issues, we believe this was inevitable given it was meme driven, although it likely brought the decline forward, possibly exacerbating it.

Regarding Solana’s network congestion, they are blaming the congestion and significant increase in dropped transactions (>75% of non-vote Solana transactions failed on April 4 for example) on high network demand, driven by significant increases in volumes, granted many are bots.

Dropped transactions are those that have taken too long to process, due to others getting there first. With Bitcoin, for example, those transactions would generally sit in the mempool (short for “memory pool”), which is the queue of pending and unconfirmed transactions on a cryptocurrency network node, until they’re eventually added to blocks in times of lower demand. But without a mempool, Solana simply lets those transactions disappear (“drop”) without processing them.

Unsurprisingly, Solana woes have led to significantly lower fees in April versus March, although fees are still higher than when the March boom kicked off. 

Chart 18 – Solana Fees (March 1 2024 – April 28 2024) (right hand axis $0 to $5m)

Source: DefiLlama

The Solana team notes that the ongoing network congestion is not a result of a fundamental design flaw but rather an implementation issue, which is a much easier fix according to Austin Federa of Solana Labs (Figure 5). 

Figure 5 – Solana Labs addressing network issues (April 10)

Source: x.com @Austin_Federa

A fix was implemented on April 15, where Solana urged validators to update to v1.17.31, a version that changes how certain validators are treated depending on their stake. The update includes modifications regarding how the software deals with “super-low stake” validators. It also addresses problems with QUIC, a transport protocol believed to cause some of these congestion issues.

This isn’t new. In late 2017, Ethereum experienced similar issues when one project called CryptoKitties clogged the Ethereum network, delaying transactions, and causing a pile-up of unprocessed transactions, with unprocessed transactions rising more than 6x that month.

While crypto investors can be fickle, Solana does have a huge fan base and provides a simple onboarding process. Further, there are many projects being built on the L1 outside the many thousands of memes launching weekly. This could provide an opportunity to gain exposure to ecosystem tokens that have been dragged down by the Solana FUD.

On the regulation front, there continues to be much anticipation on whether an Ether ETF will be approved on the current SEC timelines. This is coupled with the regulatory ambiguity on ETH’s status as a security or commodity continues to hang over the crypto ecosystem. And while US regulators continue to push out approvals, it is likely that Hong Kong will approve both BTC and ETH spot ETFs imminently. 

It was also reported that Australia’s ASX stock exchange is expected to list its first spot BTC ETFs by the end of 2024.

While not busy approving ETH spot ETFs, the SEC was certainly busy issuing Wells Notices, handing one to both Consensys (company behind Metamask) and leading DEX Uniswap ($UNI) in April. 

Uniswap wasted no time pushing back, with Chief Legal Officer Marvin Ammori calling the notice “another abuse of power” by the SEC (Figure 6)

Figure 6 – Uniswap Chief Legal Officer Marvin Ammori calling out the SEC

Source: x.com @ammori

Separately, we note Uniswap announced this month that they had surpassed $2 trillion in volume since being founded in 2018 and remains the leading DEX on the Ethereum network (Figure 7). Another sign of how fast the crypto ecosystem has grown in a very short period of time.

Figure 7 – Uniswap surpasses $2trn in volume

Source: x.com @uniswap

Consensys also fired back, filing a 34-page lawsuit against the SEC and its Chairman, Gary Gensler. Consensys claims that they planned their entire business strategy based on “regulatory consensus” following the 2018 statement by SEC Director of Corporate Finance, William Hinman, that ETH was a commodity. Specifically, Consensys requests:

  • a ruling that ETH is not a security and an injunction that says the SEC has to leave it alone when it comes to any ETH-as-a-security-related claims and charges; and
  • a ruling that its MetaMask product is not a broker-dealer. 


Let’s not forget what the SEC has seemingly become under the leadership of Gary Gensler. Just this past week, two lawyers for the SEC were forced to resign after a federal judge sanctioned the agency last month for committing a “gross abuse of power” while attempting to secure a temporary restraining order against US-based crypto company Debt Box (Figure 8).

Figure 8 – SEC’s Gross Abuse of Power

Source: Coindesk

Sounds like Uniswap and Consensys are another two stabs in the dark for the SEC in a long-line of its failed battles against the crypto industry.

Tokens

The crypto gaming sector has been smashed over the past few months as meme coins and AI have sucked away liquidity. Therein lies a potential opportunity.

A newly launched gaming project we find of interest is Saga ($SAGA). Saga is a protocol that allows for the provisioning of application specific blockchains, initially focused on gaming and entertainment, on parallelized, interoperable chains called “Chainlets”. There are currently 360 projects being built on Saga.

Highlights includes:

  • Credentialled, doxxed team who has built successful blockchain projects previously
  • Tier-1 backers with initial launch on Binance
  • Unique business model solving the dilemma of limited blockchain space
  • Clear ability to onboard gaming and entertainment projects with 360 different projects currently building on Saga
  • Innovator program to help facilitate new business and builders in their ecosystem
  • Ability to expand beyond gaming and entertainment
  • Intention to expand beyond EVM to SVM (Solana) and MoveVM (Sui, Aptos)
  • Reasonable tokenomics with no vesting for 1-year and total 3-years vesting 
  • 10.5% net APR for stakers with stakers potentially receiving a large number of tokens and NFTs (Power-Level Over 9000!)


A detailed research report on Saga is available to our LPs. If you are interested in the report, please contact us.

Vikara

Luke McFarlane
Co-Founder & Portfolio Manager
Vikara Capital

Vikara CO-FOUNDER & PORTFOLIO MANAGER

Mark Riccio, CFA
Co-Founder & Portfolio Manager
Vikara Capital

Contact Us

Vikara is an open-ended fund, with investors able to add or redeem monthly. Please contact usif you would like to discuss anything further.

Vikara, in Sanskrit, describes the process of change. Its definition is constantly evolving, changing with economic cycles, technology, and geopolitics. It is a transformation of thought or logic, a modification in the direction of travel, an alteration in action or participation. It is one thing to want change, but another to drive it. We believe in a world where commerce doesn’t need intermediaries. Where people are paid directly for content, time, and effort. Where privacy, data and free speech is given, not something to opt-in for.

This material is for the general information only and should not be construed as an offer to sell or the solicitation of an offer to buy any security or asset in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any specific action based on this material. It does not constitute a recommendation or take into account the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The material is based on information that we consider reliable, but we do not represent that it is accurate, complete and/or up to date, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only and only represent the views of the author and not those of Vikara, unless otherwise expressly noted.

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