Q2 2026 Letter
New Horizons
Q2 2026
Hepworth Iron Capital: +8%
BTC: -14%
Simply observing the price of BTC through Q2 would have you believe that we’re slipping deeper into bear market territory. While that might be true for Bitcoin, there are strong bottom-up indications of strength both in price and fundamentals across certain pockets. Turning points in the crypto market take time to play out but future winners often present themselves during these periods.
Identifying a story like Solana in 2023 required a micro understanding of the idiosyncratic story combined with a macro feeling for the turning point of bear to early bull. Market dynamics and asset-specific stories always differ but I see analogues in both single name promise and in the market environment to that which I saw in the year of 2023. In this case the single names are HYPE and LIT, and the category is perps.
One note on the numbers before getting into it. I have dropped the S&P 500 line from the header because I don’t think it is the right comparison for this book, but I should say plainly that a passive index comfortably beat me. The book returned 8% while carrying a large stablecoin balance for most of the quarter, having stepped back from the farming side. Sitting in cash has a cost and it showed up this quarter.
Reflections
I will begin this quarter’s letter with some reflections on how the quarter reconciled against the views I laid out at the end of Q1 (Q1 2026 Letter).
My previous quarterly letter addressed the relative strength BTC displayed through the Iran war headlines and the role STRC could play in a potential recovery. STRC did indeed play an outsized role this quarter with issuance ballooning, particularly in May and June, to $9.11B. The tokenised wrappers marketed by Apyx and Saturn also grew quickly through the quarter as depicted below:
An acceleration in STRC drove an increase in BTC price (trading to a high of $82.8k or +43% following my last letter) but Saylor again appeared to be the largest source of demand. Perhaps naively, I had assumed that a price increase in BTC driven by STRC could generate reflexivity and net new demand; this did not materialise. We have seen the market become fairly hostile towards Saylor and this newfound financing instrument with STRC trading all the way down to $71 against a $100 par.
When a host is infected with a virus there are two outcomes. The host fights the virus and ultimately rejects it, or the virus kills the host. Historically BTC has enjoyed a strong immune system, this time appears to be no different with the market effectively neutering Saylor’s ability to corner more supply through STRC growth.
I sold BTC long exposure in the mid $70ks once it became clear that STRC issuance was not going to drive the reflexivity I had underwritten.
The unwind of the same forces that drove BTC up early in the quarter has contributed to price trading roughly back down and below where the quarter started. However it is worth noting that we have seen a handful of bright idiosyncratic spots:
Hyperliquid
I mentioned the addition of HYPE in my Q1 letter. HYPE enjoyed a fantastic Q2, trading up +78% through the quarter. The announcement of the AQAv2 agreement between Circle, Coinbase and Hyperliquid contributed meaningfully to that performance along with the continued growth of HIP-3. While consolidation following expansion is par for the course, I maintain a positive view and expect the success story to continue.
Market Neutral
Q2 2026 has been an incredibly treacherous quarter on the DeFi or yield farming side, setting an all-time record for the number of exploits in a single quarter, somewhere between 70 and 85 reported incidents depending on the data source. KelpDAO and Drift Protocol were among them, the former of which drove a significant credit crunch across the entire ecosystem.
Beyond some hair-raising moments as liquidity froze up during the KelpDAO saga, I came through the quarter with only one loss on the market neutral side: a 10-15% haircut on apxUSD as the underlying STRC traded below par.
I should say that avoiding these exploits often feels more like luck than judgement. What was a clear judgement call was winding down the majority of farming positions through the quarter as the risk/reward deteriorated.
That said, Q2 did have one bright spot on the market neutral side in Re Protocol and their launch of $RE. I began farming this one fairly late with Fluid loops and was able to enjoy a worthwhile realised APR based on where the TGE priced. Despite this, the expected return of almost all farming opportunities does not properly compensate for the heightened risk.
Outlook
BTC has been holding the lows despite a collapse in STRC and Saylor being effectively sidelined. I remain cautiously optimistic here, and believe that we are in some form of time capitulation that will continue to play out between now and year end. Where my current view may diverge from consensus is in the future I could see for BTC next cycle. Let’s remind ourselves of how ETH has performed over the last 5 or so years; while it did technically trade a new all-time high in price, it’s reasonable to call the 24/25 cycle a failed cycle for the asset:
If one attributes much of BTC price performance in the 24/25 cycle to Saylor, the absence of Saylor in some future cycle should present concern. Previously, BTC up would lead to MSTR mNAV expansion, share issuance, BTC up on Saylor buys, MSTR mNAV expansion and so on and so forth until some equilibrium in supply and demand emerged in spot BTC markets.
Imagine a future whereby every expansion in MSTR mNAV is met with share issuance but that share issuance funds STRC dividends and convertible bond repayments. Under these circumstances, Saylor plays a much smaller role in the BTC demand story. Could this lead to a failed cycle for BTC similar to that which ETH experienced last cycle? Part of what makes me take the idea seriously is where it sits relative to positioning. It would represent max pain for the large group who have built an entire framework around a four-year cycle, and max pain is very often what the market ends up delivering. That is not a reason to believe it, and I am actively looking for reasons why it could be wrong (a new demand story).
Where I am more constructive is in the corners of the markets where it is easier to identify demand. My broader thinking here is covered in a letter I put out at the end of May titled “The End of One-Factor Crypto: Why BTC price is no longer the variable that matters most” which I encourage you to go and read. The short version is that the crypto economy is splitting between businesses whose value depends on crypto prices and businesses whose value increasingly does not.
Perps are the clearest example of that shift happening in real time, which is also why the category is my 2023 analogue. HIP-3 continues to grow as a share of Hyperliquid open interest with the assets underneath it sitting further and further outside crypto.
LIT (Lighter) has been added to the portfolio this quarter on some combination of technical and fundamental factors. From a technical point of view, I simply wanted to see the token stop going down. From a fundamental point of view, the Telegram partnership provided an early signal as to how the team think about distribution and business development: a highly targeted sniper rifle approach vs the open ecosystem Hyperliquid approach. The Robinhood announcement was a nice unexpected catalyst in this distribution vein. The recent addition of SPY as collateral is another promising addition which might foreshadow a broader spot equity roll out on the platform. I look forward to watching both Hyperliquid and Lighter win while cult-like fanatics on both sides struggle with the idea that there can be more than one winner in a growing market / winning product category.
On the market neutral and yield farming side, Variational and QFEX are both interesting and warrant farming exposure in my opinion. I had hoped to be able to participate in Variational’s OLP but that seems unlikely (or at least prior to TGE). QFEX is a more centralised alternative with a strong founding team and warrants a look. Opportunities are few and far between across more traditional DeFi farming, for the reasons above. Focus and survival are key.
Personal/Professional Update
On the personal/professional side of things, I have begun working with a team that I am extremely excited about. I look forward to updating you all in the near future with a public announcement.
I will still be managing risk and making every effort to grind my equity curve up and to the right. Equally, I have every intention of continuing to use writing as an outlet for my thoughts and intellectual curiosity. What I am going to stop doing is committing to a quarterly letter. The magnitude of the opportunity in question requires my unwavering focus, and a fixed publishing schedule is the first thing to suffer when that is the case.
So this is the last of these on a set cadence. I will keep writing when I have something worth saying, and increasingly that might be about business, growth and product rather than solely trading and positioning.
I invite you to join me for the journey on X: x.com/hepworth_