Two Prime Blog

Two Prime — Letter to Investors

Quarterly Insights from Dr. Marc Fleury. June 2020

2020 has been nothing short of exciting in every meaning of the word. When looking at the major events that happened in the first half of 2020, one saying from Mahatma Gandhi comes to mind: “First they ignore you, then they laugh at you, then they fight you… and then you win.” While the momentum of the industry was already moving in the direction of professionalization, the pandemic became a catalyst as the crypto asset class had its first real test against the ailing global markets in terms of performance as well as how investors were leveraging the asset class when traditional stores of value were no longer dependable.

When they Fight You… and You Win

In April, the Financial Stability Board (FSB) made a series of recommendations for stablecoin regulation, signifying how the financial aspects of crypto are the killer apps of crypto. Stablecoins are disrupting the traditional banking structure, enough to draw the attention of global governing bodies. Some of these governing bodies are publicly recommending a ban on stablecoins as they struggle to grasp stablecoins’ impact on the global financial system.
In late May, Goldman Sachs said in a presentation to investors in late may that cryptocurrencies are “not an asset class” nor “a suitable investment.” With the way that crypto was able to hold its own despite the global market collapse in 2020, this seems like Goldman Sach’s last attempt to fight against the inevitable. So what don’t they seem to understand? Crypto instruments are completely aethereal instruments, disembodied and trusted internet records that no one (not even governments) can hack and that hold few to no real economy assets. This apparent weakness — the lack of endogenous cash flows — is in fact what makes them such attractive stores of value, particularly at a time when real economic assets are crumbling. There are many forms of crypto — some of which are volatile, offering great upside potential (BTC, ETH); some are fully stable, offering downside protection (USDT); whereas others are balanced hybrids, offering both downside protection and upside potential (FF1 by Two Prime). As a store of value, cryptos have shined during the COVID-19 pandemic. With the ongoing monetary expansion, high net worth individuals and savers will be ill advised to ignore this numerus clausus asset class.
But not all big financial players seem to hold Goldman Sachs’ archaic view. Visa and Revolut announced that they’ll allow for interest payments in bitcoin and the purchase of bitcoin through their platforms. Payments in native cryptocurrencies are always a positive development. These platforms provide liquidity to fiat currencies, and as a result, the main store of value function is strengthened with every new payment bridge. Famed hedge fund manager Paul Tudor Jones announced that just over 1% of his assets were in bitcoin. JPMorgan also announced that they are banking for major crypto exchanges Coinbase and Gemini. This is a strong signal that we are entering the “and then you win” phase of the adoption of cryptos.
As the market crumbled in Q1 leading into Q2, cryptocurrencies outperformed every single asset class on the global market. Unless you have been living under a rock for the past three months, you may have noticed the complete upheaval of the public markets. All bets are off. Traditional hedges in volatile markets, like oil or gold have underperformed cryptos in general. What to say of oil or negative yielding debt? Negative oil contracts and negative yield certainly are new. The savvy investor requires new instruments like the FF1 hybrid stablecoin. We may be witnessing the historical emergence of cryptos as reliable stores of value, not just within the crypto exchanges and the crypto industry, but for traditional financial markets at large.
The first half of 2020 also saw tier one economies moving along with their crypto regulations. Singapore, South Korea, Canada, and Japan all made major moves to regulate crypto and give traditional investors more confidence to move into the space. Further confirming a move in the “and then you win” direction.
Bitcoin has halved for the third time in May. A highly-anticipated and important event for bitcoin miners, the halving means miners’ profit margins are halved — for the same amount of work, the bitcoin rewards are halved, hence the name. The halving has usually been accompanied by rallies. In a piece for Cointelegraph, we have argued that the miners’ influence is waning.

Two Prime and FF1 To Date

With all that is happening in the world, it’s hard to believe that it’s only been mere short months since we launched FF1 to the world the Crypto Finance Conference in St. Moritz. On January 16th, weeks before the Covid-19 shutdown, we presented our vision for the future of crypto — the FF1, a hybrid stablecoin that is a steady and dependable store of value, asset backed with top cryptocurrencies and high-performing funds, all encased in a professional risk management wrapper.
Since the FF1 was listed on Bithumb Global in mid-March, the FF1’s public price increased by 17% — from $3.00 to $3.50 at time of writing. We have maintained market making operations and stayed liquid in our primary market.

