May 3, 2022

Market Overview
Over the weekend, Bill Gurley tweeted his perspective on valuation and global markets. Bill is a General Partner at Benchmark, a venture capital firm in Menlo Park, CA. Benchmark has invested in many defining companies including Uber, Zillow, and Grubhub.

His tweets echo what we have been preaching here at Cabot SX Crypto Advisor since inception.

In the current investing environment, we must focus more than ever on the fundamental value drivers of companies and crypto projects. For equities, this means an emphasis on earnings growth, free cash flow generation, and long-term competitive advantage. To put it simply, how valuable is your business to those who rely on it? Periods of high inflation amplify the need for pricing power. Microsoft was recently able to demonstrate a strong quarter, in large part due to the company’s ability to raise prices for MS Office 365. Switching costs are high for users of Microsoft products – once an organization decides to use Outlook for email and Teams for office communication, people become deeply entrenched and the organization is unlikely to switch to Gmail and Slack.

For crypto, this means closely examining the market from a top-down approach and next filtering for the most desirable investments, bottom-up, by dissecting their utility and economic viability.

In doing so, we break down network effects and the power of community-driven, decentralized finance projects. To do this, we must mine data from the blockchain, and other providers like Dune, to better understand projects that are creating real economic value.

Much of this value creation has been driven by projects that utilize their own layer one blockchain network – like Ethereum.

By analyzing the on-chain growth in transaction fees on the Ethereum network, we can use fees as a proxy to see that total revenue is increasing rapidly over time.

Furthermore, we look at metrics like user growth through active wallet addresses. We monitor stablecoin adoption rates and examine each project’s “tokenomics.”

Tokenomics refers to the economic characteristics of a particular cryptocurrency. Undertaking this research is critically important to understanding how much supply is released or tradeable, and whether that supply is fixed or inflationary. These characteristics provide the underpinnings of our fundamental analysis.

Demand for stablecoins is increasing dramatically. Stablecoins enable more efficient peer-to-peer transfers and are vital to trading cryptocurrency. As user demand continues to increase, more stablecoins are being added into circulation.

Increasing USD Stablecoin Supply – Tether

This is an important point – money supply has been increasing at a historic rate leading to a historic bull market in U.S. equities. However, this changed as the Federal Reserve is now raising interest rates, which removes liquidity from the banking system by no longer extending its asset purchases.

Now turn to crypto markets where money supply is increasing through the demand for crypto stablecoins like Tether or UST (Terra).

This is a divergent macro phenomenon – one that is bullish for the long-term evolution and success of cryptocurrency as an asset class.

Traditional financial institutions recognize this and fear losing out on the opportunity to generate future business from crypto. Hedge funds and professional investors already trade cryptocurrency. Now, mutual fund giants like Fidelity are eager to enter crypto markets.

Goldman is now executing crypto derivative trades for clients through CME Group.

Inflation and rising rates make investing in assets like Bitcoin – digital property – even more attractive.

Elon, Twitter & Tesla
Elon Musk is taking Twitter private at $44 billion. This is a very interesting development because it now opens the door for new monetization practices at the company including cryptocurrency adoption.

According to Tesla’s most recent 10-Q filing with the SEC, the company states that they believe in the long-term potential of crypto assets both as an investment and alternative to cash.

This sheds important light into the mind of Elon Musk – and the strategies he may employ as the new owner of Twitter.

Twitter is a global company. This means that users around the world face different types of impediments that we as U.S. citizens often forget. Including, difficulties obtaining access to banking and credit, making it difficult to transact.

Twitter founder, Jack Dorsey, also runs Square, which is now Block (SQ). Twitter is likely to integrate Bitcoin and digital currency in the way that Jack is currently at Block.

If Twitter intends to verify all humans, as Musk has stated, then it is vital that crypto be adopted as a form of payment in doing so.

Twitter should use payments to monetize user verification and reduce spam bots. If a spammer wants to create a million fake accounts, they now will have to pay for a verified human account and post collateral in the form of USD or BTC. Effectively creating an economic incentive not to perform malicious actions online.

Watch List – New Recommendations
Declines in prices for numerous equities has created opportunities for us as long-term value remains robust in many cases. As a result, we are adding more names to our watch list for both the equities and pure-play crypto portfolios.

We will be covering all of these projects in greater depth during the upcoming May Cabot SX Crypto Advisor issue.

Equities
Concord Acquisition Corp – (CND)
Concord Acquisition Corp is merging with Boston based stablecoin provider Circle Internet Financial. The stated Enterprise Value is $9 billion, which represents a significant discount to the market capitalizations of other stablecoins that are currently trading well above this valuation. Circle is also demonstrating significant growth, as their U.S. stablecoin USDC, has reached over $52 billion in circulation. USDC remains stable and is backed by cash and cash equivalents similar to banks.

