Introduction
2022 was a year of downturns, shutdowns, and sideways movements for some assets. While the high-interest rate environment after decades of extremely low-interest rates finally capitulated the market to the downside across the sectors, constant development and outlier performance have been seen in many avenues. Substantial projects continue to deliver, build, collaborate and drive value even in challenging markets. Most broad indexes faced pressure to the downside, but structural and integral players accrued values in different forms. The sanctions on Russia made the oil demand supply to be skewed in Russia’s favor thus allowing them to control oil distribution and subsequently cause a rise in price.
Throughout the turbulent yearcal and massive drawdowns, there have been opportunities in the market with projects with actual utility, users, and demand. Capturing such value proactively in such projects and events is what forms the genesis of our strategies. The final trade decisions are based on well-rounded checks on technical, onchain, fundamental, and macro-level research.
We handled market volatility with our robust risk management framework that aims to mitigate systemic and unsystematic risks. Our investors have diversified their portfolio based on their risk appetites as ‘Balanced’ with equal capital allocation to each strategy. The Sharpe ratio ranges from 2.3 – 4.9. Alpha Blue Chip and Top Cap strategies work the best in times favorable to risk on assets. Arbitrage strategy and a balanced portfolio of all three strategies have been good options for those looking for less volatility and good aggregated returns.
While BTC, ETH, and all major indices have gone down this year, individual themes, sub-themes, and projects consistently outperformed the broader indexes. These opportunities, though available, are present for brief periods and hence require quick actions and market monitoring. Continuous monitoring and well-rounded decisions drive the performance of different Kunji strategies. Following the aftermath of FTX, a massive flight of funds took place from Centralized exchanges to Decentralized ones (DEXes). This increased the utilization and Total value locked (TVL) of such valuable and prominent platforms. Subsequently, projects with good fundamentals, like dYdX, outperformed the broader altcoin index to provide good upside opportunities.
Power of Currencies
Historically, USD dominance has not been good for growth assets, and bitcoin specifically has seen a significant inverse correlation to the USD’s strength. This year, the market saw USD’s astronomical rise in dominance as compared to all major currencies across the globe. This upsurge has forced countries worldwide to think hard about the assets they hold on their balance sheets and the actual dependence everyone has on the US alone. While China has successfully expanded its influence in the east part of the world, continued covid cases have blurred the picture, and the growth is more blurred than what’s happening on the ground. While these currencies continue to have a good fight, a new fight in terms of CBDC value domination has started this year. Multiple countries and authorities compete in each country, testing different models for wholesale and retail versions.
Q1 2022 : Russia-Ukraine war contributed to extreme volatility
While Bitcoin’s reversal from its top in 2021 started in Nov 2021, a significant drop was seen in January 2022. While these were severe corrections, they were just the start of the downturn that continued throughout the year. In February, Russia waging war on Ukraine further made the environment uncomfortable for risk-on assets like cryptocurrencies and equities. The complex strategies used by Russia further fueled the initial push for energy in the first month. All this contributed to a further rally in the prices of Oil, Energy, and Commodities. While these events pulled money from risk-on assets, BTC was able to close the quarter with a slight drop.
The sharp drops in February resulted from the shaking confidence in multiple altcoins. This year saw some of the biggest hacks since the start of the year. With reportedly 1 billion being hacked in the first quarter itself (Ronin bridge for $625 million, Wormhole porta technology for $325 million, etc.), the altcoin dominance took a nosedive during the first quarter. It sowed the seeds of BTC and ETH prominence, to rise.
Q2 2022 : Terra LUNA collapse exposed the structural vulnerabilities in the ecosystem
The second quarter brought a lot of crypto-specific structural breakdowns and shocks to the entities across the ecosystem, which caused a significant fall in the crypto prices across themes. The launch of BAYC’s Otherside Land Sale and the subsequent congestion on the Ethereum network highlighted the need for more refined NFT infrastructure and upgrades to existing scaling solutions. This was just the beginning of multiple other NFT sales that flourished throughout the year. On May 12th, LUNA’s price fell 96% in a day, with BTC dropping 16% in a single week. The individual value of LUNA was not enough to showcase the $50 billion whole that the event created due to multiple connected parties.
UST’s depeg, which started this fiasco, just highlighted the fragility of the stablecoin ecosystem. All this attracted serious attention and pushed the case for CBDCs by authorities across the globe. Just like currencies, a race for global CBDC domination has started fiercely. While the initial drop of UST and Terra was a bit contained, it spiraled down, taking enormous big players like the hedge fund Three Arrows Capital (3AC), which had considerable positions in the Terra ecosystem. While the final bankruptcy process for the hedge fund was carried out in July due to the Terra crypto crash, most of the exposure was clear to the public eyes before that.
While this was just the start of what eventually turned out to be a chain of shutdowns and bankruptcies, the drawdown in June was one of the biggest of the year. While all strategies saw a serious dip, all lost value recovered quickly within weeks until early July.
Q3 2022 : High-profile bankruptcies started in July with 3AC Collapse, Causing crypto contagion risk
Apart from the initial drop from 3 Arrows Capital bankruptcy filing, the third quarter mostly had private companies declining. While big private players like Voyager and BlockFi started facing liquidity and solvency issues, the overall drops in the quarter did not affect the BTC’s ending price. China piloted its e-CNY program in August, slated to go mainstream in 12 months, thus providing China with a good lead in the Digital Currency world. The benefits of China’s currency domination can be seen from its prominence in Africa and adjoining regions. The currency has started getting a good grip outside its physical borders.
The drop post-mid-September was attributed to the run-up that happened to the ETH 2.0 event that made significant protocol changes and shifted the Ethereum network from PoW to PoS system. The changes in tokenomics and other parameters made ETH extremely deflationary in the long term. While the Eth and alts price pushed a bit to the downside, in the long term, the changes are incredibly bullish for the sector and EVM ecosystem.
Q4 2022 : FTX and Alameda’s bankruptcy shook ecosystem trust
The most volatile and intense quarter of the year constituted official inflation numbers peaking out and saw some of the most consistent and substantial rate hikes in decades. A reversal in inflation numbers and the net neutral to slightly positive commentary from the Fed at the end of November brought a good relief rally to the market. Still, structural changes and shutdowns like FTX and the subsequent bankruptcies and tough times that followed did persist in the market. The big drop in Alpha for December was an after-effect of the FTX collapse that made DCG (Digital Currency Group) liquidate its major Altcoin holdings, bringing volatility to the downside. Times like these are when a distributed risk or strategies with less volatility are helpful.
The biggest contributor to the last quarter’s huge negative area was the FTX-Alameda collapse. This disintegration wasn’t just a trade gone wrong but a breach of trust by the company’s management and the deliberate blurry structuring of the company and backdoors to leverage customers’ assets incorrectly. Companies in the space need to adopt an agile approach to maintain transparency and have a good reputation and customer trust.
Ending Notes
The 2022 year was an extreme example of the days when years happen, but our team is in the asset management industry and the digital assets league for the long haul. While prices and industry giants fell in 2022, those with a strong ethos and fundamentals have endured and even prospered in troubling times. Most large startups or businesses are developed over time as small organizations with refined strategies. Our team is driven to provide the best possible offering in the digital asset management space through the sector’s precision, ownership, and passion. Playing by the ever-changing rules is a significant part of our culture, even though regulation is anticipated to be exorbitant next year. Subscribe to our newsletter to stay updated with crypto insights and analysis.
