Before we launched Dopamine Investments we used our strategy in Apollo Ventures, that transformed into fully regulated Dopamine Investments.
The Apollo Ventures investment fund began operations in March 2023. By this time, the cryptocurrency market was already in a nearly year and a half long continuous decline and we saw capital outflows, user outflows and very negative sentiment on nearly every metric, very similar to what we saw during 2019 and likely very similar to what we saw during 2015.
The cryptocurrency market is still very young, it has proportionally many times more unsophisticated retail investors – even gamblers – compared to traditional markets, which have a big impact on the high oversubscription of most cryptocurrencies. The market then tends to go from one extreme to the other – from a state of extreme oversupply to a state of extreme oversoldness and vice versa. These “cycles” have been gradually flattening over the years, thanks to the increase in the number of players in the market and its streamlining. A very well-known concept in the cryptocurrency community is the so-called four-year cycle, or also the Bitcoin halving cycle. See the following chart.
I would hate to interpret this chart of Bitcoin in such a way that since the previous 3 four-year cycles have had a very similar course, this one will have one as well. In short, the fact that something happened 3 times in a row does not give us enough confidence that it will happen again after the 4th, it is still too small a sample. However, I would like to point out the absolutely extreme swings and volatility; alternating between periods of extreme euphoria – parabolas and periods of deep depression.
Different investment strategies should be adapted to the different market phases. As we are a fully liquid fund (not a VC fund) engaged in active capital management and believe in the long-term success or at least long-term capital inflows into the cryptocurrency sector, we have the following strategies available by default:
1) Long-only – the strategy is to select the best projects across sectors and “hold” them until they are adequately capitalized (either overall or relative), which is where we want to exit.
This strategy outperforms all others multifold in a growth market – in periods like 2017 or 2021, but is very inefficient in a market that is going sideways or even down. In fact, selecting quality projects will not provide protection against portfolio declines. The entire cryptocurrency market is highly correlated and thus, very simply, either all cryptocurrencies go up or all cryptocurrencies go down. The best ones will still do -60, 70, 80% in a deep depression and the worse ones -90, 95% and 99%. Individual cryptocurrencies also become obsolete very quickly and trends change. Cryptocurrencies that were valid in 2017 or 2021 may not be at all now. Thus, a successful long only strategy must also be very active. Exposure of funds to the market in this strategy typically ranges from 0% to 100% or more. 0% means all funds in stablecoins or fiat, 100% means all funds in cryptocurrencies, and we can get above 100% at some points by using derivatives leverage.
2) Long/short – the strategy is to pair individual cryptocurrencies against each other. What does this mean? The simplest example might be this: I pick 2 similar projects, one I think has the most potential for growth from a given sector and the other the opposite. For example, I will buy the high quality project for 20% of the funds and sell the low quality project – shorting (speculating on the downside) for 20% of the funds. What happens then? Ideally, I then realize a profit wherever the market goes. If it goes down, I will make more by shoring low quality cryptocurrency than I will lose by buying high quality and vice versa. If I even think the market could go slightly in a certain direction, I can increase my exposure in that direction. For example, if I think the market could go up I can buy at 25% and sell at only 15% and vice versa.
This strategy is very effective in a market that goes sideways = moves in a range. However, the historical performance of the best known cryptocurrency funds has clearly shown us in past periods that in growth periods long-only funds overwhelmingly outperform long/short funds. Perhaps because the market starts to behave very irrationally during periods of greatest euphoria, the most shortshorted cryptocurrencies are often subject to so-called shortsqueezes, and it is then not really appropriate to short the most obviously bad projects.
Before I started Apollo Ventures, I thought for a long time about what the right approach was, I had built up the ability to approach positions and portfolios very rationally, without emotion, and that is one of the reasons why I was able to achieve the results I did. But with the fund, at least initially, it’s a little different. Our target customer is a Czech qualified investor, and while he should be qualified, that doesn’t mean he’s a veteran trader who won’t be very strongly emotionally affected, with the potentially very high volatility of the fund. So we have set a goal of starting right into the green numbers, which can be quite challenging due to the nature of the crypto market relative to and its high volatility. Given the state of the market, a more long only strategy was chosen, in the sense that we wanted to very gradually scoop up the potentially strongest projects at good prices and have positive exposure to the market, however we were also able to partially hedge it. So the beginning was, you could say, a mix of these strategies.
From March 2023 to September 2023, the market rode a similar wave. Psychologically, I would describe it as a depression phase, see the following figure.
Bitcoin as the strongest cryptocurrency gained around +10% over the period, Ethereum ended at the same levels as it was in March. The other larger projects have mostly fallen by -10 and -50% over the period.
