This week’s edition of Cabot SX Crypto Advisor will be a bit more brief than usual as I recently came down with covid. Luckily, I am vaccinated and recovering well. Each of the past few days has been a bit better than the last.
Wishing all of you good health and good fortune!
Turning to cryptocurrency markets, we are finally seeing the bounce that we all have been waiting for.
Cabot SX Crypto Issue: July 19, 2022
This week’s edition of Cabot SX Crypto Advisor will be a bit more brief than usual as I recently came down with covid. Luckily, I am vaccinated and recovering well. Each of the past few days has been a bit better than the last.
Wishing all of you good health and good fortune!
Turning to cryptocurrency markets, we are finally seeing the bounce that we all have been waiting for.
Candidly, it was a very challenging environment to launch a new research publication. Balancing providing interesting content with being prudent with our portfolio and keeping a healthy balance of cash has tested your patience, I am sure. So, a big thank you to those of you who remain with us for the long run – we certainly are committed to trying to provide the best service possible. As always, don’t hesitate to reach out with any questions or comments on what you would like to see more of via email to ian@cabotwealth.com.
One of our top crypto picks – Polygon (MATIC) – is up 164% this month. It does not show any signs of slowing down.
Crypto moves to the upside are often swift and significant. We have been highlighting this name over the past few months and began building a position. We remain confident in future upside for Polygon.
Polygon is a business-to-business focused cryptocurrency company focused on improving the efficiency of the Ethereum network (ETH). Ethereum (ETH) is also now up 49% this month. Our Ethereum domain name pick – ENS is up 11% today alone.
It is a good time to initiate a position in both names. These two have been leading the way in a broader-based cryptocurrency rally. Both ETH and MATIC have broken above their 200 day moving averages, regaining a bullish upward trend.
We are conducting diligence on cryptocurrency project Avalanche (AVAX) and equity pick – Block, Inc. (SQ). Both are looking attractive on a risk/reward basis, and we have added them to our watchlist.
Here at Cabot SX Crypto Advisor, we remain confident in our portfolio and believe that it will outperform the average indexes over the next five years. Cryptocurrencies can be volatile and moves to the downside can be challenging mentally. During these periods I would urge you to monitor your holdings less often to avoid over-trading or simply trade with a “stop-loss,” so that you have a predetermined point at which you are willing to cut the position.
The downside to trading with a stop-loss is that you could feasibly be stopped out of a position only to see it rebound shortly thereafter, a phenomenon known as getting “whipsawed.” The upside, of course, is that the automatic sale would prevent you from incurring a further unrealized loss while you wait for the position to rebound.
It is important to be patient and not over-trade. Do not sell when the market begins to go down or buy when the market is racing upwards.
If you are going to use a stop-loss – this involves a more active participation in the market. I would advise you to set the stop-loss almost at the price you paid for the stock or cryptocurrency, and re-enter the position when things rebound – much as they are today.
This process is a balancing act. You can also use sell-stops to exit a position that you are positive in – locking in gains.
The benefit of our research here at Cabot is we find winning stocks and cryptocurrencies. Staying invested over a longer period is how real wealth is created.
Market Update
- Large amounts of BTC and ETH are being moved from exchanges and into wallets. This is positive, because during selloffs we see the opposite, large amounts of cryptocurrency being moved from wallets into exchanges to be sold.
- Congress is voting this week – likely tomorrow – on a large bill that will benefit semiconductor companies like Nvidia (NVDA). The bill contains $52 billion in subsidies and $200 billion for scientific development. This bill will benefit manufacturers more than NVDA, which is fabless. So, keep an eye on Intel and TSM! I have been seeing bullish call option flow today so the whole industry may see a bounce including names like AMD, and the SOXL index. These companies are worth owning and have proven to be very powerful compounders that are powering global digitalization including the rise in cryptocurrency usage.
- We saw large crypto moves to the downside over the past few months along with the broader market. With this bottoming process came a liquidity crunch for several companies including Blockfi. None of the companies that we are holding or following have signs of credit risk or insolvency. Sam Bankman Fried has stepped in now in several cases as the vocal leader for the industry – agreeing to buy up and loan money to several companies including Blockfi. He has also expressed interest in buying the retail-focused exchange Robinhood. Why is this important? SBF and the FTX exchange have over $2 billion in cash, making FTX an attractive location for users to trade in addition to Coinbase and Binance if you do opt for the user-friendly experience of an exchange. All three names have sufficient capital and robust risk controls.
- The alternative would be to transfer your holdings to a hot or cold wallet – if this is something you are interested in learning about, please reach out to me directly.
