Dear Readers,
Welcome to Algo Capital’s Substack Channel !
Some of you might already know us, while some might be new to Algo Capital and our ecosystem.
Algo Capital is an research & advisory boutique dedicated to the world of digital assets helping institutional investors, family offices, and management teams bridge from the old economy to the new.
To explain what has driven us to spin up this channel, we have to take you back a few years, and look at the history arc of the crypto markets as we lived through the events that have reshaped the industry to what it is today.
Our team members always had an avid passion for technology and finance as well as a libertarian bent, which naturally attracted us to digital assets very early on — some of us as early as 2015. Coming from a traditional capital markets background — mainly funds or investment banks — we recognized the transformative characteristics of Bitcoin and blockchain technology and made the decision to focus our attention on this nascent industry.
The Boom & Bust Cycle of 2017/18
Aside from being personally invested in multiple digital assets, we started becoming operationally involved in the space in 2017. At the time, we were advising and coordinating the launch of several tokens to the market, through a process known as ICOs (Initial Coin Offerings). This experience gave us the unique vantage point of living through the boom & bust cycle of 2017 – 2018, recognizing early on the signs of euphoria and despair we’ve seen many times in traditional capital markets. Being market participants mainly made up of unsavvy retail investors, this industry inevitably attracted scammers, fraudsters and get rich quick wannabies. This melting pot wasn’t exactly comforting to institutional investors at the time, the majority preferred to stay on the sidelines. The lack of technological and legal infrastructure also constrained the market, which inevitably faltered when coming to the realization of how much prices overextended compared to fundamentals. The digital asset space was still too immature.
Building a new financial system is no easy task. There’s a lot of things we give for granted with how things currently operate, and we constantly complain about them. This is true until we’ve to deal with the reality of how complicated changing the current paradigm really is. Views and entrenched incentives impede progress because the current establishment is afraid of losing their status quo. Not factoring in turbulence in our analysis when new technological innovations attempt to disrupt the fabric of money itself could be considered shortsighted by most.
What do you think would happen if you stir up a hornets’ nest ?
Bull & Bear Market of 2021/2022
Following the bear market in 2018, we started seeing things move in the right direction again with new primitives being launched on the market. The incredible ride of Decentralized Finance (DeFi) in 2021 and the implosion of activity in the Non-Fungible Tokens (NFT) market have redefined the industry as we knew it. Prices were skyrocketing, as the first wave of institutional adoption was unfolding with typically conservative institutions like the endowments and pension plans coming into the space hands over fists. Venture capitalists also rebranded the industry Web 3.0 to try build a narrative away from “crypto” that managed to supercharge the boom. During this time, we were involved on the ground with a few selected management teams in different verticals like DeFi, NFTs and Play-to-Earn Gaming while also keeping an eye out for the signs of a top.
As prices kept rising and rising, the metrics we were seeing kept getting further and further away from fundamentals, just like it happened in 2018. Even though the companies we kept interacting with were chasing last year valuations, we noticed that many participants were still lacking the expertise to implement an effective risk management strategy. Just like in the previous cycle, people were entering the market without a firm understanding of liquidity, leverage, and trading.
Investors weren’t in a much better position either. Many venture capitalists were naively approaching this market without considering a fundamental truth:
It’s very different to invest into early-stage private equity than a 24/7 liquid token markets.
We also bore witness to billion-dollar marketing schemes being perpetrated by funds like Andreesen Horowitz, which deployed billions of freshly printed central monies into creating dedicated marketing arms for pushing the Web 3.0 narrative.
Mix up naïve investors and fraudulent actors and you’ll end up with an explosive concoction.
The pace at which money was being raised was unprecedented. This was exacerbated by the introduction of large lending & borrowing operations through centralized players like Genesis, Blockfi, and Celsius. Many participants in the space sought to exploit the numerous inefficiencies in the market like arbitrages or the GBT Spread by levering up their positions up to 10x or at times even at 20x. Unfortunately, some large players forgot to manage their risks and ended up investing in Ponzi schemes like Terraluna and blow up. Remember what happened to a once considered titan of the industry, three arrows capital ?
If this wasn’t enough, recent events with the incredible story of FTX have given the last blow to investor confidence. This case specifically, has shocked many because SBF (Sam Bankman Fried) – the CEO of FTX – seemed to represent the epitome of the ESG narrative pushed by the Western establishment. By crafting a persona for himself around this he was able to fool even Sequoia. The reality was that SBF was stealing user funds through FTX native token FTT while recycling them into his marketing and lobbying campaign involving political parties and regulators alike.
Let’s blame the driver, not the car
The level of corruption is staggering; however, it has nothing to do with the underlying technology or the promise of a fairer medium of exchange and financial system. It is the same human greed that has driven frauds like Wirecard, Enron or remarkably similar to what you can read by combing through the Panama Papers.
When you give people the power to print their own currency, the so called Cantillon Effect, they will systematically take advantage of it - just look at banks. However, the initial promise of an incorruptible medium of exchange written in the Bitcoin whitepaper is still valid today, even though everyone is trying to paper it over with a complete failure of the industry. Digital Assets were just a mean to an end to these individuals, and generally we don’t blame a car if it has run over people, we blame the driver.
It’s all about perspective
Aside from looking at the bleak history of recent months and learning the meaningful lessons from it, it’s refreshing to attempt to paint a picture of what may lay ahead for this asset class. Now that the industry has been cleared of the bad players and fraudsters, its ready to build the next generation of applications that will be the tailwind to the next bull market.
This time is an exceptional opportunity to enter the industry, just like the setup was in 2018. It’s a moment when prices are overly depressed and only the most resilient projects and teams have survived. As a traditional market parallel, we remember vividly the bust in 2008, and how if you managed to scoop up the right stocks like Facebook and Amazon at the cheap and sold a few years later you could have made a fortune. This setup is in our opinion very similar, and the ability to separate the weed from the chaff will be critical at this stage.
There are endless prospects that excite us lying ahead for this industry. We’re observing with interest the burgeoning growth of the Lightning Network on the Bitcoin blockchain, and how it could spur an incredible amount of activity in places like Nigeria or El Salvador. Empowering countries that have been subdued for centuries with a new form of money that isn’t inflationary, has the opportunity to do wonders in lifting these people out of poverty by allowing them to save effectively.
Another big trend we see is a wave of vertical integration of Energy companies and Bitcoin miners that will help us in the green transition. Don’t believe us, listen to what ERCOTT (Texas energy grid operator) interim CEO Brad Jones has to say on the matter in this video.
The world is at the cusp of a big transition not only from an energy perspective but also from a monetary energy perspective. The fight of the two main factions, one having centralization tendencies with FIAT money and pledge against it the growing force of decentralization and cryptocurrencies, is heating up. The force that will triumph will have the privilege to reshape and dictate what can be considered “money” and all the systems that will be built upon it.
Of course, it’s probably clear by now for which side we’re cheering. We hope that by shining light on these topics and helping more people understand the underpinning advantages of this new technological development, we can bring bring not only wealth and opportunity, but also unshackle our outdated system from the breaks that have kept it down for so long.
Our goal with the launch of this Substack channel is to give you a small glimpse into this world of exciting opportunities in Digital Assets while pinpointing the intrinsic risks we see out there in this market, and how to best address them.
By cutting through the self serving narratives of this industry and give our take on things, we hope to give our readers the tools to understand digital assets while steering clear of camouflaged pitfalls and scams.
Thank you for joining our channel and we look forward to reading your comments below!
The Algo Team
If you require a more tailored assistance from us, we welcome any enquiry at the following address: algocapital@protonmail.ch