Digital Assets Weekly: April 21st, 2020

Please see important disclosures at the bottom of this report

Portfolio Strategy

These are strange times. Very, very strange times indeed.

Oil markets have gone mad. At least that’s what I’d think if I’d only looked at the price, which plunged as low as -$37.63. Although, I’m strangely unsurprised given the macro backdrop, I must admit the situation interesting.

However, I’m not here to talk about Black Gold, I’m here to talk about Digital Gold, and by that, I mean Crypto Oil, which isn’t referring to the Venezuelan Petro either. 

The “Crypto Oil” I’m talking about is the one that’s being used to power fast growing emerging digital decentralized crypto economies.

Perhaps the best way to summarize the stark contrast between these two oil markets is with the opening passage from Charles Dickens famous novel A Tale of Two Cities:        

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.

My relevant interpretation is: It’s the best of times for the rising crypto economy. It’s the worst of times for the maturing industrial one. It’s the age of wisdom for those embracing paradigm shifts. It’s the age of foolishness for those holding entrenched beliefs… The point is, we’ve entered the fourth industrial revolution, global economies are changing and the assets that power them in the future will change as well.

Assets like Ethereum, which we’ve recommended investors overweight, represent a computational commodity within its economy. The activity in its economy has been strong and demand for the digital asset has outperformed as well. This is one primary reason why I expect crypto assets to produce strong uncorrelated returns tied to their own idiosyncratic growth driver over the long run. The “Crypto is Digital Gold” investment thesis isn’t about replacing the precious yellow metal as an innately valuable asset; it’s about investing in assets that will be valuable for their utility as a new form of oil.

Market Recommendations: Crypto markets have been choppy over the prior week, but prices have finished approximately where we left them, and our investing recommendations remain unchanged as well. Longer period of consolidation like this usually result in strong directional moves when they do break out. We recommend investors continue following the tactical approach we’ve laid out in prior weeks notes and advise against chasing potentially false moves. Our outlook for Bitcoin over the next 12 months and recommended investment from the prior weeks and are shown below:

Investment Themes

1. Remain OW crypto assets vs. market portfolio
2. Remain OW large cap vs. small cap crypto assets
3. Remain OW defensive PoW vs. cyclical PoS crypto assets
4. Remain OW blue chip alts vs. Bitcoin as recovery confirms
5. Remain OW Ethereum vs. market crypto portfolio
6. Remain UW Ripple vs. market crypto portfolio

Market Analysis

While Bitcoin broke through its key resistance level of $7K on Thursday, it ultimately finished the week flat at around $6,880 as sharp sell offs on Monday erased prior day gains.

Bitcoin has seen strong performance on the month, up 11% after recovering from the March 12th sell-off. It remains in 5^th place among macro asset categories based on year to date performance. While Bitcoin’s status as a store of value asset remains open for debate, this week’s performance proves that oil is most certainly not a store of value asset. Oil futures underwent a steep sell off the past two days as the combination of expiring futures contracts, lack of demand, and lack of storage drove prices into negative territory. That’s right, oil prices went negative.  And if I hadn’t seen it happen, I’d be sure the return numbers below were an error, but they’re not. Very strange times.

Over the week, major crypto assets saw large gains on 4/16 offset by sharp sell offs on Sunday and Monday. Ethereum, was the best performing asset and was up 8.8% on the week, while Ripple was the worst.

The FS CryptoFX 40 outperformed all other size-based indices by 1% – 2% this week. Outperformance of the CryptoFX 40 was driven by strong performance from Tezos (up 10.5%), Monero (up 4.0%) and Caradano (up 3.0%). 

Fundamental Valuations

Bitcoin’s P/CMR valuation stood at 7.1x as of 4/20. This value is remains slightly below the metrics value from Mar-19 through present.

Bitcoin’s market cap to realized value (MV/RV) multiple was 1.2x as of 4/20.

The comp table for large cap crypto asset prices and fundamental valuations is shown below.

Valuation Methodology Description

The P/CMR ratio is a fundamental valuation method I invented in December 2017 that has historically been a strong predictor of price movements. It functions like a Price/Book (Crypto P/B) ratio by telling investors if a crypto asset is relatively cheap or expensive. It’s calculated by comparing the Market Cap to Cumulative Mining Revenue (Mkt Cap/CMR). The ratio can be calculated on a per coin basis (P/CMR) by adjusting the Mkt Cap and CMR by outstanding supply. Read more.