Our exposure to the market during this period was approximately 20-50% most of the time. We held a very limited number of cryptocurrencies so that we could react quickly in such an uncertain market. Over this period we realized a loss of approximately – 5% with the fund, which I take to be almost negligible in the cryptocurrency market. In simple terms, we managed to keep a fairly decent positive exposure to the market so that we didn’t completely miss a potential quick bounce out of the market (bounces in the cryptocurrency market are very always quick and in a way unexpected) while not paying too high a premium for it. Assuming you picked up a portfolio of various altcoins from the top 100 by market capitalization, you would probably end up with an appreciation somewhere between -25% and -50% over this period.
In the following period, which initially felt quite disbelief/unconfidence and still very negative sentiment, we saw a market rebound. We rode out this entire bounce thanks to positive exposure to the market from the bottom, and from September 2023 to the end of February 2024, we achieved an appreciation of over +150%, and we did this at very reduced risk, as our exposure to the market during this period was between 35% and 60% most of the time. I won’t mention all of our positions and behavior here as this article would be endless, but I can mention that one of our top bets was on the Solana cryptocurrency ecosystem and its token $SOL. I detailed my reasoning, which has subsequently been incredibly accurate (except for the fact that NFTs have almost completely replaced meme tokens), on my Twitter feed, you can read it here.
Solana has seen +1000% appreciation over this period, from the very bottom to the very top, and is now absolutely the leader of the cryptocurrency ecosystem in terms of user activity, and even better than Ethereum itself in a lot of other metrics.
So in terms of “kicking the fund into the green”, our target was met and the overall appreciation of around +140% provided some cushion for a potential bias in the strategy. At the same time, we sent out investment questionnaires to our investors and they almost unanimously agreed on the same.
We have kept the fund in “long only” mode for the period ahead. Now, as of March 2024 to current – end of September 2024, the value of funds in our fund has fallen by -27%. We can view this negative performance as a “tax” on our exposure to a rising market. If we had managed our strategy more conservatively or even moved directly into a long-short strategy, asset volatility would have definitely been more flattened. However, our investors’ expectations for this type of investment are primarily performance, and with that comes volatility, both up and down. Our objective for this period was primarily to weather the volatility and ideally position ourselves in quality projects with the potential for higher performance in a future growth period.
Management Summary March 2023 – September 2024
| Market description | Date | Strategy | Exposure to the market | Evaluating |
| Periods of depression and disbelief | 3/2023 – 9/2023 | long only + hedge | 20 – 50 % | – 5 % |
| Market growth period | 10/2023 – 2/2024 | long only | 35 – 60 % | + 152 % |
| BTC ranging + altcoin decline | 3/2024 – 9/2024 | long only | 60 – 110 % | – 27 % |
It is also important to add how this “cycle” so far differs from previous ones, and where it is important to adapt. First of all, I would describe it as a significant change in capital rotation, the disinterest of the retail sector to trade small sometimes fundamentally interesting projects, and the related high growth of interest in meme tokens and predatory behavior of VC funds – projects.
As far as capital rotation is concerned, we were used to capital rotating in roughly the following way from previous cycles, see the following figure.
Capital was first poured into the safest and largest cryptocurrencies, which were Bitcoin, then generally Ethereum, the largest altcoins – primarily Layer 1 blockchains in the 2021 cycle and payment coins in the 2017 cycle. Then, over the cycle, smaller and smaller projects grew gradually, until eventually virtually everything grew in some way, including very dubious projects.
What changes are we seeing now? The growth and stability of Bitcoin doesn’t necessarily mean that capital is spilling over into altcoins anymore, due to the influence of the spot ETF a lot of the capital in Bitcoin is ending and not spilling over anywhere else. The same could theoretically be said of ETH however there is not as much interest in its spot ETF and furthermore, unlike Bitcoin, Solana has become its direct competitor and is not as interested as in previous cycles – it doesn’t have an absolutely clear leadership position within its category as Bitcoin has.
Furthermore, it is the world of meme tokens, also thanks to Solana’s user-friendly environment, its speed and accessibility, that meme tokens have become a huge trend during the last growth period. The most speculative capital of retail traders that resulted in the growth of all sorts of small and dubious projects in past cycles now ends up virtually all in these meme tokens, and almost no one is interested in small projects anymore.
At the same time, it is no longer the case that these lower quality or purely speculative projects/meme tokens only grow in the latter stages of the cycle, but usually even start these bounces. This state of affairs is also greatly aided by the predatory behavior of VC projects and funds who, due to their greed, launch projects at huge capitalizations with absolutely extreme issuance of new tokens into circulation. The projects then don’t have as much room for growth and many traders will prefer just even meme tokens, whose distribution and tokenomics is often much more attractive. Virtually all of the large projects launched during 2023 and 2024 have ended in fiasco due to the above facts and are trading at a fraction of the price at which they were let into the market.
The most important thing is therefore, as always, to adapt to these conditions. The cryptocurrencies interesting in 2017 were not so promising in 2021 and the same is the case with a lot of 2021 projects now.
