Fund Research Overview

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Introduction

The mission of the Fund is to deploy an actively managed, macroeconomic & multi-strategy approach to acquire more bitcoins. We apply the traditional venture capital investment model to liquid digital assets (“Digital Assets”).  We are investing on a 2-5 year time horizon, selecting the most promising projects within selected sectors of the blockchain ecosystem. The main sources of alpha in this Fund will be duration, staking, and fundamental research. We are patient enough to wait for the market to revert towards the fundamentals and quality projects that are solving real problems for consumers and enterprises. The main focus of the Fund will be on innovative technology that democratizes access to global financial services, smart contract platforms, and a specific niche in big data and IOT blockchain applications.

History of Enterprise Adoption of Blockchain

In 2017-2018, due to the first noticeable bull run in crypto assets by mainstream investors, many enterprises began to tinker with blockchain technology. There are obvious benefits to integrating blockchain-like technologies and concepts into enterprise business workflows, such as breaking down data silos(increased transparency), and improved auditability. However, these marginal improvements in technology architecture are equivalent to losing sight of the forest through the trees.

In the early 2000s, investors got very excited about the intranet. This allowed employees to stay in sync and connected throughout the globe; but they missed the larger picture. The real innovation was the open internet, which allowed people and a myriad of companies to coordinate and democratize access to information worldwide. Crypto technologies are democratizing access to capital formation in a similar fashion, and allow people to provision network resources by interacting with a software protocol, instead of a centralized corporation.

IBM was first to market in the enterprise blockchain space in 2018, and has cultivated a robust and impressive ecosystem of experiments. However, none of this innovation has found its way to market in a profound way. Simply put, the technology and the market were not ready.

In 2022, we think the time is ripe for real crypto innovation to occur within the enterprise. The infrastructure is now in place to enable enterprises to safely integrate digital assets into their existing business and technology workflows.

This technology was not meant to be monetized directly by Big Tech. Crypto-economic incentives are here to redefine the internet technology stack for the people, and re-introduce trust into the internet. This is the Trust Revolution.

Executive Summary

This offering is a Multi-Strategy Digital Asset Fund, targeting the crypto investor who wants exposure to emerging networks. Our investors will receive exposure to the most promising and fastest growing sectors of the digital asset space, while also enjoying the safety and security of well-established digital assets. We will be constantly fluctuating our exposure to Ethereum depending on current and future global macro conditions, as well as the risk-return profiles and opportunity cost of the exposure to newer, high risk-high reward crypto assets.

We are investing in provably scarce Digital Assets. All asset prices are driven by supply and demand. When we know the supply of a Digital Asset in the future, we can attempt to forecast the price of that asset, based on the anticipated demand for the use case of that particular network.

We are specifically focused on real-world blockchain use cases and the utility that these networks provide to users and businesses. As the market matures, the price of crypto assets will eventually begin to reflect the value that the network provides, instead of the narrative driven price movements we see in the market today.  This will usher in a new era of verifiable trust into the digital economy.

Beyond Bitcoin and maybe Ethereum, we believe the rest of the alt coins should be considered ventures, with the full possibility of losing all of your capital. That being said, there is also opportunity for massive appreciation, but not without risk. Furthermore, we hold between 60-80% of the Fund’s assets in blue chip cryptos. We will also invest about 20-40% of the portfolio in promising earlier stage Digital Assets.

This Fund is a flagship fund designed for the new crypto investor who wants exposure to the whole ecosystem. It is risk averse, while also giving you exposure to other blue chip and promising emerging networks besides Bitcoin and Ethereum.

Why take a Multi-Strategy Approach?

Crypto asset investing requires the application of public market investment techniques plus access to and understanding of venture-stage tech investing. This dynamic landscape demands active portfolio management and flexible investment strategies. Iron Key Capital combines systematic trading techniques to manage risk with a thesis-driven venture style research framework, focusing on enterprise adoption of utility driven digital assets. This strategy is unique because we are a venture style liquid hedge fund.

Different strategies will prove to be more lucrative than others, at different times within market cycles. For example, DeFi was massively profitable in 2020, but has suffered since, ostensibly due to looming securities regulations around the globe.

Macroeconomics Matter in Crypto

The Federal Reserve’s actions have a massive impact on the crypto markets. Bitcoin is undoubtedly a macro asset at this point; in fact, the majority of the large capitalization crypto assets are highly correlated to the broader macro markets. Crypto assets trade as high-beta tech stocks for the time being, so it is absolutely necessary to not consider digital asset investing in a vacuum.  However, in the medium to long term, we expect the long tail of digital assets to decouple from the macro markets as these technologies find product market fit and real world use cases.