The MV/RV ratio is another method later developed that takes a similar approach but adjusts the denominator value based on the last time coins were moved. Read more.

The P/CMR and MV/RV metrics gives an approximate measure of unrealized profit, and therefore an investors incentive to sell or hold. The P/CMR ratio gives a measure closer to the absolute floor value of sunk costs for all investors while the MV/RV ratio gives the highest end of the range. Its best to take multiple approaches when valuing any asset. These two have been the best for crypto assets in my experience, and the answer probably lies in the middle.

Blockchain & Crypto Stocks

The table shows publicly traded blockchain and crypto related stocks, which offer a vehicle for investors who are constrained from owing underlying crypto assets themselves. We added The Bitcoin Fund this week. This investment vehicle was recently listed on the TSX and currently has a market cap of about $16 million.

Industry Insights

Last week, The Libra Association published v2.0 of its whitepaper which detailed major changes to its framework. In summary, there were four major developments:

1. Four, single-currency stablecoins were added in addition to the LBR libra reserve token. Support will initially be added for USD, EUR, GBP and SGD with plans to roll out to other currencies in the future. The paper also cited that the Libra association would look to discontinue said stablecoins in favor of CBDCS should their respective monetary authorities issue them.  

2. Further clarity on permitted wallet operators: The Libra association will be limiting its support for certain types of wallets. “Unhosted Wallets” which would drive the spread of the Libra network to financially underserved communities, will not be permitted for the time being.

3. Postponing the transition to a permissionless system: One of the major concerns raised by regulators was how the network would ensure compliance with KYC/AML regulations while maintaining a permissionless system. The short answer? The Libra Association agreed that this is, indeed, hard to accommodate and will be putting any plans to move to a fully permissionless system on hold.

4. Further details on what assets would be held in the reserve: Each single-currency stablecoin will be backed by a reserve of cash or cash-equivalents and “very short-term government securities” denominated in their respective domestic currencies. Additionally, more clarity was provided on what assets would compose the reserve for LBR, dubbed the “multicurrency coin”. The LBR token will be backed by a basket of some of the single-currency denominated stablecoins. Libra also conceded that it is open to and will likely delegate oversight and control over the basket weights to a group of regulators or central banks.

In combination, the changes provide some more clarity on what the Libra Association could actually look like. If there was any question as to how the Libra Association would navigate the regulatory landscape, the v2.0 whitepaper confirms that regulatory concerns will be top of mind going forward. Decentralization will continue to occupy the back seat.

Winners & Losers

Winner: Grayscale’s Q1 Digital Asset investment Report highlighted $504 million of total investment into Grayscale products during Q1. This quarterly raise is nearly double its previous quarterly record of $355 million in 3Q19. While some of this demand was likely driven by the so-called “premium arbitrage” opportunity for these products, $504 million is an impressive number, nonetheless. Read more here.

Loser: dForce, a decentralized lending platform, had its core product lendf.me product hacked resulting in misappropriation of about $25M. The good news? The attacker leaked important data about himself while stealing the funds and ultimately returned the full $25MM.

Financing Activity

Crypto Finance AG – The Switzerland based crypto asset manager raised $14.5MM in a Series B financing led by prominent Swiss investor Rainer-Marc Frey and Beijing-based private equity fund Lingfeng Capital. Read more.

BitGo – The Palo Alto based crypto custodian announced it will acquire tax management platform Lumina for an undisclosed sum. The transaction furthers the company’s strategy to become an all-in-one provider for the institutional crypto market.

Recent Research

Access Fundstrat’s recent crypto insights if you missed them by clicking below or visiting FS Insight.

• David Grider: subbing in for Tom this week: Tom’s Take on Crypto: What is the Investment Outlook for BTC and Cryptocurrencies?
• Robert Sluymer: Crypto Technical Analysis: Crypto rebounds stalling at resistance – ETHBTC remains noteworthy
• Ken Xuan: Crypto Quant: Benchmark Crypto Indices Weekly Performance Review
• David Grider: Digital Assets Weekly: April 14th, 2020