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SX Crypto Advisor
Profit from Digital Currency & Blockchain

Cabot SX Crypto Issue: August 16, 2022

Here are my latest thoughts on the stock market and crypto market, followed by some news on Ethereum…

  • With the S&P 500 back up to 4,200 — just 11% below the all-time-highs — we are officially coming out of the bear market. This has been our stance here at Cabot SX Crypto Advisor over the past several weeks. I am urging readers to begin to consider putting cash to work in the face of historic equity and crypto outflows.
  • July’s 0% month-over-month CPI inflation data was a great sign that pricing pressures are easing.

Cabot SX Crypto Issue: August 16, 2022

Here are my latest thoughts on the stock market and crypto market, followed by some news on Ethereum…

  • With the S&P 500 back up to 4,200 — just 11% below the all-time-highs — we are officially coming out of the bear market. This has been our stance here at Cabot SX Crypto Advisor over the past several weeks. I am urging readers to begin to consider putting cash to work in the face of historic equity and crypto outflows.
  • July’s 0% month-over-month CPI inflation data was a great sign that pricing pressures are easing.
  • Over the weekend, I entered a debate about the validity of crypto over the dinner table at a friendly gathering. This reminded me how important it is to ensure readers understand how cryptocurrencies operate – many people struggle with capturing the fundamentals.
  • Cryptocurrencies like Ethereum are economic incentives for transaction validation. Meaning, in exchange for peer-reviewing transaction data to be added to the blockchain, validators on the network (people with computers and computer science skills) earn crypto.
  • Cryptocurrency exchanges and easy-to-use software wallets like metamask have made it possible for traders to buy these cryptocurrencies.
  • This is where people often misunderstand the purpose behind them and see them only as speculative vehicles. When in fact, layer one blockchain platforms like Ethereum are in their nascent stages of becoming a platform operating system akin to the Apple app store.

ETH News

  • Ethereum is up over 65% this month. We continue to view this platform as best in class and is where we recommend putting your money, along with other ETH-based tokens including Polygon (MATIC) and Ethereum Name Service (ENS).
  • The final test run before the highly anticipated “Merge” event – the Goerli testnet – is a simulation of the actual Merge that will take place next month. This final test run was successful this past Wednesday. In our view, the transition for Ethereum from a PoW (Proof-of-Work) to PoS (Proof-of-Stake) system is bullish for the cryptocurrency, making the “Merge” an important date for your calendar.
  • To ensure this test was a success, we were watching carefully to see if block validation proceeded as planned.
  • Second, we monitored transaction activity, to see if users are filling up blocks. Blockchains sell blockspace.
  • With the success of the third and final Goerli testnet, that officially schedules the Merge of the Ethereum mainnet and the proof of stake Beacon chain for about five weeks away, on September 15-16.

The Merge

  • The event is one of the most significant catalysts in Ethereum history as it impacts the network on several fronts.
  • For instance, the Merge will significantly reduce Ethereum’s energy consumption, alleviating critics’ concerns around its environmental impact and making the asset more attractive to ESG-conscious institutional investors.
  • The Merge will also clear the path for other changes to Ethereum at the protocol level, such as proposer-builder separation. This helps democratize MEV (maximal extractable value) extraction by separating block production from block validation, as well as EIP-4844, which will reduce transaction costs for rollups by an order of magnitude.
  • Finally, the Merge will greatly increase the attractiveness of ETH the asset. ETH’s issuance will be cut by ~90%, likely making it deflationary, while also providing stakers with the ability to earn a yield on their holdings (Bankless).

Institutional Adoption

Blackrock, the world’s largest passive investment management firm, which has about $8.5 trillion in assets under management, recently announced a partnership with Coinbase that allows its institutional clients to buy crypto, starting with bitcoin. Blackrock will offer a private trust that gives their clients an opportunity to invest directly in Bitcoin (source: CNBC).

Regulatory Update

U.S. senators sent an open letter to the Acting Comptroller of the Office of the Comptroller of the Currency, asking that he rescind interpretative letters allowing banks to engage in crypto activities and explain how involved banks are becoming in crypto. The Senate Agriculture Committee chair and others introduced the Digital Commodities Consumer Protection Act of 2022. Among other things, the legislation clarifies that Bitcoin and Ether are commodities (as opposed to securities), which would place them under the jurisdiction of the CFTC; and it creates new categories of registration (including digital commodity brokers, digital commodity custodians, and digital commodity dealers, and so on).

