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Q4 2023 Newsletter

In the final quarter of 2023, the cryptocurrency market experienced a resurgence, signaling not just a recovery but a transformation. This era will be chronicled as a pivotal moment when the market transitioned from the shadows cast by the downfall of previous market leaders such as FTX, Celsius, BlockFi, Voyager, Luna, and Three Arrows Capital. The vacuum created by their absence led to a significant shift towards decentralized development, fostering an emergence and even larger focus on decentralization that has defined the crypto landscape.

Simultaneously, this period marked the entrance of heavyweight institutional and traditional finance players, most notably underscored by Blackrock’s pioneering efforts to secure approval for a spot Bitcoin ETF. This development not only symbolizes a bridge between the traditional financial world and the crypto sphere but also sets a precedent for future institutional involvement in digital assets. Taking advantage of these evolving trends, Parkour was able to generate returns of around +70% during the quarter on working capital.

Bitcoin ETF Approval
The first Spot Bitcoin Exchange-Traded Funds (ETFs) was approved by the SEC on January 10, 2024, representing a significant milestone in the integration of cryptocurrencies into mainstream financial markets. This landmark decision, coming after years of anticipation and several rejections, signifies a transformative step in broadening cryptocurrency adoption, opening the gates for substantial institutional and retail investment flows into the space​​.

Historically, the SEC had disapproved more than 20 exchange rule filings for Spot Bitcoin ETFs. However, a pivotal change occurred with a court ruling that found the SEC’s previous disapproval of a Grayscale ETF proposal inadequately justified. This ruling, along with evolving market conditions, led the SEC to reassess and eventually approve the listing and trading of Spot Bitcoin ETF shares.

The milestone is poised to drastically alter the investment landscape by providing an easily accessible means for investors to gain exposure to Bitcoin. This is expected to attract billions, potentially trillions, of dollars into the cryptocurrency space, as it enables indices, retirement funds, and various other investment vehicles to allocate towards crypto easily. This “passive bid” mechanism will likely foster continued growth and adoption of digital assets​​​​​​.

More importantly, this is more than just a win for Bitcoin; it signifies a shift towards a more inclusive financial system where digital assets play a central role. As more people and institutions gain exposure to Bitcoin, the spotlight on the broader cryptocurrency space intensifies.

Bitcoin’s role in the crypto ecosystem mirrors that of an established, secure, and stable corporation, making it a preferred entry for institutional adoption. However, similar to the dynamic between large corporations and nimble startups, newer blockchain projects offer faster, more functional alternatives but sacrifice Bitcoin’s unparalleled stability. Ethereum marked an initial leap beyond Bitcoin’s capabilities, introducing smart contracts and DApps. Yet, the evolution continues with projects like Solana, which further refine blockchain utility, offering high throughput and low costs, embodying the startup’s ethos of rapid innovation and adaptability.

Solana (SOL)

One of the big winners of the fourth quarter 2023 is the Solana ecosystem. Rarely do we encounter projects with the potential to unlock possibilities on the scale of Bitcoin and Ethereum. After years of research and careful evaluation, we believe Solana possesses this growth potential, making it one of the strongest blockchains that we’ve identified as a potential foundational platform alongside the two biggest ecosystems.

Emerging Stronger from a Crisis

Solana found itself unfairly entangled with the FTX collapse as FTX was publicly a large proponent of Solana and held a large allocation of SOL. This caused a detrimental impact on its valuation and market sentiment due to perceived associations. However, the issues that led to FTX’s downfall were entirely separate from the intrinsic value and operational integrity of the Solana ecosystem. Its industry-leading scalability and low costs are increasingly attracting attention. Solana is only 3.5 years old, but its progress and enterprise momentum suggest it’s on the cusp of a breakthrough use case in the next cycle.

The “Integrated System” Advantage

As many smart contract platforms converge towards similar technical goals, trade-offs emerge. Solana, with its integrated design, stands to capture a unique space. While Ethereum embraces modularity, Solana’s “integrated” approach offers superior performance for specific applications. This positions it as a premier integrated system, complementing Ethereum’s modular path. Solana’s journey echoes Ethereum’s rise after the 2018 ICO crash. Though Solana bottomed out after FTX, its current valuation doesn’t reflect its progress. Technical upgrades, growing developer momentum, and unique capabilities position it for significant upside.

Solana decentralized exchange volumes have already surpassed the highs in the 2021 bull market and Solana daily active users have far surpassed its counterparts. Solana’s rapid adoption and unique capabilities position it for explosive growth in the years to come. 

Crypto Infrastructure – “Picks and Shovels”

In the wake of the collapses of centralized exchanges like FTX and Celsius, the “picks and shovels” strategy in cryptocurrency investment has gained renewed focus, particularly regarding decentralized exchanges (DEXs). This analogy, borrowed from the gold rush era, emphasizes investing in the tools and infrastructure necessary for mining over speculating on the gold itself. In the context of crypto, this means focusing on the platforms and technologies that underpin the trading and exchange of digital assets, in addition to the assets themselves.

