Market Overview
In our view, the best, quality assets bottomed last week. After months of heavy selling across a myriad of asset classes, BITO is up 10% today on heavy volume. We reiterate this ETF as a BUY and feel this is an attractive entry point to own Bitcoin.
In the coming months, we expect to be more aggressive in our portfolio allocation, gaining exposure to high-quality U.S. equities and crypto assets. The multi-month decline in prices have increased the expected return of these assets.
Today is a favorable time to begin to put cash to work. As a result, we are opening a position in Nvidia and adding the stock to our portfolio. Finally, we have added several new names to our watch list and will be releasing comprehensive coverage of several new companies and cryptocurrencies in the upcoming report.
New Investment Recommendation- NVDA
We have been waiting for the quarterly earnings report from Nvidia (NVDA). The results did not disappoint, with the company posting over 80% growth in sales for their datacenter chips. These large datacenters power the digital acceleration to web-based enterprise using data in “the cloud.” NVDA is the market leader in the production of these semiconductors. Semiconductors are powering the global economy today and are comparable to the new oil. As a result, we are BUYING A QUARTER and expect the total portfolio weighting to be 10% of the Cabot SX Crypto Equity Portfolio.
NVDA continues to increase both revenue and profitability at a significant pace. Despite macro headwinds, the company is still seeing significant demand for their proprietary GPUs. These graphics processors are used for applications such as cloud software, gaming, and visualization.
Key Catalysts:
- NVDA generated $8.29 billion of revenue vs estimates of $8.11 billion and $1.36 of adjusted earnings per share vs. $1.29 expected (Source: Refinitiv, CNBC).
- Nvidia said its board has authorized an additional $15 billion in share buybacks through the end of next year. It spent $2.1 billion on share buybacks and dividends in the first quarter. NVDA thinks their stock is undervalued; we do too.
- The termination of their merger with ARM will free up capital in the long run to continue to buy back stock.
- Its total sales were up 46% year over year, and its core businesses of data center and gaming sales both grew during the quarter.
- Nvidia’s datacenter business grew 83% annually to $3.75 billion, surpassing the company’s core gaming business, which sells graphics cards for playing advanced 3D games, which grew 31% annually to $3.62 billion.
Portfolio Update
We are now beginning to increase exposure to equities and crypto as valuations have declined, making expected future returns higher on a risk adjusted basis. We are currently recommending only a handful of high-quality assets that we expect to outperform the broader markets over a longer horizon.
For our crypto “pure play” portfolio, we are currently offering recommendations to begin positions in Ethereum (ETH), Polygon (MATIC), and Ethereum Naming Service (ENS). These positions are largely predicated on the continued success of the Ethereum network. Ethereum is the global, industry-leading Layer One blockchain solution for distributed computing projects.
Ethereum enables creators to build and engage in digital commerce through the use of smart contracts, a technology created by Ethereum to allow for blockchain-based transactions to take place at scale. Ethereum continues to dominate all other blockchain projects in terms of fees generated on the network (revenue proxy) and total engagement. ERC-20 is the industry standard for tokenized assets; as the world becomes increasingly digital, more people have turned to use the Ethereum network.
Crypto Portfolio
Ethereum (ETH)
Ethereum is continuing to experience growth in key metrics like users, transactions, and fees generated on the network. Ethereum network transaction volume is increasing as more projects continue to build on the platform, attracting more users. Ethereum remains the industry leader, demonstrating high switching costs, as projects continue to choose ETH to run their decentralized applications. Recommendation – BUY A QUARTER
Ethereum Name Service (ENS)
Ethereum Name Service (ENS) aims to make it easier for users to operate on Ethereum. ENS is similar to GoDaddy, allowing investors to purchase a domain name for their public address and web address. ENS aims to become the go-to naming protocol by making web3 usernames that can be utilized across multiple blockchain networks over time. This process is what many describe as interoperability – moving across blockchains (for example, Ethereum blockchain and Bitcoin blockchain). These domains can be bought and sold across the blockchain!
Users and businesses are used to traditional web addresses. Users of blockchain technology will likely prefer what they already know instead of having to utilize a long phrase of letters and numbers. ENS will help to overcome this friction and improve the user experience.
Companies are increasingly beginning to offer “sign in with Ethereum.” ENS is helping improve this authentication process for companies.
Valuation
ENS is now trading at a 7.6x price/sales ratio, well below its historical average and the historical multiple for software, which often trades around 20x P/S. In our view, today represents an attractive entry point for ENS token (Source: Dune Analytics).
The ENS governance token (crypto), created on the Ethereum blockchain, enables participants to propose changes within the organization, much like voting rights are afforded to members of a traditional company board.
ENS has a low supply of 100 million tokens, making it an attractive investment if adoption continues to increase – buying pressure will move the price of ENS quickly. Recommendation – BUY A HALF (of total intended position)
Polygon (MATIC)
Ernst & Young, a member of the “big four” public accounting firms currently auditing numerous public companies, is working with Polygon on Project Nightfall. They are aiming to make some of their clients’ Ethereum information private, which could be more suitable for large companies’ specific use cases. Due to competitive advantage, many companies do not desire their information posted to a public blockchain. EY is using Polygon to help with this large project that could apply to things like, supply chain management, NFT marketplaces, and aims to be finished with the project by 2023. This could give EY an advantage over competitors such as Deloitte, in their ability to service companies looking to gain exposure to web3.
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.
Key Metrics
- More than 19,000 decentralized applications 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.
- 65% 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 Platforms (FB), 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, over 650k 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 QUARTER
| Ticker | Original Weight | Price | Price at Rec | Performance | Rating |
| ETH | 15.0% | 1,982.92 | 3,444.22 | -42.43% | BUY A QUARTER |
| ENS | 2.50% | 12.40 | 10.22 | 21.33% | BUY A HALF |
| MATIC | 1.25% | 0.67 | 0.678 | -1.18% | BUY A QUARTER |
| APE | — | 6.93 | — | — | WATCH |
| SOL | — | 46.32 | — | — | WATCH |
| HNT | — | 9.30 | — | — | WATCH |
| STEPN | — | 1.18 | — | — | WATCH |
*Prices as of 12 pm ET
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 1/10 the market capitalization of gold.
Fidelity recently announced that they are adding the ability to purchase Bitcoin in 401k 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 under 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, high-performance computing environments. ANET is positioned to benefit form 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
| Ticker | Original Weight | Price | Price at Rec | Performance | Rating |
| Proshares Strategy Bitcoin ETF (BITO) | 2.5% | 19.84 | 25.93 | -23.49% | BUY A QUARTER |
| Arista Networks (ANET) | 2.5% | 103.4 | 105.00 | -1.52% | BUY A QUARTER |
| Nvidia (NVDA) | — | 188.20 | 188.20 | — | BUY A QUARTER |
| Concord Acquisition (CND) | — | 9.93 | — | — | WATCH |
| Galaxy Digital (GLXY.TO) | — | 8.11(CAD) | — | — | WATCH |
| Unity (U) | — | 40.89 | — | — | WATCH |
*Prices as of 12 pm ET
Watch List
Solana (SOL) – more centralized but powerful Layer One blockchain solution focused on gaming and NFT applications.
Bored Ape Yacht Club (APE) – ETH based Layer Two cryptocurrency used to power the Bored Ape Yacht Club’s emerging metaverse ecosystem.
STEPN (GMT) – play to earn cryptocurrency used to incentivize health and wellness.
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.