We are waiting for the consummation of the merger, as previous de-SPAC entities have traded lower following the completion of their respective mergers. If this is indeed the case, we will be looking to initiate a position in the equity at a discount.

Galaxy Digital Holdings Ltd – (GLXY.TO)
Founded by Mike Novogratz, Galaxy Digital describes itself as the bridge between crypto and institutional investors. Galaxy Digital is a merchant bank that invests across a variety of crypto asset classes including layer one blockchains and gaming. The company’s net income and total assets have been increasing significantly along with broader trends of increasing crypto adoption. We are currently analyzing GLXY’s business model along with other merchant banks to discount risks before making any recommendation.

Crypto
Bored Ape Yacht Club – (APE)
Over the weekend, the Bored Ape Yacht Club raised $350 million in an NFT sale on the Ethereum network. This community is an industry NFT leader and has demonstrated significant pricing power in the sale of digital assets. The IP and art created in this community reminds us of Pixar or Disney projects in their infancy, and the runway ahead is huge. By holding APE, people can vote and participate in royalty profits. We are currently analyzing the project through the lens of the Howey test and will publish more information in the upcoming May issue.

Crypto Portfolio
LUNA, ETH, and BTC all have been resilient in the face of broader market sell offs. We remain largely in cash and are supremely confident about the future opportunities for all companies that have been both purchased and highlighted to date. Furthermore, we expect to deploy a significant amount of uninvested capital in the coming months buying discount investment opportunities as Berkshire Hathaway is currently doing – building up large positions in quality companies like Apple (Source: Berkshire Annual Shareholder Meeting).

Equity Portfolio

This is a good sign of relative strength as demand for crypto stablecoins such as UST and USDT continues to rise. In periods of volatility, traders increasingly move between stablecoins and crypto assets. This represents part of our bullish overall thesis that LUNA benefits not only from increased trading but can outperform during periods of volatility. Recommendation - BUYTerra - LUNA
LUNA has remained significantly more resilient when compared to the broader market. LUNA is trading around $85.

Ethereum – ETH
Ethereum is the leading global layer one blockchain. Ethereum powers a new ecosystem of decentralized web projects where creators can launch art, games and content while also retaining ownership of their own data and custody of their own appreciating digital assets. Smart contracts power this ecosystem and remain the fundamental value driver of ETH.

Like Bitcoin, ETH is regulated by the CFTC and is a safer cryptocurrency investment when compared to other altcoins that may demonstrate properties of a security. That is why today, we own ETH in addition to BTC and recommend it as part of every portfolio. Recommendation – HOLD

ProShares Bitcoin Strategy ETF – BITO
Since first recommending the investment last week, BITO has traded sideways at $25. This is a good thing. This ETF is outperforming the broader market in a time of significant downward momentum.

In our view, this Bitcoin ETF bottomed in late January of 2022, and it is time to consider increasing your exposure. Investor adoption of BTC and other cryptocurrency assets is at an inflection point. Fidelity’s recent announcement alone is likely to catalyze a new era of owning BTC in retirement accounts.

Owning BITO is a cheaper and easier alternative to purchasing Bitcoin. Recommendation – BUY A QUARTER (of total intended position)

Coinbase Global, Inc – COIN
Coinbase just launched the initial version of their NFT marketplace on April 20. This marketplace, coupled with subscriptions, is likely to begin to diversify the company’s reliance on trading fees over time. However, this will take time. We are watching these metrics closely, as the stock has underperformed over the past two weeks along with the broader market. We are not recommending increasing exposure to this name until the stock forms a tradeable base, despite being valued at 8X EV/EBITDA – a historically low valuation for any well-performing company let alone an industry leader. COIN represents an attractive alternative to owning digital assets outright and will continue to benefit from their increasing adoption. Recommendation – HOLD A QUARTER

Watch List
Nvidia – NVDA
Nvidia is currently on our watch list. The stock is down 32% in the past month alone. This is setting up a generational buying opportunity to own the company with the single biggest exposure to the digitization of our material world. Nvidia is embarking down bold new chapter in the history of the company.

Demand for AI, software and datacenters means that semiconductors are the new oil powering our digital economy. This process will remain robust for years to come. Nvidia’s graphics cards are best in class.

The company’s fundamentals are incredibly strong, with revenue and EBITDA both growing well over 50% y/y. The only other large-cap company putting up these types of numbers is Tesla (TSLA).

On a technical basis, the stock is not yet oversold. We are patiently awaiting our chance to purchase the stock at a significant discount.

In our view, when the stock begins to form a tradeable base over the next several months, it should be bought. We will keep you appraised. NVDA is poised to outperform the broader market over the next five years.

Others
We continue to actively monitor Solana (SOL) and Polygon (MATIC). These are highly scalable blockchain solutions that are likely to represent significant return on investment when the time is right to buy. In addition, we are watching Unity (U), an industry leader in graphics software.