Fund Investors

Our Fund investors are cognizant enough to notice the trend of digitization, but do not have the time or desire to dedicate countless hours learning how to buy and custody their Digital Assets. We provide a safe and effective way for investors to get exposure to the emerging Digital Assets. Our investors have a high level of financial literacy and generally do not have a technology background. We have designed this Fund to cater to someone fairly new to the space, who maybe owns a little BTC or ETH and wants to deploy capital in a more sophisticated and diverse way.

Fund Holdings

The Fund will hold a reserve currency in Ether and interest bearing stable coins, as a traditional fund would hold cash. Cash has a negative real yield of 10-20% annually due to the monetary expansion that has occurred over the last decade, and now specifically due to the government stimulus response to COVID-19.  The Fund will take long-term (2-5 year) positions in what we expect to be the winners in various blockchain verticals or sectors. However, we will be constantly evaluating new information as it becomes available in the market and continue to retest our hypothesis. Industry verticals include, but are not limited to, platforms competing with and/or building on Ethereum, blockchain interoperability platforms, blockchain scalability solutions, decentralized exchange tokens, data availability networks, gaming ecosystems, digital real estate, and potentially non-fungible tokens (“NFTs”) in the future.

Investment Diversification

From a portfolio construction perspective, it makes sense to hold a portion of your portfolio in assets that are uncorrelated to the broader public markets, to act as a hedge in your portfolio. This reduces overall portfolio risk and tends to boost returns over long periods of time. This is advantageous because in the long run, we believe digital assets will begin to slowly de-correlate from equities and macro assets, and also eventually begin to de-correlate from Bitcoin. Furthermore, we believe Bitcoin specifically, and crypto assets broadly, are the best asymmetric return asset(s) to hold for the next decade.

We believe allocating 2-10% of one’s portfolio to digital assets is the best strategy to generate superior risk-adjusted, uncorrelated, and asymmetric returns for your investment portfolio in the next decade.

Macroeconomic factors driving demand for crypto-related solutions:

  • Chinese Capital Flight and Regulation
      1. Being a closed economic system, China has and will continue to ban and regulate anything they cannot control. This is a net positive for bitcoin for two reasons
        1. Miners will move elsewhere, which will reduce China’s control over the hash power
        2. BTC mining will be more renewable(currently 75% renewable), as most of the Bitcoin mining done in China uses coal which is the most toxic energy source for the environment
  • Geo-Political Risk
      1. When countries are in disagreement over foreign affairs, or there is political and/or economic turmoil in a particular region; this is a net positive for digital assets
      2. Since Bitcoin is non-sovereign, and most digital assets are decentralized to a certain extent, this means geo-political risk is a tailwind for digital assets.
  • Tech Overreach & Data privacy
      1. There is a general disdain for big tech companies for selling their user’s data as a product. Frankly, people find it creepy that they are constantly tracked online
      2. Crypto fixes this by allowing users to own and control their own data
      3. As governments and big tech companies double down on financial surveillance, the Fund will be investing in privacy preserving technologies that help individuals secure and protect their future
  • Government Overreach
      1. The government seems to increasingly want more oversight and surveillance over your life and finances.
      2. Crypto based solutions attempt to restore property rights to the individual
  • Monetary policy irresponsibility from central banks globally
      1. Low interest rates, quantitative easing, stimulus, modern monetary theory
      2. This widens the inequality gap in two ways
        1. Hourly non-inflation adjusted workers see their purchasing power go down with almost 100% certainty over time
        2. Given the great asset inflation, Those humans without investable assets will suffer because they have no way of benefiting from accommodating monetary policy by the Fed
        3. Crypto solutions help fix this, by providing basic financial services to the billions of humans who are not connected to financial infrastructure or underbanked.
  • Fiscal irresponsibility from governments globally
    1. Inability for all central banks to balance a budget like a household should(spending more money than taking in taxes)
    2. Increasing yearly government budget deficits levels on top of increasingly untenable debt levels

Inflation

The price of all goods and services has risen exponentially since the pandemic began in March 10, 2020. Lumber is up 400% this year, real estate prices are at all-time highs, gas pricing are soaring. Yet, the Fed seems to worry little about inflation. A 30% increase in prices in 12 months sounds like inflation to me. Normally, when one attempts to hedge against inflation, they would buy Treasury Inflation Protection Securities (“TIPS”), precious metals, and real estate. 

The current monetary expansion rate is between 10-15%, so if you are not exceeding that hurdle rate, you are effectively falling behind.

Fortunately, we have discovered the best inflation hedged asset class in human history, scarce digital assets, due to their transparent supply and monetary policy. However, the utility of these other digital assets is targeted towards different use cases, which makes it more difficult to value, with potentially higher returns. We will discuss valuation models for crypto assets later on.

