Rate Expectations Moving Lower

Last week, we discussed how rate expectations were a barrier to crypto moving higher and that we anticipate continued non-recessionary but soft economic data will help spur flows. Fast forward to this week, and we have seen a cool manufacturing PMI, a soft JOLTS report, and a services PMI in which the price component was below market expectations. The remaining important data for this week includes non-farm payrolls and the unemployment rate on Friday.

There is clearly a new impulse of demand in this Goldilocks (slowing but non-recessionary economy plus disinflation) environment. As rate cuts slowly start to get priced back in, we can see the Coinbase premium moving higher.

Additionally, there have been massive inflows into spot Bitcoin ETFs, with nearly $900 million on Wednesday.

Stablecoin data has also turned positive, with the rolling 7-day change in aggregate stablecoin market cap moving conclusively higher.

This combination of lower rate expectations and improving market data suggests a more favorable environment for crypto assets in the near term.

STX Remains Compelling Beta Exposure to BTC

Back in November, we added STX to our core strategy due to several tailwinds: the increasing strength of the bull market, its high beta to Bitcoin, an intriguing narrative, and strong fundamentals. At that time, there was a growing DeFi ecosystem on Bitcoin in a post-Ordinals world, an addressable market for L2s indicated by lofty valuations in the ETH L2 space, an upcoming catalyst in the Nakamoto upgrade, and the reliable beta exposure that STX offers to BTC.

STX has appreciated over threefold since our recommendation, though it has taken a breather since its YTD peak in March. Upon reviewing our thesis, we find that most of the major points still hold true, including the catalyst aspect, as the Nakamoto upgrade was delayed until the end of August. This upgrade is expected to bring faster transactions, better scalability, and increased security to Stacks.

There are often gray areas when it comes to the Layer 2 designation. In our view, a true layer 2 fully leverages the security budget of its Layer 1. According to Stacks developers, the Nakamoto upgrade should allow for this. In April, the core developers identified the need for a more advanced signer resiliency/recovery system, leading to the tough decision to delay the Nakamoto activation by about eight weeks. Based on a recent blog post, the team seems on track to meet this timeline.

Amended Timeline:

• July 15th: Target date for code completion of the new signer resiliency features, addressing key resiliency issues.
• August 28th: New start date for Nakamoto activation, with enhanced features and thorough testing to ensure a smooth transition.
• +4 weeks post-activation: Rollout of sBTC on the mainnet, ensuring all critical components are in place and functioning as intended before final features are activated.

There is still potentially untapped speculative fervor around the Nakamoto upgrade. TVL data suggests continued investment of STX into emerging DeFi applications like StackingDAO, a liquid staking app, and Zest, a borrow/lend app, indicating a marginal source of demand for the token.

We do not want to cherry-pick data, though it is clear that on-chain activity has subsided since the beginning of this year, with active users and transactions trending lower. This subsidence is understandable as users on Stacks await the Nakamoto upgrade for faster execution, and many users are likely farming the new applications launched in recent months.

The most convincing case for doubling down on Stacks here is its proven reliability as beta exposure to BTC.

The beta of STX to BTC has increased since 2021, as evidenced by the relationship in weekly returns since 2023 and the increased R-squared.

The beta of STX to BTC is greater than that of ETH to BTC, likely due to each asset commanding different narratives and flow dynamics at given times.

In summary, we believe that should BTC break out to new ATH (which we think it will), then STX should run with it.

Bitcoin Mining and AI

This week, Core Scientific announced a landmark 12-year, $3.5 billion deal with CoreWeave to provide 200 megawatts of infrastructure to host CoreWeave’s AI operations. They plan to convert 500 MW of their Bitcoin mining capacity to HPC data centers over the next 3-4 years to support this deal and other AI/HPC customers. Although no specific revenue figures were provided, the CoreWeave deal alone could generate over $100 million in annual revenue for Core Scientific based on the $3.5 billion total. AI/HPC revenue is expected to become a major revenue stream for Core Scientific in the coming years as it diversifies from Bitcoin mining.

There were also reports that CoreWeave offered to buy CORZ at $5.75 per share. However, based on market pricing, it seems that the offer was not given much credence, and the material aspect was the hosting contract. Diversifying into HPC makes a lot of sense for Bitcoin miners. Goldman Sachs predicts that data centers will triple this decade.

The surge in demand for data center capacity has led to increased demand for hosting providers with the proper infrastructure and grid connection, as well as energy at an attractive price point – miners possess both.

