A Peak Inside Forest Road's Digital Assets Chartbook | Portfolio for the Future

By Chris Solarz, CIO, Digital Assets, Forest Road. The Forest Road Company is an investment platform providing solutions to companies that are capitalizing on disruption, generating great risk-adjusted returns while prioritizing downside protection.

MACRO ENVIRONMENT YEAR-TO-DATE

DEEP DIVE ON FTX INSOLVENCY

• The majority of FTX’s post-bankruptcy assets have been revealed to be illiquid self-created tokens, and there is a ~$10 billion hole of customer deposits missing from FTX.

Sources: CoinDesk; NASDAQ, Glassnode, Financial Times; All data shown is as of November 30, 2022 unless specified otherwise

• Nasdaq Inc, the public holding company that operates multiple exchanges, was coincidentally worth the same as FTX a week before its implosion despite having multiples of FTX’s trading volume, assets, and employees.

TRADE OF THE MONTH: SHORT TETHER STABLECOIN ($USDT)

• Founded in 2014, Tether is a stablecoin that aims to keep a fixed 1:1 exchange ratio with the U.S. Dollar.

• Stablecoins are the backbone of the digital assets industry, and Tether is the largest and most important stablecoin.

• With a market cap of $65 billion, it is the third-largest digital asset behind Bitcoin and Ethereum.

• Despite claiming to have 1:1 reserves for all tokens, Tether has never released its audited financials, and many believe that Tether does not have the assets to meet its liabilities.

• However, Tether maintains that it keeps an equivalent amount of reserves in commercial paper, bank deposits, precious metals, government bonds, and digital assets.

• During the Terra Luna collapse in May, Tether successfully processed >$16bn of redemptions, but experienced a brief de-peg from $1.00 to $0.95 during the period of contagion.

• Tether briefly de-pegged again on a few exchanges during the FTX collapse in November to $0.97

•Given doubts about its reserves, Tether represents both the most important liquid reserve in the digital ecosystem and one of the largest systemic threats.

• The short Tether trade has positive asymmetry because $1 is its upper bound, but it could trade close to $0 if proven insolvent.

• The collapse of Tether could be more impactful to digital assets than the fall of FTX because of Tether’s ubiquity, and some managers consider this trade a portfolio hedge.

• Managers are short Tether using institutional brokers (like FalconX) or decentralized lenders (like AAVE).

MARKET UPDATE

• Digital assets fell sharply amidst FTX’s collapse and market contagion, with most coins down 15-20%.

• Polygon was the top large-cap performer because of its announcements of integrations with large Web2 firms, including Starbucks, Reddit, and Instagram. The digital assets market cap first surpassed $1 trillion in Jan ‘21, peaked at over $2.9 trillion in Nov ‘21, but has since lost over 2/3rd of its value, now fluctuating around $850 billion.

• Bitcoin and Ethereum continue to remain the flagbearers of the industry, maintaining 56% of the industry’s market share.

ADOPTION RATE - RETAIL ADOPTION

• Crypto adoption includes the number of unique on-chain wallets plus unique centralized exchange wallets.

• China has the largest number of outright digital assets owners of any country due to its CBDC, but a larger percentage of Vietnam’s population invests in crypto.

ADOPTION RATE - INSTITUTIONAL ADOPTION

• Most of the world’s largest asset managers have started to embrace digital assets; Blackrock, the world’s largest asset manager, has partnered with Coinbase to offer clients direct access to crypto, while Fidelity, the largest 401(k) provider in the US, announced customers can invest up to 20% of their 401(k)s in Bitcoin.

To read the rest of the report: Here's a link to the chart book directly, a link to subscribe, and the author's email: csolarz@forestroadco.com.

About the Author:

Chris Solarz leads Forest Road's research process across the digital assets ecosystem, and he is responsible for Forest Road Digital Fund's portfolio construction, manager selection, and due diligence.

Chris brings 18 years of experience as a fund allocator, bridging his institutional expertise to this nascent asset class. Chris has a BA from the University of Pennsylvania and an MComm in Finance from the University of New South Wales. He also has CFA, CAIA, and CPA credentials.