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Building a crypto portfolio is hard. It’s a constant battle between returns, risk, and FOMO. Do I have enough coins? Do I have enough of the right coins? Is a high Bitcoin allocation a cop-out? Should I be risking up on sh*tcoins to get those sweet triple digit multiples? (The answer to this one is almost always no).
Every week I discuss my portfolio in the rundown (if you skip this section, don’t), but I’ve never explained why I own what I own or the thesis that drives those decision. So today that changes – this edition will be a deep-dive on my investment thesis, investments, and target multiples.
My Investment Thesis
Computing technology evolves fundamentally every one and a half decades. We went to the moon on mainframes in the 60s. We personally computed in the 70s. The world was brought together via the web in the 90s. Our pockets got smart with phones in the 2000s, and in 2008 Satoshi Nakamoto introduced blockchain computing with Bitcoin.
Blockchain computing broke the mold. Unlike the centralized computing methods of before, blockchain is built on trust between users, developers, and the code. This trust is organically derived from game-theoretical and mathematical properties of the system – not the trustworthiness of participants.
Crypto represents an unprecedented intersection of computing, finance, economics, politics, and psychology. A system where the participant is the system and the rules are determined by math, not by an arbitrary governing body.
This system will fundamentally change money, payments, stores of value, contracting, and finance, eventually driving us towards Web 3.0 where the global network of everything will not be controlled by gatekeepers at the center but by participants at the nodes.
I invest my money across the crypto-sphere to take part in this revolution using the following principles:
Long-term patience. I’ve been investing in crypto assets since 2017, while I may engage in occasional rebalancing I aim to “hodl” these assets for 10+ years.
Deep impact. I look for crypto projects that will provide meaningful strong impact and change to not only the crypto ecosystem but the broader world. Change happens at the margin and that margin is billions of users.
Flexibility. I am agnostic to stage, development, funding, or asset type. If it gains me exposure to the underlying technology, I’ll buy it.
People first. Great things are built by great teams, while software will consume the world it still takes humans to write it. I invest in only the highest quality teams in crypto.
Crypto’s development has been marked by waves since 2008. With every wave the technology gains promoters and detractors but net it moves ahead. While these waves are likely to get bigger and choppier, the underlying principles of crypto will remain the same. These principles will drive my investing for years to come.
The King needs no introduction. Bitcoin is the most recent development in the history of sound money. Scarce, secure, immutable, and easily transferred Bitcoin will become the gold of the digital era.
Currently the market cap of gold is $10T. Bitcoin will eventually eat most of this if not all of it. At a $10T market cap 1 bitcoin will be worth $476,000, just over a 10x from current levels.
The computer network for the decentralized world. If the King will store the value, Ethereum will handle everything else. Like the internet in the 90s, the possibilities for this network are endless – but the most promising areas are around financial transactions and contracts.
The global financial markets market cap is about $300T with legal services coming in at another $800B. Through DeFi, Dapps, and smart contracts Ethereum will likely be responsible for a large share of these combined market caps. This implies a multiple somewhere in the 100-1000x range from current levels.
The link (pun intended) to the legacy world. Smart contracts, Dapps, and DeFi are only as smart as the data fed to them. Most of the data in the world does not live natively on the blockchain. Chainlink interfaces will external data sources and pairs them with the blockchain, this is called the Oracle function. For Ethereum to take over financial markets and contracts it will need legacy financial and legal data – Chainlink will be the main delivery mechanism for this information.
In the near term the protocol will likely be valued at some percentage of Ethereum’s market cap with most of this value coming from DeFi activity. In the long run, Chainlink is blockchain agnostic meaning its fate is not tied to a specific network should Ethereum fail to win out (see Cardano).
A better Ethereum. Cardano’s team has taken the inverse approach to Ethereum’s developers. Rather than building in production, Cardano has thoughtfully laid out their blockchain over time carefully addressing Ethereum’s main weaknesses. They have built scaling, trust, and regulation in the foundation of the project. Cardano will be able do everything Ethereum can do but will do it faster and at a bigger scale.
It’s possible this project could take a large share of Ethereum’s market cap or win out completely. Near term this protocol will be valued on its execution against the roadmap and movement towards a fully functional product. If Cardano is unable to attract developers to build on top of it at a similar scale as Ethereum it will likely fail or underperform.
Decentralized lending. Aave is an open source and non-custodial protocol enabling lending between crypto pairs. A leader in the DeFi segment, Aave is currently generating $2.1M in weekly fees for its lenders and users.
DeFi’s TAM at the high end is the entire derivatives market ($1Q, yes that’s quadrillion). Its Servicable-Obtainable-Market (SOM) is closer to $300T – this is the slice of the derivatives market that can be serviced by a protocol or product. The current market cap of DeFi is $35B – that implies a 1000x increase if DeFi were to penetrate and convert 100% of the SOM. Aave, like most of DeFi, is powered by Chainlink.
Open source courts. Kleros is built on Ethereum and is designed to fairly adjudicate disputes. This can be applied to ecommerce transactions, smart contracts, regular contracts – anywhere a transaction occurs that can be disputed.
In 2020, $270B in transaction value occurred on Ethereum – Kleros estimates a 3-5% dispute rate resulting in $13B in disputed value. With transaction value rising exponentially Kleros offers a way to solve blockchain disputes transparently on the blockchain. As DeFi explodes this use case will only become more important. Long term, Kleros’s value will likely function as a percentage of resolution value. At the moment this is a bonafide moonshot as Kleros currently has a market cap of $80M.
The Portfolio Rundown
Chainlink, Cardano, and Ethereum are the winners of this week all with excellent moves upward. Aave is rocketing upward as well. Link’s chart continues to look great:
My altcoins continue to eat away at Bitcoin’s dominance in the portfolio – a product of Bitcoin stalling out around $35k and the beginning of what will likely be the 2021 altseason. I expect this trend to continue in the near term.
I have been impressed with Bitcoin’s two recent tests of $30k, both were rejected as the price trended back towards $35k. This indicates strong support and while the sideways trading isn’t exciting, it means Bitcoin is consolidating support in this range. The days of $20k Bitcoin are likely history.
You’ll also notice my USD allocation is now zero. Given the setup of alts I have risked up to take advantage of the movement. Should we see a bonafide altseason (2017-style with double digit multiples) I’ll begin start stacking cash again in the 5-10% range.
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Nothing in this email is intended to serve as financial advice. Do your own research.