Most publicly traded miners are sitting on power purchase agreements and data center facilities that can be leveraged by those with high-performance chips but lack the infrastructure to bring them online. Mining and hosting high-performance computing is not an entirely new concept for miners. For example, Iris Energy was discussing diversification into HPC back in 2020. However, until now, the market has not appreciated the opportunity, and miners have not pursued this strategy more intensely due to the bear market, which left many miners strapped for cash. Throughout the bull market, Bitcoin mining has been the more profitable business line.

Now that the market has noticed, it is worth highlighting the group of miners that we have identified as either pursuing or having already operationalized an AI/HPC strategy:

• Iris Energy (IREN) Iris Energy is reviving its high-performance computing (HPC) strategy alongside its Bitcoin mining operations. The company plans to leverage its existing and planned renewable energy data center infrastructure to host HPC and AI workloads, driven by growing market demand for clean computing power. This HPC strategy has started generating revenue through deals like providing 248 NVIDIA H100 GPUs for AI startup Poolside, contributing $0.6 million in AI Cloud Services revenue in Q3 FY24. However, the financial impact remains relatively small compared to IREN’s core Bitcoin mining business, which generated $53.4 million in revenue for the same quarter.
• TeraWulf (WULF), previously focused on Bitcoin mining, is now expanding into the high-performance computing (HPC) and AI markets. They have already deployed GPU systems at their Lake Mariner facility to support generative AI applications. For 2024, TeraWulf has committed resources to build out larger HPC/AI infrastructure capable of hosting thousands of GPUs, aiming to offer AI/HPC services as a new revenue stream alongside their mining operations. Their strategy capitalizes on the growing demand for GPU compute power in the generative AI space.
• Bit Digital (BTBT 2.70% ) has launched a new business line called Bit Digital AI to offer specialized cloud infrastructure services for GPU-accelerated AI workloads like large language models. They have secured a major customer contract worth up to $257 million over 1-3 years to provide rental services for up to 4,096 GPUs, with plans to double this capacity. This AI business is expected to significantly boost Bit Digital’s revenue, potentially reaching an annualized run-rate of around $100 million, and provide a non-correlated revenue stream complementing their core Bitcoin mining operations. The HPC/AI strategy allows Bit Digital to diversify beyond just crypto mining, capitalize on growing generative AI demand, and establish a more durable business model.
• Hut 8 (HUT -0.13% ) has launched a new GPU-as-a-service vertical targeting AI applications, with forecasted annual revenue of around $20 million starting in late 2024. The company is also expanding its high-performance computing and cloud services segment to handle more AI/HPC workloads beyond just Bitcoin mining. These new AI/HPC business lines allow Hut 8 to diversify its revenue streams, reduce reliance on volatile crypto mining, and establish a more durable business model capitalizing on growing demand for AI and cloud computing services.
• Bitdeer (BTDR) is launching “Bitdeer AI Cloud,” a new cloud service powered by NVIDIA’s DGX SuperPOD systems, to offer powerful GPU-accelerated computing capabilities for AI workloads like generative AI and large language models. As a Preferred Cloud Service Provider in the NVIDIA Partner Network, Bitdeer aims to cater to the surging demand for cloud-based AI computing power in Asia through this strategic initiative. This AI cloud vertical represents a key diversification move for Bitdeer to establish new revenue streams complementing their core Bitcoin mining operations by leveraging their expertise in global data centers and high-performance computing.
• Hive Blockchain Technologies (HIVE -2.74% ) is strategically pivoting towards AI and high-performance computing (HPC) by leveraging existing third-party data centers to host and deploy a fleet of GPUs. They have acquired high-end hardware, including NVIDIA A100 GPUs and Cerebras AI chips, to enhance their AI compute capabilities. This approach aims to diversify their revenue streams beyond Bitcoin mining, with their HPC services generating $1.13 million in Q4 2023. Hive’s strategy focuses on using advanced GPU infrastructure to offer AI, machine learning, data analytics, and rendering services, capitalizing on the growing demand for AI and HPC solutions.

With the apparent emergence of overlapping bullish themes – AI and Bitcoin, we believe it’s right to add the names above (CORZ, WULF, BTDR, IREN, BTBT, HUT, HIVE) to our crypto equities basket. It is worth noting that those who own WGMI already have relatively significant exposure to these names, as they comprise 46% of the WGMI basket as of market open on Thursday.