Crypto Portfolio
| Ticker | Initial Weight | Price | Price at Rec | Performance | Rating |
| ETH | 15.0% | 1,472.30 | 3,444.22 | -57.25% | BUY A QUARTER |
| ENS | 2.50% | 10.74 | 10.22 | 5.09% | BUY A HALF |
| MATIC | 1.25% | 0.90 | 0.678 | 33.04% | BUY A QUARTER |
| APE | — | 5.65 | — | — | WATCH |
| SOL | — | 40.04 | — | — | WATCH |
| HNT | — | 9.17 | — | — | WATCH |
| STEPN | — | 1.06 | — | — | WATCH |
| AVAX | — | 22.49 | — | — | WATCH |
Ethereum (ETH)
Ethereum remains the industry leader, demonstrating high switching costs as projects continue to choose ETH to run their decentralized applications over competitors like Solana (SOL). ETH is currently undergoing a long-awaited network upgrade, moving from Proof of Work to Proof of Stake. In our view, this should act as a catalyst for the ETH price. Recommendation – BUY A QUARTER
Polygon (MATIC)
Polygon is a Layer Two scaling solution for the Ethereum network. Polygon helps to alleviate congestion and reduce latency and costs for running projects on ETH.
According to company reports, along with data from Alchemy, Polygon reported 6x growth over the past six months in the number of dApps building on its network. DApps are decentralized applications – crypto based businesses that are building out some form of real-world use case.
Key Metrics
- More than 19,000 decentralized applications now on its network, a 500% increase from 3,000 dApps in October.
- Polygon now serves over 8,000 monthly active teams, up from over 6,000 in January and just a few thousand in October.
- Sixty-five percent of the teams were built entirely on Polygon, whereas thirty-five percent were built on Ethereum.
- Processed over 3.4 billion total transactions.
- 135 million unique user addresses
- Over $5 billion in assets.
A key catalyst for Polygon adoption and acceleration has been partnerships – Polygon has forged ahead with industry leaders like Meta Platforms (Meta), EY (consulting), and Alchemy (web3 infrastructure).
Since partnering with Alchemy, the number of Polygon apps has increased by more than 95x. Alchemy provides key support in web3 infrastructure and platform capabilities, working alongside Polygon to resolve and prevent problems as they occur at the developer level. This partnership has served as a valuable flywheel and competitive advantage for MATIC.
Turning to trading dynamics, over 650k MATIC tokens have been removed from circulation since their recent network upgrade at the beginning of 2022. These key growth and trading metrics coupled with the recent MATIC price decline has made MATIC an attractive, long-term, risk-adjusted investment opportunity at today’s price level. Recommendation – BUY A QUARTER
Ethereum Name Service (ENS)
Ethereum Name Service (ENS) is a distributed, open, and extensible naming system based on the Ethereum blockchain. ENS converts human readable Ethereum addresses like john.eth into the machine-readable alphanumeric codes. The goal of Ethereum Name Service is to make the Ethereum-based web easier to access and comprehend for humans – like how the Internet’s Domain Name Service makes the internet more accessible. Like DNS, ENS also uses a system of dot-separated hierarchical names called domains with domain owners fully controlling their subdomains (Source: CoinMarketCap). Recommendation – BUY A QUARTER
Equity Portfolio
| Ticker | Initial Weight | Price | Price at Rec | Performance | Rating |
| Proshares Strategy Bitcoin ETF (BITO) | 2.50% | 13.36 | 25.93 | -48.48% | BUY A QUARTER |
| Arista Networks (ANET) | 2.50% | 100.58 | 105.00 | -4.21% | BUY A QUARTER |
| Nvidia (NVDA) | 2.50% | 161.01 | 188.20 | -14.45% | BUY A QUARTER |
| Okta Inc. (OKTA) | 2.50% | 95.46 | 95 | 0.48% | BUY A HALF |
| Block Inc. (SQ) | — | 66.27 | — | — | WATCH |
| Concord Acquisition (CND) | — | 9.98 | — | — | WATCH |
| CrowdStrike (CRWD) | — | 177.25 | — | — | WATCH |
| Galaxy Digital (GLXY.TO) | — | 6.30(CAD) | — | — | WATCH |
| Proshares Short Bitcoin ETF (BITI) | — | 37.28 | — | — | WATCH |
| Unity (U) | — | 35.31 | — | — | WATCH |
OKTA, Inc. (OKTA)
After the company’s most recent earnings release, we published a BUY rating on Okta, Inc (OKTA). OKTA delivered an outstanding quarter during a difficult macro environment, raising their expected 2022 guidance. This is exactly the type of company that we look for. Let’s dig into what the company does and why they are well positioned to benefit from increasing digital trends.
