Marching Through May After a Volatile April
BLOK retraced much of its gain in April with a decline of 15.03% (NAV return), closing the month up 3.42% YTD (see standardized performance). The pullback in the Fund’s performance followed a significant broad sentiment change towards risk off as almost half of the Fund’s 56 positions were down greater than 10%. Even steady companies in the portfolio like IBM and Accenture were repriced down almost 13% due to concerns about slowing IT spending. Volatility, of course, is difficult to time, so our best defense remains our focused approach to diversification, the pursuit of new companies focused on implementing blockchain technology, and continuing to trim our winners when they reach our levels. In many ways, we see this pullback as an opportunity to capture volatility. We continue to see expanding evidence around progress regarding adoption of blockchain, tokenization, and digital assets. Specific examples include:
1. The Miners: The very much anticipated fourth Bitcoin network “Halving” was executed as planned. As a cherry on top, there was an upside surprise, with a brief explosion around transactional fee volumes which provided a short-term boost in revenues.1 Just because the Halving worked without a hitch does not mean its technological success should be taken for granted, especially given the volatility of the risk/reward. To this point, we believe the correlation to Bitcoin price will work much like a coiled spring in the upcoming price rally.
2. Trillion-Dollar Asset Manager Race: Two of the largest trillion-dollar global asset managers are now offering US Government Money Funds on the Blockchain, both with about $370 million. It may be a horse race between Blackrock (BUIDL) and Franklin Templeton (BENJI) for now, but if clients benefit, it would be reasonable to assume that other asset managers will follow.2 We believe this is an initial step to push forward the technology applications on traditional rails (aka mutual funds) while pursuing a true stablecoin effort. These two firms are not thinking millions. Currently, there is about $167 billion in true stablecoin assets ($1 pegged) sitting blockchain rails.3 By 2028, forecasters expect the stablecoin market to reach $2.8 trillion. Blackrock’s collaboration with Circle (USDC) in a seamless offering using blockchain is just the beginning.4 We would note that both Blackrock and Fidelity have invested in Circle since 2022 and there is an active Form S-1 on file.5,6
3. Venture Capital: After bottoming in Q4 2023, Galaxy Digital’s venture capital spending targeted at Blockchain started to tick back up in Q1 2024, with a 50% sequential increase quarter-over-quarter (QoQ) to 603 deals, and a 29% increase in dollars invested at $2.49 billion.7 We hear venture capital activity is certainly picking up, and there remains dry powder still in the funds from 2021 and 2022. To be fair, because large generalist funds have backed away, capital remains difficult to raise. We believe this will only mean business plans need to have more clarity than during the peak cycle periods, and the quality of the deals will just be stronger. People looking for further evidence of progress should also know that there will certainly be an overlap between AI and Blockchain.
4. Bitcoin Miners Earnings: We would also like to highlight that...
*BPs: A basis point (BP) is a unit that is equal to 1/100th of 1%.
**Schedule K-1 is a federal tax document used to report the income, losses, and dividends of a business’ or financial entity’s partners or an S corporation’s shareholders. This information does not constitute, and should not be considered a substitute for, legal or tax advice.
1 https://cointelegraph.com/news/bitcoin-mining-revenue-107-m-ath-btc-halving-day
2 https://www.coindesk.com/markets/2024/04/30/blackrocks-buidl-becomes-largest-tokenized-treasury-fund-hitting-375m-toppling-franklin-templetons/
3 https://www.theblock.co/post/291954/stablecoin-volumes-stay-strong-as-fdusd-hits-record-high-while-usdt-declines
4 https://cointelegraph.com/news/circle-blackrock-transfers-usdc-buidl
5 https://www.prnewswire.com/news-releases/circle-announces-400m-funding-round-301523647.html
6 https://www.circle.com/en/pressroom/circle-announces-confidential-submission-of-draft-registration-statement-for-proposed-initial-public-offering
7 https://www.galaxy.com/insights/research/crypto-and-blockchain-venture-capital-q1-2024/