Birkoa Newsletter 4 (end of June 2022)
Dear Birkoa LPs:
Wanted to touch base re: the portfolio after a couple of weeks.
Succinctly, our portfolio is divided into two parts, according to the LP Agreement -
1. Static crypto portfolio consisting of only Bitcoin and Ethereum
2. Mobile non-crypto portfolio consisting of global macro assets like stocks (US, developed markets, Emerging Markets), commodities, currencies, fixed income.
The main idea behind dividing up the portfolio this way is to provide an outsized multi-fold return from the crypto side at maturity, while independently maintaining the other portfolio relatively actively that'll generate great returns in a more sustained fashion. In other words, we generally get the non-crypto side to hold the fort and provide a steady buildup of the portfolio, while once crypto matures it'd lead to an accentuated return. Whereas crypto is a macro asset for Birkoa strategy, in practice the reason for this makeup within our portfolio is geared more towards creating a venture fund-like utility.
We are doing quite well on #2 as of this writing, and over the past 2 months. On #1, due to the crypto market drawdown that began precisely 2 days after Birkoa went live, we're caught in the middle of it all, and that has brought the entire portfolio down as of this moment. However, once the initial period of forced selling was over and fraudulent companies/cryptocurrencies went down under, there seems to have been an effective floor placed in crypto. Bitcoin and Ether, our two investments, have been steadily hovering around their present values the past week and half. This means that although there's uncertainty about how much longer we'll have to wait until crypto comes back up, the worst seems to be behind us. In the meantime, #2 remains my active focus to ensure continuous value creation.
Crypto investors in known and proven projects like Bitcoin and Ethereum need not worry in the longer-term. The reason crypto has suffered an unraveling is due to the leverage inherent within some of the derivatives-focused crypto companies like Three Arrows Capital, Celcius, etc., that had the effect of creating a mini 2008-like contagion scenario. As these companies were forced to sell and liquidate their positions, it led to a cascading-effect of levered players receiving margin calls leading to persistent selling. Over the past couple of weeks, that selling has been arrested, especially the violence of it anyway. Moreover, due to some consolidations taking place within the crypto space (e.g: FTX buying BlockFi), an effective floor has been placed underneath high-quality crypto assets. Unless you are levered and/or investing in anything outside of proven assets within crypto, there's absolutely nothing to worry about. This is why I'm confident of hitting our price targets of Bitcoin and Ether of $250k and $20k within the next few years.
For #2, we are heavily invested in the Chinese tech sector and the Chinese equities markets, along with U.S. energy markets. Commodities like crude oil, palladium, gold and silver, too form a large chunk of our portfolio. Thus far, the gains in oil have been rather muted and well off their highs about 3 weeks ago. Similarly, precious metals like gold and silver have been flat, while palladium negative. I believe oil has a long way to go with a target of at least $140/barrell (as of July 4 $110/barrell) by end of summer (JP Morgan on July 2 put a tail-risk possibility of crude reaching $380/barrell) driven by more systemic supply-side constraints, ranging from underinvestment in refineries to geopolitical pressures. The move down was facilitated by short-term news of G7 nations talking about imposing a cap on Russian crude (could not be implemented) and Biden talking about a gas tax holiday plus his apparent threats of legislatively imposing a windfall tax on energy companies (not expected to go anywhere). The talk about "demand destruction" pausing the upward movement of the price of oil seems to be incorrect, and it excludes the fact that China is still in lockdown mode. Thus, all things considered and with the structural supply-side issues, oil is expected to keep moving up higher through this year, though with jitters along the way.
Precious metals like Gold and Silver have been flat thus far due to the artificial dollar strength despite inflation rising through the roof. That too is temporary and I expect a double digit upside in both once it breaks. Palladium has been rising in recent sessions and as China reopens, should continue moving higher. Although recession worries might hurt the demand for cars (cars use Palladium in catalytic converters), I assess that this position might surprise us on the upside. Palladium is the rare precious metal that also has a major economic utility, and could benefit on at least one dimension from either inflation or secondary Russian sanctions or China reopening. This is why I continue to believe that Palladium could surprise us on the upside.
Chinese equities have shown results right off the bat, and I recently doubled down on them - including some new buys. I expect anywhere between 50%-200% returns per position and will be holding them for the foreseeable future of 1-2 years.
Finally, it's important to remember that part of managing a portfolio is adherence to a probabilistic process, which dictates that increased trading activity or trading frequency or panicked-selling compound over time to produce subpar results. During the worst of pullbacks, I try to remember this basic concept and never forget the relatively longer-term horizon of our portfolio positions. Being able to remain calm under pressure and sticking to the basics is as significant an emotional quality as anything intellectual for a fund manager. Ultimately, unless the facts on the ground change, I will not change my positioning on anything, so you can continue to remain confident in my decision making during moments of duress. Thus far, I haven't had the need to do that.
Please do not hesitate to contact me re: any questions at any time.
Sincerely,
Pranjit Kalita
Chief Investment Officer