OKTA offers cloud based digital network management software. The company is the market leader in identity management, meaning they offer the best way to ensure secure digital interactions with employees and customers. They are the market leader in multi-factor authentication services, single-sign-on, API management, and onboarding for thousands of companies worldwide.
This software is essential to how large companies today operate, thus making it increasingly difficult to cut back on spending in areas like enterprise software where OKTA, Inc. resides. Enterprise “software as a service” (SaaS) business models are sticky, generating recurring annual subscription revenue, offering a great lens into the future by measuring key metrics like remaining performance obligations to gain insights into expectations of future performance.
OKTA continues to increase both revenue and profitability at a significant pace. Despite macro headwinds, the company is still seeing significant demand for their software. As a result, we are BUYING A HALF and expect the total portfolio weighting to be 10% of the Cabot SX Crypto Equity Portfolio.
Nvidia Corporation (NVDA)
NVDA is an American multinational technology company based in Santa Clara, California. The company designs software and graphic processing units (GPUs) for high performance computing, artificial intelligence, and gaming. In our view, NVDA is well positioned to benefit from continued cryptocurrency adoption, as well as global cloud-based commerce. NVDA is the global leading fabless semiconductor designer for these applications. Recommendation – BUY A QUARTER
ProShares Bitcoin Strategy ETF (BITO)
Bitcoin is digital property. BTC is quickly becoming the reserve currency of the digital era, as other DeFi protocols, traditional companies, and institutional investors continue to purchase Bitcoin to serve both as a form of collateral and a store of wealth. The inherent properties of BTC make it a highly desirable asset in today’s period of high inflation. BTC has 1/10 the market capitalization of gold.
Fidelity recently announced that they are adding the ability to purchase Bitcoin in 401k accounts. This is a significant move by the industry giant. Currently, 23,000 companies use Fidelity to administer their retirement plans. This is extremely bullish for the crypto asset class, as current investor exposure to BTC is under 5%.
In our view, the easiest and best way to gain exposure to BTC is through BITO in a traditional brokerage account. Recommendation – BUY A QUARTER
Arista Networks (ANET)
Arista Network designs and sells multilayer network switches to deliver software-defined networking for large datacenter, cloud computing, high-performance computing environments. ANET is positioned to benefit from workloads transitioning to the cloud. Acceleration in the digital economy, partially powered by increasing web3 and cryptocurrency adoption will benefit Arista.
According to the IDC 2021 Report, 200G-400G switches are growing at 70% due to hyperscale and cloud providers continuing to build out larger data center footprints. Companies have increasingly shifted workloads from on-premise data centers onto the cloud, utilizing primarily AWS, Azure, or Google, as server providers. Data growth has been exponential and as a result companies are looking for scalable solutions to reduce internal dependency on hardware update cycles. However, companies still prefer to have infrastructure on-premise within their own data centers for security, data governance, and lower latency. This is often performed through the AWS Outposts solution and requires switching devices like the ones that Arista provides. As early as 2018, there has been a push to 400G infrastructure to increase network speed and performance. Recommendation – BUY A QUARTER
Watch List
CrowdStrike (CRWD) – end to end, tier-one, cyber security company offering services to three quarters of the Fortune 500.
ProShares Short Bitcoin ETF (BITI) – potentially useful as a future hedge against our long portfolio.
Block, Inc (SQ) – peer-to-peer Cash App solution provider that allows participants to send currencies including crypto. SQ also has a B2B focused payment processing engine.
Helium (HNT) – decentralized blockchain network for internet of things devices (IOT). Users who operate Helium hotspots mine and earn rewards in Helium’s native cryptocurrency HNT.
Avalanche (AVAX) – competing layer one blockchain solution to ETH with 6,500 transaction-per-second capacity.Bored Ape Yacht Club (APE) – token for the growing community of creative digital content.
The next Cabot SX Crypto Advisor issue will be published on August 16, 2022.
About the Analyst
Ian Beaudoin
Ian Beaudoin is Chief Analyst of Cabot SX Crypto Advisor.
Ian provides deep insights into emerging disruptive technologies, covering cryptocurrency, blockchain, play-to-earn gaming, fintech, and the venture ecosystem. He has independently invested in and traded cryptocurrencies, securities, and derivatives since 2015 and actively seeks to identify asymmetric investment opportunities in both public and private markets through fundamental research, event driven strategies, mean reversion, and arbitrage.
Ian also serves as the Senior Analyst at Hyperion Capital Partners.