Digital Assets Weekly: March 27th 2020

Mar 30, 2020 • 8 Min Read

Portfolio Strategy

It continues to be our view that crypto markets are in the 2nd or 3rd innings of a prolonged recovery following their December 2018 bottom.

The earlier months sell off likely flushed a significant portion of leverage and speculative short term traders out of the ecosystem, as we discussed on our FS Insight Digital Assets call earlier this week. This dynamic bodes well for reducing market downside risks and positions crypto on firmer footing for a healthier recovery. At the same time, while global market prices are improving, the situation remains uncertain and that means crypto liquidity and prices are still fragile.

Overall, we have enough confidence to continue recommending investors maintain the increased exposure to crypto assets that we called for on March 13th. Then, valuations had just swiftly shifted down from levels we’d previously advised were reasonable long term but weren’t cheap, to levels we considered more attractive, and we urged investors to buy. Prices have since rebounded a bit, but valuations still look fairly cheap across the board, and while that doesn’t mean they can’t temporarily get cheaper, our view is we’re close, and the 12-month risk/reward looks attractive. If prices retrace to 6x P/CMR multiples or below, we’d advise longer-term investors to continue increasing exposure by accumulating more/less aggressively at cheaper/richer levels.

At the same time, we are still cautious enough to advise investors to gravitate within their crypto exposure towards safer holdings near-to-medium term until there’s greater certainty in the market turn around. We continue to be wary of taking on exposure to small cap names with higher betas that could fall harder and encounter liquidity trouble, as we discussed last week. Additionally, we recommend investors gravitate towards proof of work (PoW) names, which have shown to have more defensive staying power during prolonged downturns, as we discussed in our note a few weeks ago. As outlook visibility improves, investors should be ready to gradually shift towards slightly riskier but still relatively conservative blue-chip alternative coins to capture more of the upmarket cycle beta without taking on too much risk.


Looking past current uncertainty, our 12 months outlook ascribes an 80% chance Bitcoin finishes the year at or above $10k. We see several factors that could drive fundamental improvement alongside multiple expansion, that include 1) structural supply/demand dynamics, 2) central bank and government fiscal response, and 3) macro market influences.

Investment Themes

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

Market Analysis

The price of Bitcoin continued to recover from the earlier months sell off and finished the week heading into Friday up 8.9%.

Digital Assets Weekly: March 27th 2020

The positive weekly performance was in line with the general improvements we’ve seen in global asset prices as market fears over COVID-19 have modestly eased. Bitcoin remains the 5th best performing asset YTD behind US bonds.

Digital Assets Weekly: March 27th 2020

Large cap crypto assets largely moved in line over the course of the week with Bitcoin finishing as the best performer among the top 5.

Digital Assets Weekly: March 27th 2020

Bitcoin’s valuation continued to rise and now sits just above 7x P/CMR. It has rebound sharply after briefly touching a 4.9x P/CMR during the recent sell off we had that triggered a cascade of structural debt/margin deleveraging waves across the industry. For reference, the P/CMR ratio is a valuation method that I invented in December of 2017. It compares the market cap of a crypto asset to its cumulative mining revenue (Mkt Cap/CMR) and can also be adjusted and shown on a per coin basis (P/CMR).

Digital Assets Weekly: March 27th 2020

Bitcoin’s market cap to realized value (MV/RV) multiple sits at the lower end of its range as well after likewise rebounding off its lows during the recent sell off. For reference, the MV/RM ratio is another method that was later developed that takes a similar approach but adjusts the denominator value based on the last time coins were moved.

Digital Assets Weekly: March 27th 2020

The usefulness of both methods are similar in that they each give an approximate measure of unrealized profit, and therefore an investors incentive to sell. The P/CMR ratio gives you a measure closer to the absolute floor value of sunk costs for all investor’s while the MV/RV ratio gives you the highest end of the range. As with all asset valuations, the answer usually lies somewhere in the middle, and its best to look at prices through multiple lenses – I’ve found these two to be the best over the years.

Digital Assets Weekly: March 27th 2020

Valuations expanded modestly faster than prices on the week but remain reasonably cheap across the board compared to historical levels. Bitcoin continues to trade at a premium to its peers, which we believe is justified giving its market dominance and competitive advantages.

Digital Assets Weekly: March 27th 2020

The table above shows the major publicly traded blockchain and crypto related stocks. These assets offer a vehicle for investors who are looking to gain exposure to the asset class but are constrained from owning actual crypto assets themselves. Our advice to investors:

  • Avoid ETHE within the investment vehicles sector due to its 600%+ Price/NAV premium (P/B Ratio) which may greatly contract.
  • Cautious of investing in the mining sector until there’s greater certainty on how the recovery will play out. Miners are leveraged to crypto prices and may enter financial distress if markets experience prolonged depressed levels. These risks could be negatively amplified by the Bitcoin halvening reducing industry revenue and the potential for competitors to enter the market with more efficient mining equipment taking additional market share.

Winners & Losers

Winner: Bitmain the largest mining equipment hardware producer is the winner this week as its Bitmain S19 Antminers Sell Out but Won’t Ship Until May 11.

Loser: Low cap illiquid more speculative coins are the losers this week as Bitfinex delists 87 different market pairs due to low trading volume. We’ve warned investors to avoid these types of coins in last weeks note and suspect that the trend will continue.

Financing Activity

Coinmetrics – The Boston based crypto-asset data and infrastructure provider raised $6M in a Series A financing led by Highland Capital Partners with participation from FMR, LLC, Castle Island Ventures, Communitas Capital, Collaborative Fund, Avon Ventures, Raptor Group, Coinbase Ventures, and Digital Currency Group. Read more

Billon Group – UK based distributed ledger technology (DLT) for national currency and business documents raised $6m in Series A financing led by Billon CEO Wojtek Kostrzewa. Read more

Recent Research

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

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