Miner Trade Strategy

Aside from the AI theme, we think that one should not overthink the miners trade here. As we have noted before, miners have a similar relationship to Bitcoin as small caps have to the S&P 500.

Miners are inherently more sensitive to rates given their cost of capital, and therefore broadly underperform BTC when rates are rising.

This is not to say that there aren’t other reasons that certain miners have underperformed. It is no secret that the entire cohort has diluted shareholders quite substantially.

However, should BTC move higher in the near term, and rates continue rolling over, miners should outperform.

Adding HOOD to Crypto Equities Basket

Robinhood has announced its acquisition of the U.K.-based crypto exchange Bitstamp for $200 million in cash, with the deal expected to close in the first half of 2025. This move aims to expand Robinhood’s global crypto presence and attract institutional clients by integrating Bitstamp’s established exchange, staking, and lending products. The acquisition is anticipated to enhance Robinhood’s crypto offerings, potentially aligning its price action more closely with crypto market trends. By leveraging Bitstamp’s robust platform and regulatory compliance, Robinhood positions itself to compete more effectively in the international crypto exchange market, challenging other major players like Coinbase.

Below, we map out the pro forma topline numbers for Robinhood with the Bitstamp acquisition. We took quarterly volume numbers from CoinGecko and applied a take rate of 17 basis points, roughly 50% of the fees charged by Coinbase.

A couple of things to note:

• Robinhood’s crypto-derived revenue has been climbing.
• Our estimates for Bitstamp’s revenue would make crypto almost half of Robinhood’s transaction-based revenues. This is quite impressive and likely pulls their share price performance closer to crypto.

Previously, at 11% and 19%, we did not view HOOD as an appropriate source of crypto beta. However, given recent growth coupled with our estimates of what Bitstamp would add to Robinhood’s crypto presence, we think it’s right to consider adding HOOD as part of one’s crypto equities basket.

Core Strategy

Our view remains that early May’s QT taper and dovish commentary from the Fed marked a local top in the DXY and suggests better liquidity conditions going forward, which is favorable for crypto. SOL remains a preferred avenue for large cap beta, but ETH ETF approval brings ETH back into the equation. Look for continued crypto equity outperformance on a breakdown in rates.

A brief summary of the theses behind each component of the Core Strategy:

• Bitcoin (BTC 1.27% ): Censorship-resistant money that serves as a liquidity sink in developed markets and base layer money in the global south. It is provably decentralized and can be used to build out a more robust, green energy grid throughout the globe.
• Ethereum (ETH 2.49% ): Distributed internet architecture whose proven use cases include the distribution of fiat currencies on global rails and a venue through which one can exchange digital assets globally in a permissionless fashion. Potential to supplant rent-seeking intermediaries via immutable smart contracts and digital ownership rights.
• Solana (SOL 9.12% ): The monolithic competitor to Ethereum’s layered strategy. High throughput L1 relying on the eventual reduction in hardware costs to scale. Goal is to be a global shared state operating at the speed of light.
• Optimism (OP 3.13% ): As ETH looks to scale in layers, more applications and users will migrate to layer 2 networks. OP Stack is the most popular development platform for other L2s. Outside of ARB, which is excluded due to the recent inflation of token supply, Optimism has garnered the most traction compared to other L2s with a liquid token. Offers beta exposure to ETH.
• Stacks (STX -2.18% ): A bet on the development of a bitcoin economy. Key catalysts include the bitcoin halving and the Nakamoto upgrade in Q2 2024.
• Helium (HNT 7.60% ): DePIN is an emerging theme in crypto that we think is bound to make waves in traditional markets. Helium is a leader in this category and has shown signs of early traction in its 5G product. Helium also adds Solana beta to the portfolio.
• Immutable X (IMX) & Ronin (RON N/A% ): Both networks have displayed impressive traction and are poised to be the category leaders among crypto gaming platforms.
• MakerDAO (MKR 10.41% ): MakerDAO stands as an integral piece of the DeFi landscape, offering a decentralized alternative to traditional banking with its stablecoin, DAI. With the anticipated Endgame upgrade, expanding product offerings, and increasing integration with traditional financial markets, MakerDAO is well-positioned to achieve outsized adoption and growth, making MKR a compelling ETH beta opportunity in the intermediate term.

Active Trades

• Dogecoin (DOGE 5.37% ): We think that broadly animal spirits are still working their way back into the market. DOGE is only slightly above its 200-day SMA relative to BTC.