Other highlights from the last few months include:

  • Partners that have joined the Two Prime journey. The strategy of TwoPrime is straightforward: we invest the proceeds of your sales in the best of breed instruments and people in the crypto field. We have signed a partnership with BlockFi, a leading DeFi firm where we earn interest on BTC. We have invested in SPiCE VC and NGC Ventures, premier equity funds in the crypto space. We have signed and allocated investments with a highly-regarded U.S. private equity fund, which we will announce in due time. We are actively pursuing further partnerships for example in derivatives trading in order to bring more flexibility to our treasury management.
  • FF1 made available to the public on Bithumb Global. Two Prime made the FF1 available to the public with its unique “Continuous Token Offering” (CTO) token model. Unlike the typical ICO — which raises all its money and releases its tokens upfront — the CTO starts with a public listing, like the one we did on Bithumb Global, followed by private sales. Created to release circulating tokens based on demand, this model is in reverse compared to what the speculative cryptocurrency market is used to. The mechanism helps stabilize the price and counteracts the volatility (of which many traditional finance players criticize the crypto asset class) while maintaining its accretive ability. The FF1’s price action, from $3.00 to $3.50 over the past two and a half months and through the thick of the Covid-19 pandemic, has proven some of the theoretical design of public market making.
  • FF1 also made available to accredited investors in the U.S. under a Reg D SPV. Following the CTO playbook, we offer the token for private investors, outside the public book. We have seen even stronger demand on the private side. Most Asian exchanges do not allow U.S. investors to participate. By private demand, and in order to accomodate U.S. investors to participate in FF1 and its capital allocation, we have developed a Reg D SPV which allows SEC compliant participation for accredited investors. Please contact us directly for private placement inquiries.
  • FF1 allocation to be an open book. In the spirit of Open Source, we have decided to open our book publicly and share our portfolio allocation. This will increase transparency and confidence into what we are doing. We also hope to lead by example and we put your (and our) money where our mouths are. You may find our allocation, updated once every quarter, through our website.
  • Read Short, Enchant Long. In the last four months, there has been a lot of learnings for the Two Prime team. Two Prime, the company, is a mix of seasoned entrepreneurs and enthusiastic novices, and there is nothing more exciting than putting the team’s designs to the test and seeing actual results and progress. With team members based in Russia, Europe, and Asia, and management in the United States, we are truly a distributed team with a built-in “work from home” structure from the get go. We know a lot more about exchanges, liquidity, PR, social marketing, crypto markets and technical market-making than we care to admit. We deal with the devil in the details every day so you don’t have to.
  • FF1’s performance during the market turmoil. Since its listing in March, the FF1’s performance has made us very proud. During the worst of times it has 1) proven its ability to be uncorrelated to the crypto market and the market at large; 2) functioned as hybrid stablecoin that is able to hold stable value with accretion in the long run; 3) emerged as a thought and operational leader in the ‘stable store of value’ category of cryptos.