Federal Deposit Insurance Corporation

The FDIC simultaneously released a fact sheet titled, “What the Public Needs to Know About FDIC Deposit Insurance and Crypto Companies,” and an advisory on “FDIC-Insured Institutions Regarding FDIC Deposit Insurance and Dealing with Crypto Companies”. The FDIC clarified what it perceives to be a principal point of confusion—that is, that the FDIC only pays deposit insurance after an insured bank fails, but does not protect non-banks’ customers against default, insolvency, or bankruptcy of any non-bank entity (including crypto custodians, exchanges, brokers, wallet providers, and neo-banks).

Securities and Exchange Commission

The SEC charged 11 individuals for their roles in creating and promoting Forsage, an allegedly fraudulent crypto pyramid and Ponzi scheme that raised more than $300 million from investors worldwide, including in the U.S. The SEC’s Complaint seeks injunctive relief, disgorgement, and civil penalties. Law firm Simpson Thacher & Bartlett published a useful article in Law360 explaining the Securities and Exchange Commission’s insider trading lawsuit that it brought against a former Coinbase product manager on July 21, 2022.

Now, on to our portfolios…

Crypto Portfolio

TickerInitial WeightPricePrice at RecPerformanceRating
ETH18.0%1,889.573,444.22-45.14%BUY A HALF
ENS7.00%14.5310.2242.17%BUY A HALF
MATIC7.00%0.950.67840.28%BUY A HALF

Ethereum (ETH)
Ethereum remains the industry leader, demonstrating high switching costs as projects continue to choose ETH to run their decentralized applications over competitors like Solana (SOL). ETH is currently undergoing a long-awaited network upgrade, moving from Proof-of-Work to Proof-of-Stake. In our view, this should act as a catalyst for the ETH price. Recommendation – BUY A HALF

Polygon (MATIC)
Polygon is a Layer Two scaling solution for the Ethereum network. Polygon helps to alleviate congestion and reduce latency and costs for running projects on ETH.

According to company reports, along with data from Alchemy, Polygon reported 6x growth over the past six months in the number of dApps building on its network. DApps are decentralized applications – crypto-based businesses that are building out some form of real-world use case.

Key Metrics

  • More than 19,000 decentralized applications are now on its network, a 500% increase from 3,000 dApps in October.
  • Polygon now serves over 8,000 monthly active teams, up from over 6,000 in January and just a few thousand in October.
  • Sixty-five percent of the teams were built entirely on Polygon, whereas 35% were built on Ethereum.
  • Processed over 3.4 billion total transactions.
  • 135 million unique user addresses
  • Over $5 billion in assets.

A key catalyst for Polygon adoption and acceleration has been partnerships –Polygon has forged ahead with industry leaders like Facebook (Meta), EY (consulting), and Alchemy (web3 infrastructure).

Since partnering with Alchemy, the number of Polygon apps has increased by more than 95x. Alchemy provides key support in web3 infrastructure and platform capabilities, working alongside Polygon to resolve and prevent problems as they occur at the developer level. This partnership has served as a valuable flywheel and competitive advantage for MATIC.

Turning to trading dynamics, more than 650,000 MATIC tokens have been removed from circulation since their recent network upgrade at the beginning of 2022. These key growth and trading metrics coupled with the recent MATIC price decline has made MATIC an attractive, long-term, risk-adjusted investment opportunity at today’s price level. Recommendation – BUY A HALF

Ethereum Name Service (ENS)
Ethereum Name Service (ENS) is a distributed, open, and extensible naming system based on the Ethereum blockchain. ENS converts human readable Ethereum addresses like john.eth into the machine-readable alphanumeric codes. The goal of Ethereum Name Service is to make the Ethereum-based web easier to access and comprehend for humans – like how the internet’s Domain Name Service (DNS) makes the internet more accessible. Like DNS, ENS also uses a system of dot-separated hierarchical names called domains with domain owners fully controlling their subdomains (Source: CoinMarketCap). Recommendation – BUY A HALF

Equity Portfolio

TickerInitial WeightPricePrice at RecPerformanceRating
Proshares Strategy Bitcoin ETF (BITO)2.50%14.7925.93-42.96%BUY A QUARTER
Arista Networks (ANET)2.50%128.74105.0022.61%BUY A QUARTER
Nvidia (NVDA)2.50%190.32188.201.13%BUY A QUARTER
Okta Inc. (OKTA)2.50%107.119512.75%BUY A HALF
Block Inc. (SQ)86.71WATCH
Concord Acquisition (CND)10.01WATCH
CrowdStrike (CRWD)201.82WATCH
Galaxy Digital (GLXY.TO)8.84(CAD)WATCH
Proshares Short Bitcoin ETF (BITI)32.59WATCH
Unity (U)54.30WATCH

After the company’s most recent earnings release, we published a BUY rating on Okta, Inc. (OKTA). OKTA delivered an outstanding quarter during a difficult macro environment, raising their expected 2022 guidance. This is exactly the type of company that we look for. Let’s dig into what the company does and why they are well positioned to benefit from increasing digital trends.

