Trump Bump

In our last quarterly commentary “Breaking Free” we forecasted that crypto markets were due for a strong upward push in reaction to an emerging confluence of positive factors including a pro-crypto administration, macroeconomic tailwinds, and accelerating fundamentals. That’s exactly what we got. 

From the date of the election into year-end, the price of Bitcoin increased approximately 36%, from $69,000 to $93,000. During this period of time, the Fund performed exceedingly well, roughly doubling in just under 60 days. Once again, we attribute this result to our core competency of asset selection, having identified a number of opportunities that were particularly well-positioned for this outcome. We will dive further into our positioning in the Portfolio section.

Once the votes were counted markets went into “easy mode”, and the only thing we really had to do was decide when to dial down our exposure to lock in gains. While most market participants expected an infinite parabola of returns, we maintained a balanced approach given our more measured view of market positioning around these catalysts and the timing and magnitude of progressive reform around crypto.

In mid-December, as the initial excitement began to fade, we began to cut our exposure and maintained a high cash position into year-end. We observed an impending confluence of factors that caused us to flip bearish:

1. Risk assets rallied hard on the back of Trump’s win and there was a palpable sense that investors feared missing gains rather than managing downside risk.
2. Momentum was rolling over on high timeframes across most assets, and catalysts for upside continuation were largely focused on short-term events (i.e. Day 1 Executive Orders). Even good news was increasingly met with tepid price action, showing that market expectations and positioning were offsides.
3. Liquidity conditions continued to tighten (which we discuss below in Macro section) with this aspect of thesis proving itself out in real time as upside performance became highly concentrated in a few assets and at the expense of most.
4. The market was underestimating the potential impact of tariffs on the dollar, interest rates, and overall uncertainty that the new administration would bring in its first 100 days.

This proved to be a wise decision, as many of the small- and mid-cap digital assets we owned up to that point have proceeded to decline 50% or more. What ensued since then has been 45 days of pure volatility that we have been happy to largely avoid, having cut out a majority of the downside thus far via active management and a heavy cash position.

At this point in time, the most important question in our minds is the degree to which crypto markets pulled forward years of positive news in H2 2024, and whether the post-election future features any immediate catalysts that can propel us higher. As discussed below, Trump’s initial policy actions are massively bullish over the long-term for the future of crypto and, by extension, our fund. But whether the market has the juice for immediate upside is less clear, and somewhat dependent on the developing macroeconomic picture.

Portfolio

As mentioned above, the Fund had a strong quarter, returning approximately +70%, bringing our annual performance in 2024 to roughly +60%. This follows last year, where the Fund returned +105%,. We believe this to be a sustainable trajectory. Historically, the final year of the bull market tends to feature the highest returns, with many digital assets returning a substantial multiple on capital albeit with quite a bit of volatility. 

Counterintuitively, the most powerful tool we have as managers is not to buy to maintain these returns, it’s to know when to sell. By avoiding steep drawdowns, of which there will be many, we can potentially realize even higher rates of return. Thus far January has been great in that regard with the Fund outperforming to a wide margin on the downside by rotating most of the portfolio into cold hard cash. We believe remaining patient for more opportune entries will add significant upside convexity to the fund, raising our return targets substantially for 2025.

Highlights

While markets did go into "easy mode" in the latter half of Q4, our previously discussed theme of dispersion continued. Without clear market favorites like you see in the stock market (i.e. the Mag7),  crypto has recently exhibited a “hot ball of money” dynamic whereby the same capital recycles between different subsectors. This will likely continue as long as we have a backdrop of tight monetary conditions. In Q4, we captured outsized gains due to our growing competency in AI.

For those not familiar, agentic AI describes an evolution from the current static AI models that have catalyzed the AI craze (OpenAI’s ChatGPT, Google’s Gemini Meta’s Llama, Anthropic’s Claude, etc) to dynamic, reasoning-based systems. Traditional AI systems often rely on zero-shot prompting, where a model generates a single output based on a given input. In contrast, agentic workflows employ iterative, and sometime continuous, processes that mimic human problem-solving. This brings us to the first two investable opportunities we uncovered at the intersection of agentic AI and crypto: Virtuals Protocol and AIXBT.

Virtuals Protocol

We first began our diligence on Virtuals Protocol after discovering it in our research pipeline in early Q4. At its core, Virtuals is a framework that enables the creation, ownership, and growth of AI Agents that effectively have a bank account on-chain.

