Flovtec’s Monthly Commentary for May, 2021

May saw elevated levels of price volatility across digital asset markets! Volatility is the product of uncertainty that develops due to the dissemination of mixed signals in markets. It is beyond doubt that digital assets and distributed ledger technology (DLT) have now entered the ‘dinner table’ conversations. We believe that to be the case due to the sheer quantity and variety of news and new information that came in May, and it could be interpreted in a positive or negative light depending on where the reader stands. 

The European Investment Bank, the deep pockets lending arm of European Union (EU) member states, issued its first-ever digital bond on Ethereum in collaboration with Goldman Sachs, Santander, and Societe Generale. That such a supranational entity of the EU’s magnitude, is embarking on adopting real applications of DLT is remarkable and significant in showcasing how wide-scale institutional adoption is starting to shape up. 

Notwithstanding, we saw a steep decline in digital asset prices. From its recent highs around 64’000, the price of Bitcoin tumbled by nearly 50% before bouncing back slightly back at the very end of the month. Ether even fell by more than 55% from peak to through. Smaller capitalization digital assets, that typically move in tandem with Bitcoin, also suffered major losses. Such strong declines coincided with Tesla’s announcement that it would stop accepting Bitcoin as a currency for car purchases due to concerns over the carbon footprint of Bitcoin mining.

Tesla’s co-founder and CEO Elon Musk later asserted that Tesla had not sold any Bitcoin that it holds following the highly publicized purchase earlier this year. Concerns levied by Tesla reveal the emergence of well-developed and nuanced conversations about DLT protocols, their sustainability, and general utility to a global society. Hence, despite the price action, we see this as a great opportunity for technical, constructive scrutiny that reinforces the trajectory of the development of DLT protocols.  

The U.S. regulator has expressed the desire for more investor protection. Gary Gensler, Chair of the U.S. Securities and Exchange Commission, said that he would like to see more regulation around cryptocurrency exchanges, including those that solely trade bitcoin and do not currently have to register with his agency. Also, HSBC communicated that they have no plans to launch a cryptocurrency trading desk or offer digital coins as an investment to customers. Europe’s largest bank’s stance contrasts with its rivals such as Goldman Sachs and UBS, which are friendlier towards cryptocurrencies.

Additionally, Ray Dalio, the founder of Bridgewater Associates, indicated in an interview that he owns “some” Bitcoin. After being rather skeptical as recently as last November about the cryptocurrency, this statement shows a change of heart this year. Additional positive news included PayPal announcing to be working on crypto withdrawal capabilities and various companies announcing further purchases of Bitcoin. It is interesting to see that in the corners of the old world of finance, a consensus is hard to find. 

In terms of trading volume, the last weeks have broken new records for exchanges. After three consecutive months where volumes exceeded USD 1 trillion, May was the first month where crypto exchanges have totaled more than USD 2 trillion in trading volume. While Binance continues to be the leader for crypto-to-crypto trading, Coinbase remains the top fiat-to-crypto exchange. 

In such a volatile market environment our Market-Making strategies continue to showcase their most important advantage to  investors. That is a return profile that is uncorrelated with the market. Despite the sharp declines in digital assets prices in May, our Market-Making algos closed the month up by 1.2%. As markets took a deep dive on the 18th of May, our trading strategies had strong positive returns on that day.

To conclude, our view at flovtec is that this is not yet the end of the bull market, rather a probable correction after the strong market rallies since November last year. We continue to believe that the current period is comparable to the early to mid-2017 period. The next few months will provide more critical developments for our ecosystem. With the near-continuous advancements to DeFi protocols and innovative liquidity solutions, the role market makers play will take the center stage. As with previous commentaries, we highlight that we are proud of how our market-making profile and track record are in line with the main features of market-making returns relative to the market, that is, less correlated and much lower variance.   

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