OKTA offers cloud-based digital network management software. The company is the market leader in identity management, meaning they offer the best way to ensure secure digital interactions with employees and customers. They are the market leader in multi-factor authentication services, single-sign-on, API management, and onboarding for thousands of companies worldwide.

This software is essential to how large companies today operate, thus making it increasingly difficult to cut back on spending in areas like enterprise software where Okta, Inc. resides. Enterprise “software as a service” (SaaS) business models are sticky, generating recurring annual subscription revenue, offering a great lens into the future by measuring key metrics like remaining performance obligations to gain insights into expectations of future performance.

OKTA continues to increase both revenue and profitability at a significant pace. Despite macro headwinds, the company is still seeing significant demand for their software. As a result, we are BUYING A HALF and expect the total portfolio weighting to be 10% of the Cabot SX Crypto Equity Portfolio.

Nvidia Corporation (NVDA)
NVDA is an American multinational technology company based in Santa Clara, California. The company designs software and graphic processing units (GPUs) for high performance computing, artificial intelligence, and gaming. In our view, NVDA is well positioned to benefit from continued cryptocurrency adoption, as well as global cloud-based commerce. NVDA is the global leading fabless semiconductor designer for these applications. Recommendation – BUY A QUARTER

ProShares Bitcoin Strategy ETF (BITO)
Bitcoin is digital property. BTC is quickly becoming the reserve currency of the digital era, as other DeFi protocols, traditional companies, and institutional investors continue to purchase Bitcoin to serve both as a form of collateral and a store of wealth. The inherent properties of BTC make it a highly desirable asset in today’s period of high inflation. BTC has 1/10th the market capitalization of gold.

Fidelity recently announced that they are adding the ability to purchase Bitcoin in 401(k) accounts. This is a significant move by the industry giant. Currently, 23,000 companies use Fidelity to administer their retirement plans. This is extremely bullish for the crypto asset class, as current investor exposure to BTC is less than 5%.

In our view, the easiest and best way to gain exposure to BTC is through BITO in a traditional brokerage account. Recommendation – BUY A QUARTER

Arista Networks (ANET)
Arista Network designs and sells multilayer network switches to deliver software-defined networking for large datacenter, cloud computing, and high-performance computing environments. ANET is positioned to benefit from workloads transitioning to the cloud. Acceleration in the digital economy, partially powered by increasing web3 and cryptocurrency adoption, will benefit Arista.

According to the IDC 2021 Report, 200G-400G switches are growing at 70% due to hyperscale and cloud providers continuing to build out larger data center footprints. Companies have increasingly shifted workloads from on-premise data centers onto the cloud, utilizing primarily AWS, Azure, or Google as server providers. Data growth has been exponential and as a result companies are looking for scalable solutions to reduce internal dependency on hardware update cycles. However, companies still prefer to have infrastructure on premise within their own data centers for security, data governance, and lower latency. This is often performed through the AWS Outposts solution and requires switching devices like the ones that Arista provides. As early as 2018, there has been a push to 400G infrastructure to increase network speed and performance. Recommendation – BUY A QUARTER

Watch List

CrowdStrike (CRWD) – end-to-end, cloud-based cyber security company offering services to three quarters of the Fortune 500.|
ProShares Short Bitcoin ETF (BITI) – useful as a future hedge against our long portfolio.
Block, Inc. (SQ) – peer-to-peer Cash App solution provider that allows participants to send currencies including crypto. SQ also has a B2B-focused payment processing engine.
Concord Acquisition (CND) – Circle, now the world’s most trusted and audited digital dollar.
Helium (HNT) – decentralized blockchain network for Internet of Things devices (IoT). Users who operate Helium hotspots mine and earn rewards in Helium’s native cryptocurrency, HNT.
Avalanche (AVAX) – competing layer one blockchain solution to ETH with 6,500 transactions-per-second capacity.
Bored Ape Yacht Club (APE) – token for the growing community of creative digital content, like Pixar.

The next Cabot SX Crypto Advisor issue will be published on September 20, 2022.

About the Analyst

Ian Beaudoin

Ian Beaudoin is Chief Analyst of Cabot SX Crypto Advisor.

Ian provides deep insights into emerging disruptive technologies, covering cryptocurrency, blockchain, play-to-earn gaming, fintech, and the venture ecosystem. He has independently invested in and traded cryptocurrencies, securities, and derivatives since 2015 and actively seeks to identify asymmetric investment opportunities in both public and private markets through fundamental research, event driven strategies, mean reversion, and arbitrage.

Ian also serves as the Senior Analyst at Hyperion Capital Partners.