As we dug deeper, it became clear that Virtuals had engineered a tightly integrated token-economic model designed to reinforce VIRTUAL’s role as the ecosystem’s foundational asset. Each new agent launch mints its own token and can list it for trading against VIRTUAL, ensuring continuous demand for the asset. This structure directly aligns incentives between users, token holders, and agent creators, reinforcing VIRTUAL as a universal trading pair while establishing a scalable and framework for AI-driven economies. 

Although it was an interesting concept, we knew the long-term investment case would ultimately hinge on whether Virtuals could incubate agents compelling enough to drive sustained adoption. We believed that if just one breakout agent found product-market fit, it would serve as a catalyst for broader adoption, attracting an influx of talent eager to launch their own AI agents on Virtuals. We continued to monitor Virtuals and planned to quickly scale into a position as soon as we saw a compelling agent launch on the platform.

Enter AIXBT

In November, we came across the X account for one of the early agents launched on Virtuals that was gaining mindshare rapidly as it delivered remarkably sharp market insights. The account was a combination of autonomously generated crypto market insights and direct replies to X users who tagged it in posts asking for market analysis. In addition to the X account, the team behind the project had built a terminal that required holding 600,000 AIXBT (~$20k at the time) to access. The terminal provided even higher quality analysis of crypto markets and projects and could be continuously prompted in natural language similar to ChatGPT, but with a specialized model trained on crypto market data and insights. It was a well-done product that was actually useful.

The terminal was able to surface answers to the types of research questions we constantly ask at the fund faster than any human analyst ever could. Early access to critical data isn’t just an edge—it’s alpha. And what’s alpha worth? To a single trader, maybe a few thousand. To a whale, millions.

A gold rush ensued, and we observed as Virtuals Protocol began generating significant revenue on the back of exponential user growth. We began building positions in both VIRTUAL and AIXBT. At the time AIXBT had a market cap of ~$40M and ~10k followers on X and Virtuals sat at a circulating market cap of ~$450M. After we built our positions, both assets underwent a rapid re-pricing higher. These investments ultimately contributing over 15% to fund performance.

Enter Griffain: 

Following Virtuals and AIXBT’s overnight unicorn status, the AI-crypto space saw an explosion of new projects. Rather than chasing copycats, we held our positions in Virtuals and AIXBT, focusing on projects that solved actual problems that began to emerge. The primary problem was that the extent of innovation that twitter chatbots could send people money. There was nothing agentic or inherently valuable outside of incremental novelty to AIXBT.

In November we signed up for early access to a new agentic AI application called Griffain. Griffain stood out by wrapping an AI ecosystem into a highly usable, unified application with high quality UX. The core product was a customizable personal assistant that could intuit a user's intentions and perform complex multi-step transactions on the user's behalf. We made an investment that quickly drove another ~10% in returns for the fund.

Crypto (Policy)

In the post-election haze, most crypto investors were fixated on the short-term: namely whether Trump would implement a Strategic Bitcoin Reserve (“SBR”) in the first slate of Executive Orders and, if so, whether this would entail new outright purchases (“true SBR”) rather than retaining previously confiscated funds by the DOJ (“SBR-lite”). If you read our last commentary, we assigned a low probability to “true SBR”happening on Day 1. With that being said, Trump’s first week in office has been a paradigm shifting moment in the history of crypto. Here are the highlights:

1. Trump signed an executive order that established a Presidents Working Group on digital assets headed by David Sacks, which will seek to “Make America the Crypto Capital of the World” and explore the possibility of a “national digital asset stockpile”.
2. SAB121 was repealed, enabling banks and financial institutions to custody digital assets. This opens the door for major banks to build entire business lines around crypto and was a major roadblock to these offerings. We expect JP Morgan, Bank of America, and many more to debut offerings in the near future.
3. Trump signed an executive order to prohibit a Central Bank Digital Currency. This was met with a sigh of relief for the industry as the government being able to digitally control, censor, and revoke citizens’ money is the antithesis of why decentralized blockchains matter.

The policy agenda going forward is very real and will have profound impacts on our industry. It is clear that the administration is making this a priority, and the people involved in crafting policy are highly competent. We have confidence that when we look back, this will be the watershed moment we all thought it was. 

Our Fund stands to disproportionately benefit from this new regime. Not only do we expect to greatly expand the investable universe of projects, but also we expect this new policy stance to increase the total addressable market for every crypto project. It is important to note that most projects that we invest in are not even allowed to serve US customers, and almost 100% of their business has been offshore. Finally, our location in the DC area has become ever more valuable as domestic regulatory agendas are positioned to drive competitive dynamics for the foreseeable future.

