DAIM Issue 27 - Diving Beyond Bitcoin And Ethereum

October 2, 2023
  1. Forecast
  2. Evaluating Digital Assets
  3. Solana
  4. Noteworthy

    What’s Going On In This Issue?

  5. Forecast - As we close the books on September we wrap up a rather uneventful summer. Bitcoin stayed in the $26K-$30K range through the duration of the summer months. Volume on exchanges is at 4-year lows. Interest in crypto seems to be tied with broader stock market developments as participants patiently wait to see how things play out. The latest Fed decision to hold rates steady, and subsequent comments from Chairman Powell, seem to put us in higher for longer territory. Bitcoin didn’t perform well when rates increased dramatically in a short time period. We’re confident that it can thrive in a high-rate environment, as long as the volatility is muted. The other thing to keep an eye out for is ETF applications. The threat of a government shutdown allowed the SEC to push back their deadlines. We still think we are on track for multiple approvals in Q1-Q2 2024, but we know it won’t happen in October. Our peak Bitcoin price projection for the remainder of the year lies within the range of $33,000 to $36,000.
  1. Evaluating Digital Assets - In its short history, the Crypto market has been dominated by two assets, Bitcoin and Ethereum. Making a long-term investment case for any assets outside of these two has been difficult. Every halving cycle has brought a bull run and, subsequently, hopium for a slew of altcoins. So far the success of those altcoins hasn't been enough to turn the big 2 into a big 3 or more. Just because something hasn’t happened yet does not mean it never will. We are constantly looking for new projects that could help diversify our model portfolio and deliver clients long-term alpha that will help them reach their investment goals. Our criteria for allocating away from BTC is stringent. Some of the main things we look at are tokenomics, liquidity on exchanges, and future projections.Tokenomics - At a basic level, tokenomics represents how and to whom tokens are distributed and what their use case is. It is important to pay attention to how many tokens were created, how many the founders and developers kept, what is the inflation rate of the token issuance, and what purpose it serves. The distribution of tokens is very important. Many projects distribute only a fraction of the token supply and keep the majority in locked wallets that are only accessible to founders and developers. When the project pumps the tokens are magically unlocked and dumped on retail investors. If a project is fully distributed or the distribution is tied to a mechanism like Bitcoin’s Proof of Work (PoW) it makes the fundamentals of the project much stronger. The more transparency there is in token distribution the better the project. In the same vein, even if a token has a fair distribution it is important to see what percentage of the total supply is owned by the top wallets. Whales could buy up the token supply and manipulate the price to pump so that they can dump on retail investors. If the top 10 wallets hold 80% of the tokens then your holdings are at the mercy of a select few market participants. Then there is token utility. We are in the nascent stage of crypto so a lot of perceived utility is abstract at the moment. Is Bitcoin peer-to-peer digital cash or simply a store of value like digital gold? While you could argue the utility of any token there are some that are created explicitly to capitalize on hype. Meme coins fall into this category. They are unabashedly created as a joke with the hopes that hype will drive the token price. For every 1 investor who makes a fortune on these tokens, there are thousands more who lose a substantial amount.

    Liquidity     - The ability to transact your token at its quoted price is very important. If a token is thinly traded and you are trying to buy or sell a large amount of it, you could materially move the price in a direction that eliminates all of your alpha. A lot of the best-performing small-cap cryptos not only have little trading volume, but most of it can be on decentralized exchanges that use their own liquidity. Using these platforms can lead to slippage of 10% or more. For example, you think you are selling a token at $1 but it ends up executing at $0.90. That’s a material difference. When we look to invest in a project it needs to primarily trade on large centralized exchanges and have a volume large enough to easily accommodate a buy or sell in the millions of dollars with little slippage.Future Projections - What does the future of this project look like? It’s easy to say that you want to invest in something because the price is going to go up, but it’s better to have concrete reasoning. Some crypto projects, like Ethereum, have defined roadmaps laid out by their leaders. Others, like Bitcoin, have discrete events that are known and can be modeled to determine the impact on price. In Bitcoin’s case, we have impending spot ETFs. We think they will be here by Q1-Q2 2024. These instruments will increase demand for spot Bitcoin (initially at least) and could usher in a new wave of crypto adoption that would flow into other projects as well. A basic tenet of valuing traditional stocks is to discount future cash flows to find the present value of the company. While it might feel cool to live in the moment and yolo into meme coins, we need tangible future events that we can assign value to in order to determine if the project currently makes sense for us and our clients.These are just the main factors we use to evaluate a project. Our diligence is intense and it is for that reason that we have only held Bitcoin and Ethereum to date. We’d like to add more projects to our portfolio but if we can’t make a long-term investment case, we won’t buy it.

     

  2. Solana - One project we have been looking at is Solana. Solana was founded in 2018, and the token officially launched in 2020. During the 2021 bull run it garnered a lot of hype as an “Ethereum killer”. It also had some pretty big backers from SBF to Multicoin. It rode the hype to a peak value of $250 per token and an overall market capitalization of $100B. While the fun didn’t last, the project isn’t dead and we think there could be some opportunity down the road to reclaim some of its success.So what sets Solana apart? First, it utilizes a unique consensus mechanism called Proof of History (PoH) in conjunction with the traditional Proof of Stake (PoS) consensus mechanism. PoH essentially adds a timestamp to each transaction as part of the hashing algorithm. This gives a defined sequencing that streamlines the validating process. This combined with PoS enables Solana to process a high volume of transactions at lightning-fast speeds, often surpassing thousands of transactions per second. This scalability not only ensures rapid confirmation times but also makes Solana an ideal choice for decentralized applications (DApps) and DeFi platforms that require near-instantaneous transaction processing.Furthermore, Solana boasts impressively low transaction fees. The network's efficiency and scalability result in minimal fees, making it an attractive option for users who are frustrated by the high transaction costs associated with other blockchain networks like Ethereum. This cost-effectiveness is particularly appealing for microtransactions and enables developers to build more accessible and user-friendly applications on the Solana blockchain.One of the main drawbacks of the project is, coincidentally, one of the reasons it is so cheap and fast. The project is highly centralized. The requirements to run a full node and validate transactions are extremely high to the point where only a few entities can afford to run machines that possess the computing power to act as a validator. This gives a lot of control to a few validators. One downside of this is that the network can be more prone to shut down if a few validators are offline. This has happened in the past. However, Solana is making efforts to further decentralize.

    Overall, Solana's scalability and affordability make it a promising contender in the cryptocurrency space, despite its issues. It remains a viable alternative to the Ethereum network and when activity picks up during the next bull run it could take considerable market share from ETH as a faster and more cost-effective option.

  3. Noteworthy - DAIM is proud to sponsor the No Double Bogies Foundation’s second annual golf tournament on October 16th. If you enjoy golf and would like to support this great event you can sign up here.If you are a highly skilled professional in Orange County, we will be speaking at a lunch and learn presented by Impactful Resources.  We will be focusing on employer-sponsored 401k plans with spot Bitcoin, but other important non-crypto topics will be covered as well. If you are interested in attending email us at [email protected] you will be in SoCal December 3rd-5th we are a sponsor for the 2023 Alternative Investing Summit presented by the Opal Group. It’s a great opportunity for institutional allocators to speak to managers and learn about innovative investment strategies. If you’re looking to attend reach out to us!Bryan recently appeared on the Brave New Coin podcast. Give it a listen here.

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