Looking into the Crypto Crystal Ball

Since the bitcoin halving in May, the market has reacted with a lot of hype but little real volume in the markets. While the price of bitcoin reached $10,000, this is merely an arbitrary and psychological barrier that looks visually appealing. The little amount of real volume is to be expected and nothing too significant as the sell pressure is halved and the buy pressure will likely follow. However we have argued that a sideways movement in price may indicate a “peak miner” moment — the point at which bitcoin miners will no longer have as much control over the BTC price as they did previously. The lackluster reaction to the halving may be the “canary in the bitcoin mine.” To where will the power shift? Possibly the exchanges.
Speaking of exchanges… There seems to be more exchanges than there are coins these days. Everyone is either running or launching “yet another exchange,” most of which lack operational expertise, proper infrastructure, — and most important of all — sufficient liquidity. While the volumes in crypto in general are growing, this comes from institutions and large pockets of money who trust only the best exchanges. It is our experience that the crypto retail market has not fully come back from crypto winter, with too many “ghetto exchanges” chasing too few users. However given the private deals we see and the wall of liquidity (see below) coming our way, we predict a shift.
QE + Crypto = A Match Made in Heaven. Central banks around the world have reacted to the pandemic as they should: by printing vast amounts of money to ensure social stability (food and shelter) with varying degrees of success and this is still ongoing. What this means in practical terms is a “wall of liquidity” that is currently storming its way through the debt markets. This “wall of liquidity” will soon hit the equity markets, and inevitably the crypto markets. It is somewhat ironic that the third halving happened against this background of historical monetary expansion. Far from criticism of quantitative easing (we are actually fans of QE), we argue that this will result in a massive rush to cryptocurrencies. To hedge against infinite monetary expansion, one looks at numerus clausus assets, such as cryptocurrencies with their finite supplies. Cryptocurrencies are easier to unload than real estate and hipper than a Damian Hirst art piece. The crypto market will see dramatic inflows over the next year due to monetary policy and will need to diversify from its reliance on bitcoin. This is the biggest story in crypto: new stable stores of value capable of absorbing these flows.
The risky business of bitcoin… We have publicly gone on record about the fact that the crypto universe is too reliant on BTC. The crypto market consolidation of 2017–2019 may officially be over — congratulations to all who made it through! We have BTC to thank for making it through the bear years. Unfortunately, this was at the expense of altcoins — even ETH started looking shaky for a little while. As a result, the crypto industry now has an over dependence on BTC. This may soon prove problematic specifically if we are indeed at “peak miner” as alluded to above. The industry has to find alternative stores of value bridging traditional finance and crypto markets. We do this by building on the strength of the existing infrastructure: financial applications. These modern crypto solutions are all financials in nature. Forget “bollockschain” and “sh*tcoins”!
Financial illiteracy is the real crisis. The low level of literacy in the field is still a major cause of concern. With the Covid-19 pandemic, we have been handed a once in a lifetime opportunity to prove that the crypto asset class can survive and thrive as international stores of value in times of crisis. In order for the industry to reach maturity and for cryptos to take their rightful place in the financial world, we need to educate ourselves and others on how finance works — its potential and its limitations, its benefits as well as its risks. Now is the time to step up our collective game. You can be a public proponent of crypto without sounding like a naive lemming drunk off “krypto Kool-aid” all the time.

But what does it all mean?

We are optimistic and bullish for the future of crypto, and Bitcoin in particular, at least in the short and mid term. We are heavily invested in Bitcoin at the moment, but are diversified with private equity funds and will be adding derivatives in the near future as a way to further hedge our portfolio and stay nimble. We will continue to allocate to top five cryptocurrencies and continue to validate best of breed funds.
The biggest development for Two Prime has been the validation of our hybrid stablecoin (aka “supercoin”) model. With a package of liquid and illiquid instruments, we have managed to offer a completely unique product to the market that has been uncorrelated to the crypto market at large. In the tradition of stablecoins, the FF1 offers higher liquidity by partial asset backing; but unlike traditional stablecoins, it is able to maintain accretive potential on the upside. While the markets crashed, the price of the FF1 slowly but surely went up without much drama or publicity — just the way we like it. While a 17% return in two months may bore the typical crypto “10x pump and dumper” to tears, this type of performance during the worst crash in recent market history is sure to dazzle a typical public market investor.
We advance the thesis that this new category of tokens. A crypto-based “stable store of value” is actually saying something to the traditional investor — here is a way of storing your value in a liquid instrument that is accretive and can smooth out inherent volatility of crypto instruments. From a traditional investor’s standpoint this is a very attractive “all weather” type of financial instrument, which leverages the financial characteristics and strengths of crypto while . From a crypto standpoint, ironically, this emerging hybrid category seems to confound the crypto masses. The industry seems to only understand pump and dump moon coins or stable coins. We observe, perhaps as an isolated data point and wholly dependent on our own distribution channels, a strong interest in public markets but a stronger interest from the private markets. This is a telltale sign of maturation in the crypto markets.
Until next time: To Abundance!
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