We reverted to the mean. Markets have corrected significantly, falling back towards their longer-term averages.
Crypto, which was more resilient than the Nasdaq for a time, has now taken a hit.

This begs the question: What is investible in a time like today?

Cabot SX Crypto Issue: June 21, 2022

Crypto, which was more resilient than the Nasdaq for a time, has now taken a hit.

This begs the question: What is investible in a time like today?

Stick with the engines that power the modern-day economy in any time frame.

These companies are going to be the first to recover and lead us to fresh highs over the next several years.

The market leaders in their respective areas of enterprise software, cloud computing, semi-conductors, cybersecurity, and blockchain infrastructure are each essential to every business operating on the planet.

Imagine trying to run a business today without software. That would entail me writing this to you now with pen and quill and sending it off via pigeon.

Businesses today are looking at how they can cut costs – however, the budget items listed above simply cannot be axed. Companies are looking to expand spending in these categories, according to Gartner, IHS Markit, and Ibis.

These pillars are simply how companies today conduct business. They rely on data-driven decisions to measure impact and drive a high degree of touch points with their customers.

Here at Cabot SX Crypto Advisor, we seek to identify market leaders in each of these areas and construct durable portfolios based on fundamental insights.

Media Headlines Driving Down Markets

The following news items have weighed on stocks (and crypto) in recent days:

• The Michigan Consumer Sentiment Index – a measurement of Americans’ perspective on the overall economic climate – fell sharply to a serious low of 50.2 this month.
• Layoffs have begun to hit crypto companies and real estate fintech as exhibited by Coinbase and Redfin. We view these business models as much more cyclical than the ones built into our portfolio.
• Tech companies are either slowing their hiring processes or beginning layoffs of their own (this could actually help slow down rate hikes).

Then there’s this from The Wall Street Journal: “In the previous 12 recessions, stocks have typically declined by 24%, so the S&P 500 is very close to pricing in a typical economic slowdown. Credit markets, via bond spreads, have also moved toward discounting the market turmoil and a possible recession. The better news is that future stock returns have historically been elevated after a bear market decline of at least 20% from the peak. Dividend yields, an essential part of the total return from stocks, should already provide higher income. It would not be a surprise to see a market bounce in the short-term after the indiscriminate selling last week.”

Portfolio Update

Although our cryptocurrency “pure play” portfolio remains solidly in cash at this time, we stand by our current recommendations to begin building positions in Ethereum (ETH), Polygon (MATIC), and Ethereum Naming Service (ENS). These positions are largely predicated on the continued success of the Ethereum network and we entered several of these trades during the downdraft but we believe firmly in this web3 ecosystem. Ethereum is the global industry-leading Layer One blockchain solution for distributed computing projects.

Ethereum enables creators to build and engage in digital commerce through the use of smart contracts, a technology created by Ethereum to allow for blockchain-based transactions to take place at scale. Ethereum continues to dominate all other blockchain projects in terms of fees generated on the network (revenue proxy) and total engagement. ERC-20 is the industry standard for tokenized assets, as the world becomes increasingly digital, more people have turned to use the Ethereum network.

Crypto Portfolio

Given recent volatility in the crypto markets, new positions will be considered “Full” at 5% of portfolio allocation. Existing holders should maintain the original weight in ETH; however, buyers should initiate new positions with a one-quarter weight.

Ethereum (ETH)
Ethereum is continuing to experience growth in key metrics like users, transactions, and fees generated on the network. Just take a look at the chart below, courtesy of Dune Analytics:

Ethereum network transaction volume is increasing as more projects continue to build on the platform, attracting more users.

Ethereum remains the industry leader, demonstrating high switching costs as projects continue to choose ETH to run their decentralized applications. 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 achieved 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 Facebook/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. BUY A QUARTER

Ethereum Name Service (ENS)
Ethereum Name Service (ENS)
aims to make it easier for users to operate on Ethereum. ENS is similar to GoDaddy, allowing investors to purchase a domain name for their public address and web address. ENS aims to become the go-to naming protocol by making web3 usernames that can be utilized across multiple blockchain networks over time. This process is what many describe as interoperability – moving across blockchains (for example, Ethereum blockchain and Bitcoin blockchain).

Users and businesses are used to traditional web addresses. Users of blockchain technology will likely prefer what they already know instead of having to utilize a long phrase of letters and numbers. ENS will help to overcome this friction and improve the user experience.

It gets better. Companies are increasingly beginning to offer “sign-in with Ethereum.” ENS is helping improve this authentication process for companies.

The ENS governance token (crypto), created on the Ethereum blockchain, enables participants to propose changes within the organization, much like voting rights are afforded to members of a traditional company board.

ENS has a low supply of 100 million tokens, making it an attractive investment if adoption continues to increase – buying pressure will move the price of ENS quickly. BUY A QUARTER

Equity Portfolio

New Recommendation

Okta, Inc. (OKTA)
After the company’s most recent earnings release, we are issuing 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 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 QUARTER and expect the total weighting to be 10% of the Cabot SX Crypto Equity Portfolio.

Nvidia Corporation (NVDA)
Nvidia (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. 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 1/10th the market capitalization of gold.

Fidelity recently announced that they are adding the ability to purchase Bitcoin in 401(k) 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 less than 5%.

In our view, the easiest and best way to gain exposure to BTC is through BITO in a traditional brokerage account. BUY A QUARTER

Arista Networks (ANET)
Arista Networks (ANET) designs and sells multilayer network switches to deliver software-defined networking for large datacenter, cloud computing, and 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. BUY A QUARTER

Watch List

CrowdStrike (CRWD) – An end-to-end, tier-one cybersecurity company offering services to three quarters of the Fortune 500.

Helium (HNT) – A decentralized blockchain network for internet of things devices (IOT). Users who operate Helium hotspots mine and earn rewards in Helium’s native cryptocurrency HNT.

The next Cabot SX Crypto Advisor issue will be published on July 19, 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.