Traditional Monetary Policy vs Bitcoin’s Monetary Policy

Bitcoin has an open, transparent monetary policy that can be audited within the open source software.  It is disinflationary, meaning the supply increases less and less over time.  This is the opposite of the US Central Bank’s policy. The Fed’s policy has been to print money via quantitative easing and government stimulus, flooding the market with liquidity. This causes all asset prices to rise, but what are the long term implications of prolonged low interest rates and cheap money?

Bitcoin is a non-sovereign, decentralized, immutable, hard capped supply, digital store of value. It is an insurance policy against monetary and fiscal policy irresponsibility from governments and central banks globally.

The best part about inflation when it comes to bitcoin, is that there only needs to be fear of inflation to drive capital flows. It seems every day there is a new announcement of government spending and stimulus, and talks of inflation.

As it relates to equities markets, Big tech has done well for long periods of time due to cheap money and gov’t stimulus. We are analyzing the similarities between the way platforms grow (Amazon, Google, Facebook, Uber, etc.) and the way crypto networks accrue value. Both of these ecosystems derive a majority of their value from network effect.

Big Tech

Bitcoin is simply digital gold on a big tech network. Gold is the analog application of sound money principals. Bitcoin is the digital application of sound money principals. The digital version is usually 10 times larger than the analog version, because revolutionary technology is market expansionary. Uber didn’t just take market share from taxis, It took market share from buses, trains, bicycle to work, etc. We expect the same to happen with Bitcoin. First, it will eclipse gold’s market cap, and then eat into negative yielding sovereign debt from weak currencies such as Venezuela, Argentina, Greece, and Turkey.

We take a big tech approach to investing in this crypto world. That means holding 15-25 individual positions (subject to change) for long periods of time. This is similar to holding Amazon, Google, Facebook, Uber, Apple, and others, in a portfolio from 2011-2021. Just as in the 2001 dotcom tech bubble, we believe over 90% of crypto projects will ultimately fail and the vast majority of value will be driven to the winners in each vertical. It is our intention to find these winners, acquire them at the lowest possible price, and hold them for long periods of time. We then look to de-risk or take profits and recycle those profits into Bitcoin as we uncover new opportunities. We invest in high quality protocols in order to provide a crypto investor with a low level of risk tolerance relative to the rest of the crypto ecosystem.

The lindy effect states that the longer a technology survives, the decrease in the probability it will fail. For example, Bitcoin has been around for almost 13 years, with a 99.99% uptime reliability.

A New Era of Monetization

In 2001 and beyond, almost all the value created by the internet accrued to the application layer of the technology stack in the form of equity in platform businesses like Amazon, Google, Facebook, Uber, etc. We believe that value can now begin to accrue to similar types of trusted internet protocols like DNS, HTTP, email, etc. This is the trust revolution; banks and intermediaries are no longer necessary. If Bitcoin is truly email for money, there will be winners in each industry vertical as well over the next decade, creating trillions of dollars in value in the process. We will be deploying capital into the future of fintech, which is the decentralized, permissionless, and open financial system.

Blockchain technology flips this model on its head, allowing value to accrue to the protocol level layer of the technology stack, instead of the application layer, as shown below.

An important assumption to make before deciding whether to invest in this asset class: Are digital goods that have USD market value an asset class? We believe the answer is yes.

 We have seen various in-game currencies emerge from massive online multiplayer games such as World of Warcraft and Runescape. What if there was a digitally native currency built into the internet itself?

The Fund will invest in scarce digital assets coinciding with the macroeconomic tailwind of “digital real estate.” We believe owning 1 bitcoin is the digital equivalent to owning the best property at the best location in cyberspace, the physical equivalent might be a building on 5th Ave in midtown Manhattan. We have now seen prominent investors start to move into this space such as Tesla, Microstrategy, Mass Mutual, Fidelity, Mike Novogratz of Galaxy Digital, and Mark Cuban’s http://lazy.com Now is the time to consider the idea of the inevitable trend of the digitization and monetization of all assets, including art, domain names, and Digital Assets such as NFTs. Only once we acknowledge that trend, can we then plan to capitalize on it.

Smart Contract Platforms

The advent and rise of blockchain programmability is undeniable at this point. This broad concept of creating trusted, automated digital contracts will likely have a trillion dollar impact on the market by 2030. This figure is an extrapolation of the current operating system market(Macintosh, Windows, Linux, etc) dating back to the 1990’s, which served as the foundation for thousands of applications to be served to consumers. For this reason, as a general rule of thumb, programmable digital platforms will make up the vast majority of the Fund’s long term positions. The Fund uses various on-chain metrics, such as development activity, in order to determine the health and utility of these networks.

In addition, we are very interested in public blockchains that cater to legacy technologies as well as the emerging Web3 stack.  There will be immense value created by establishing trusted “links” between trustless computation and honest data in Web3 alongside players like Visa, Apple, Amazon, and the like.