Decentralized Exchanges

Decentralized exchanges (DEXs) have become indispensable in the crypto infrastructure, providing a secure and transparent platform in contrast to their centralized counterparts. Through automation and smart contracts, DEXs verify transactions and safeguard holdings, thus addressing vulnerabilities that have caused high-profile failures of centralized exchanges. This move towards decentralization embraces blockchain’s core values—transparency, security, and user sovereignty—while reducing the risks of fund mismanagement and hacking. Platforms like Uniswap, Jupiter, and Orca demonstrate significant innovation. Uniswap leads with its automated liquidity on Ethereum, Jupiter offers optimized trading for the best rates, and Orca delivers exceptional liquidity on Solana, each contributing to the sector’s growth with user-driven advancements.

Crypto and AI

The “picks and shovels” approach extends into the AI revolution, focusing on decentralized computing power essential for AI model training. Projects such as Akash Network, Nosana, and PAAL AI leverage these decentralized networks to make AI model training more accessible, promoting equitable computing resources. This movement democratizes access to AI development and deployment, facilitating a broader engagement in technological innovation. By integrating blockchain with AI, these projects represent a significant advancement in making cutting-edge technology more inclusive and fostering growth within the digital asset ecosystem.

By focusing on the infrastructure that underpins both the crypto and AI sectors, the Parkour team is strategically positioning itself to capitalize on the foundational elements driving growth and innovation in the digital asset market. This approach not only serves as a hedge against the volatility of individual cryptocurrencies but also supports a broader vision for a decentralized, secure, and user-empowered financial ecosystem, showcasing a commitment to pioneering the integration of blockchain technology with AI advancements.

Macroeconomic Factors

Although the advancements within the crypto space have been noteworthy, it is crucial to also weigh the macroeconomic forces at play. These broader economic indicators, including inflation rates, interest rate policies, and the overall health of global markets, are key to assessing the true investability of these projects.

Interest Rate Cuts on the Horizon

Arguably, the most important macroeconomic indicator for predicting the future performance of risk assets like crypto is the “price” (interest rate) and availability of capital. The end of the last crypto bull market coincided with the Federal Reserve’s interest rate hikes initiated to combat rising inflation, highlighting the influence of monetary policy on the crypto sector. Since 2022, inflation has significantly receded, as evidenced by Consumer Price Index (CPI) readings, which marked the initial reason for the Fed’s rate increases. This decrease in inflation rates presents a conducive environment for the Fed to consider rate cuts.

Going into 2024, the Fed is signaling it is done hiking rates and will be looking to start cutting rates this year. This policy adjustment is also partly motivated by the need to manage the burgeoning federal debt. With interest payments on this debt consuming a large fraction of the annual budget, refinancing at the current, higher rates could prove unsustainable.

Moreover, the political implications of monetary policy, particularly in an election year like 2024, cannot be understated. The performance of the economy and stock market bears significant weight on electoral outcomes, adding pressure on the Federal Reserve to lower interest rates.

Discontinuing the Bank Term Funding Program

The Bank Term Funding Program (BTFP), established by the Treasury under Janet Yellen in March 2023 to stabilize regional banks in the wake of Silicon Valley Bank and Signature Bank’s failures, is concluding this January. This program provided banks with a mechanism to borrow against the full face value of certain loans, a move crucial for maintaining solvency during liquidity shortages.

The BTFP’s end may restrict liquidity in banks, potentially hindering their operational capabilities and lending. This, along with regional banks’ challenges, might lead the Federal Reserve to reconsider its interest rate strategy, possibly resulting in earlier-than-anticipated rate cuts or the introduction of more emergency support measures to ensure market stability. Consequently, disturbances in the banking sector could boost the appeal of cryptocurrencies as alternative assets, or the Fed’s proactive monetary adjustments could stimulate the crypto and broader risk asset markets.

In light of these macro developments, the ending of the BTFP, falling inflation, and a decrease in interest rates is anticipated to provide a supportive backdrop for cryptocurrencies in 2024. As inflation eases and the Federal Reserve adjusts its monetary policy, lower interest rates could make risk assets more attractive, potentially stimulating investment in the crypto market as investors search for yield in a low-rate environment. This confluence of factors underscores the intricate connections between macroeconomic policies, political considerations, and the evolving dynamics of the cryptocurrency space.

The development in the crypto space over the past year has been unprecedented. This, coupled with the landmark approval of the first Spot Bitcoin ETF by the SEC, underscores a period of substantial evolution within the cryptocurrency landscape and for Parkour’s portfolio strategy.

The approval of the first Bitcoin ETF signifies a monumental shift towards the acceptance and growth of cryptocurrencies, closely aligned with Parkour’s strategic positioning. The resurgence of the Solana ecosystem, and other emerging developing projects, reinforces our commitment to foundational technologies within the space, aligning with our investment strategy. And with a shifting macroeconomic environment characterized by interest rate changes and the conclusion of the Bank Term Funding Program, we anticipate a favorable backdrop for cryptocurrencies in the coming cycle, positioning us for a promising future.

Looking to 2024, since the new year, there has been a sell-off in crypto assets, spurred by the short-term market corrections following the ETF hype. Bitcoin in particular sold off nearly 25% from highs of $49,000 down to lows of $38,000 before rebounding to where it currently stands around $43,000. While the fund stands approximately -3% year to date, the market levels present a strategic entry point allowing Parkour to redeploy our capital at very attractive levels which we are exceedingly optimistic about as we enter the next cycle. We are grateful for your continued trust and support as we venture into this exciting phase, confident in our collective journey towards achieving sustained success and innovation in the crypto market.

The Parkour Team

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