Macro

Today the US economy is seemingly humming along at a strong pace. In December we saw a flurry of strong economic data points across GDP, jobs, and housing. While this may seem to be highly supportive of markets continuing to run, we are back in the classic “good news = bad news” dilemma. Macroeconomic data is generally lagging, mind you, but most economists would argue that Trump’s initial effect has been a re-ignition of “animal spirits” that will further strengthen consumer and small business confidence which will ultimately find its way into future releases.

Jerome Powell has vowed to break the back of inflation, and as long as inflation remains above the target rate of 2%, a strong economy only gives him more room to maintain a hawkish policy stance. Higher growth + tariffs = sticky inflation. As the economy strengthens, he has very little incentive to continue cutting rates, and it seems as though market participants across asset classes were caught offside in Q4, with expectations converging to only two cuts in 2025.

At the end of the day, we are not a macro fund, and do not have a crystal ball when it comes to the economy and inflation. All we can do is maintain a balanced perspective and respond to new data (just like our friend Jerome). With that being said, the largest driver of price action towards the end of the year was a continued march higher in 10 year rates and the dollar which created headwinds for a continuation higher across asset markets. While these factors have retraced over the last few weeks (as of this writing), domestic liquidity conditions are a key hidden factor that we expect to continue driving volatility in both directions.

As a quick reminder, the Federal Reserve has repeatedly found itself in a rather precarious position. While the Fed needs to tighten monetary policy via higher interest rates in order to stem the risk of inflation, doing so has many adverse consequences. In March 2023, for example, higher yields resulted in a mini banking crisis. It turns out mandating banks to hold government debt and then aggressively devaluing it was a bad idea. Whoopsies. During this period of time, the Fed was able to maintain a high interest rate environment while pumping liquidity into crucial financial actors behind the scenes. We wrote about this at length in our Q2 2023 commentary "Quantum Entanglement".

The primary source of liquidity for markets thus far has come from the Overnight Reverse Repo Facility, where financial market participants can deposit cash and earn a yield. As long as short-term rates are high, it is the most liquid place to park massive amounts of cash. When cash is withdrawn from the ON RRP by financial institutions, it is multiplied into the economy and markets. The zenith of the ON RRP coincides quite well with the bottom of major risk assets like Bitcoin (and Nvidia) since early 2023. This facility is beginning run dry after $2.1 trillion was injected into markets since the Fed commenced the rate-cutting cycle. Some investors are wondering “what’s next?”

Bitcoin seems to be a bit disconnected from reality at the moment sitting just around all time highs despite the headwinds. Maybe that’s for good reason: the sitting president of the free world is clearly a crypto bull, and will do anything in his power to buoy markets. He has said in the past that with 1 in 3 Americans owning crypto, and more Gen Z owning crypto than stocks, he sees crypto as the key index for a major part of his constituency. We are cautiously optimistic.

Looking Ahead

While many market participants are constantly flipping between “up only” and “it’s so over” amidst January’s volatility, we see a long-term uptrend that is generally intact but susceptible to short-term risks. It is very possible that there will be more blood. The markets simply do not act well when liquidity is not being continuously injected in their veins, especially when rates are high. This is something we have been reminded of time and time again. We are okay waiting for an all clear signal and missing some upside rather than catching the exact bottom. If we break higher, there is nothing but sky for Bitcoin and the remainder of digital assets. As we mentioned above, the best alpha we can generate at this point in the cycle is to preserve capital and maintain a measured approach.

Zooming out, we are seeing a similar dynamic playing out in digital assets as 2020, where a cycle of post-pandemic Quantitative Easing sent Bitcoin higher, and with it 20x returns in small cap digital assets. From here, the market needs new money via Quantitative Easing, broad retail participation, and/or follow through in Bitcoin strength. It is possible that we don’t need QE to make a move of this magnitude in 2025, but it certainly wouldn't hurt. Unlike 2020, Bitcoin has held up extraordinarily well, likely due to the massive influx of capital this time around via ETFs and broader institutional adoption.  At some point, we expect a wealth effect whereby some subset of Bitcoin holders, now a $2 trillion ocean of wealth, begin to rotate into the small pond of small cap digital assets. This would result in unusually high returns in our portfolio.

The world is moving in a direction that is increasingly supportive of a tremendously positive long-term outcome for digital assets. Our conviction in this industry and its future investable opportunities has never been stronger. For the first time since inception, traditional financial institutions have direct access to crypto and are actively allocating capital into the space. Crypto markets are transitioning from an aggressively restrictive regulatory environment into one that shows signs of being markedly more accommodative. For patient investors, all the volatility will be worth it in the end.

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Onward and upward,

‍The MJL Team

‍Marcus Leanos - Chief Investment Officer‍

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‍Sean McElrath - Chief Technology Officer‍

‍Domenic Salvo - Managing Partner