Valuation Considerations

Each type of digital asset requires the use of a different valuation model, if any at all. For example, a good starting point for a monetary asset like Bitcoin is the equation of exchange, MV = PQ. However, the deeper you go, the more this model begins to break down. This is a new asset class.

One way to think about smart contract platforms is to view them like a country. Each platform has a native currency, and the market capitalization can be viewed as that country’s GDP.

Furthermore, emerging crypto protocols are now producing real revenue, which makes cash flow analysis possible. We are focused on developing specific valuation models for different types of digital assets. It is not a one-size fits all approach like a discounted cash flow model. Additionally, relative valuations are used as an arrow in our investment quiver.

Utility Ecosystems

As a prerequisite to be considered as a long term Fund investment, protocols must solve real problems for either other blockchains, or consumers and businesses. We use real world adoption metrics as a proxy for the efficacy of the utility that crypto assets deliver. We are especially interested in crypto projects that build an ecosystem of different market participants, within a specific vertical. We are even more interested in networks building an ecosystem where the token acts as a fundamental driver of economic activity. In these ideal scenarios, the token is a necessary and integral part of the ecosystem that delivers proportional value to protocol developers, 3rd party developers, and users/token holders. Utility Ecosystems involve projects who’s token serves as an access gateway for utilization of the utility or services provided by the network. Thus, creating a demand for the token based on utilization of network services which goes beyond a speculation of value. This is a unique subset of assets within the crypto space where token value is correlated with economic adoption.

An example of this in the gaming industry is the UOS ecosystem which allows all participants to monetize their contributions. Game participants and testers,  promoters, and game publishers/creators are rewarded in the native Ultra token for driving value back into the ecosystem. All of the content and IP that is created on the platform is truly owned by the users, which allows these virtual goods to be traded in the secondary market as well. In this scenario, the majority of the value is driven back to the individual contributors and users, instead of the company distributing the game(ex. Xbox). This is merely one example of the fundamental paradigm shift in blockchain technology vs. Web 2.0 monopolies.

*DISCLAIMER: The Fund may hold a UOS position

Blockchain Nodes and Staking as Passive Income

The Fund will take advantage of various passive income streams available to the intelligent crypto investor such as DeFi staking. An example of this concept is operating proof-of-stake nodes on various emerging blockchains. This is similar to operating crypto mining rigs, with less hardware fixed costs, and the ability to earn an APY of 5-50%, in addition to capital appreciation. When the Fund amasses enough tokens of a particular asset to operate a node, the Fund will do so to allow investors to receive additional benefits that come with economies of scale and large pools of capital.

The Fund will participate in various crypto lending and staking protocols, but only those whose code has been audited and tested. We are not simply looking for the newest protocol with the highest yield.

Crypto Market Cycles

It is necessary that serious digital asset investors have experienced more than 2 market cycles in crypto, meaning more than 4 years of experience, due to the bitcoin halving. This ecosystem and the assets within are reflexive, with opportunity for significant alpha for those who understand the superlinear nature of the way these networks accrue value. Systematic profit taking is necessary to ensure capital preservation through multiple market cycles.

Human Capital

One reason Joseph Argiro got into this space in 2016 was due to the fact that he saw the smartest people around him start to get curious; talking about it, investing in it, and/or building businesses in this space.

The fact that Bitcoin has no marketing department, no CEO, never held a board meeting, is a feature, not a bug. No one human or government should be in control of the monetary policy. That is the ethos behind Bitcoin’s decentralization. However, for the broader crypto market, having a brilliant entrepreneur running the team building the protocol is a significant form of alpha. A great example is CZ of Binance. We made a bet on CZ at $11 BNB per coin in 2018. Bottom Line – We plan to invest in brilliant builders.

Conclusion

The Fund invests into liquid Digital Assets and early stage crypto companies launching tokens in the USA. We aim to outperform the Bitwise 10 through market cycles and provide best-in-class risk-adjusted exposure to the crypto asset class. This focus on through-cycle, risk-adjusted returns may lead to neutral performance during bear markets i.e. performance in line with ETH – and significant outperformance during bull markets. This will allow us to collectively generate significant outperformance through multiple market cycles. We are most focused on capital appreciation, and secondary focused on passive income and yield-generating strategies for our investors. Investors are guaranteed exposure to sustainable, environmentally friendly investments that enact lasting societal change for humanity. 

However, there are no guarantees in this space; this is still experimental technology, but we are willing to bet on the fact that value can now (with the invention of bitcoin) accrue to the protocol level layer of the internet technology stack.

Sincerely,

Joseph Argiro

Founder & CEO

Iron Key Capital LLC

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