December 2019 – Market Commentary

Greetings and Happy New Year from the team at Strix Leviathan. We are excited to celebrate the conclusion of 2019, which marks our first full calendar year of trading.  

For December, the cryptocurrency markets were down across the board led by the Bloomberg Galaxy Crypto Index (BGCI) which was down -13.3%, the BITX down -6.8%, and Bitcoin down -5.2%. 

The Strix Leviathan investment thesis has remained constant since we launched in May of 2018: Cryptocurrencies are digital financial instruments with opaque fundamental value, fractured liquidity, an uncertain future and reflexive properties. This set of characteristics results in a market rife with extreme volatility as prices are driven by behavioral biases and the subjective beliefs of millions of global participants trading 24×7.

Cryptocurrency Volatility

Despite many predictions over the years that cryptocurrency volatility would settle as the market becomes more efficient and liquid, the inherent volatility is as much a feature of today’s market as it was in the past. Such volatility provides ample opportunities to systematically harvest returns from the booms and busts while mitigating the tail risk that many assets in this space will end up with little to no value.


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The Year of the Halving Narrative

Through the first half of 2019, Bitcoin and Litecoin led a resurgence in bullish market sentiment  with many market participants front-running both Bitcoin and Litecoin’s miner halving events. While one should never underestimate the power of narratives in financial markets, there appears to be no discernible impact on price from a halving event beyond broader market sentiment as suggested by research published earlier this year

The Litecoin halving narrative was short-lived as the asset rose 350% before collapsing 58% following the halving on August 5th, 2019. With Bitcoin’s halving expected to occur in May of 2020, the asset similarly rose 276% before falling 43% during the back half of the year. Despite its steep drawdown, Bitcoin still ended the year strong while other markets failed to regain bullish steam.


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The promise of active management is rightfully challenged during periods where Bitcoin outperforms the rest of the market, particularly when that outperformance occurs in a parabolic fashion. Indeed if cryptocurrencies are a one-pony show then there is less justification for active management. Bitcoin holds a unique position due to its first mover advantage. Bitcoin also has the most liquidity, the most fiat on-ramps, an expanding derivatives market and acts as a reserve currency for the industry. 

However, if history can teach us anything, it is that the unexpected is the norm. At this moment, long Bitcoin is the most over-crowded trade in this space and Bitcoin’s future as digital gold is considered common knowledge. A woefully underappreciated tail risk in this market is the potential for unexpected outcomes contrary to preconceived beliefs currently held by market participants. 

The industry is so early in the game and adoption so limited that prematurely picking a single winner in this nascent market is more akin to lottery-style gambling than investing. Active strategies will provide the best risk-adjusted returns in a market where annual run-ups and drawdowns of 70%+ are the norm and a reasonable expectation that most of the assets existing today go to $0. 

The algorithmic approach of the Nest Fund tackles this challenge head on. 

A Year Of Lessons Learned

The Strix Leviathan trading platform evolved dramatically throughout 2019. As the complexity of strategy ideation evolved, so too did the operational requirements to execute these new strategies. In 2019, the portfolio management capabilities, risk management tools, performance tracking features and trade execution capabilities were expanded. Additionally, new tools to support electronic execution of trades through our OTC counterparties and our reporting capabilities were overhauled to ensure timely generation of statements. These changes were the culmination of over 4400 code commits to our proprietary software platform – a differentiator that continues to reap rewards for the team and investors.

Reliable Signals are Unicorns – There is no shortage of quantitative strategies published over the internet for equity, forex, futures and cryptocurrency trading. Indeed within the crypto-realm there are countless models and signals that are widely shared and praised as proof for the originator’s preconceived beliefs. However, few outside the realm of quantitative trading seem to grasp that statistical evidence alone rarely constitutes evidence of something that exists in the real world. 

Regulatory Catch-22  – From day one, the only clear point in the regulatory landscape of cryptocurrency was that it would be a challenge. Regulators both at the Federal and State level have yet to set firm guidance for what is and is not a security. This ambiguity leaves market participants reliant on expensive legal opinions unsupported by case law and as a consequence, makes compliance extraordinarily more complex and expensive than it otherwise should be. 

2020 Shines Bright

Everything about cryptocurrencies moves at an unimaginable pace and for an entity to succeed, adaptability and the ability to overcome are ‘make or break’ in these markets. 

We are jumping into the new year feeling proud of the progress we have made and excited for 2020. The software, data and strategies that we leverage have evolved tremendously and will serve us well during the inevitable booms and busts that lie ahead. 

We are at a tipping point in financial history whereby advanced technology is meeting the demand for decentralized and censorship resistant money (whether for transactional means or store of value). This collision of forces will lead to the disruptive software moment for the monetary system and create an enormous amount of value for investors. However, this value will accrue over time and experience a long cycle of bubbles and bursts. The smart approach to investing in this type of environment is through algorithmic trading that can harvest yield in both the up and down swings of the market.

The Strix Leviathan team will continue the mission to drive outperformance against passive investment through its people, processes, and technology.  

We look forward to the journey ahead.