Hello Everyone,
Before we get into it this week, I wanted to first let you know that I am looking to hire a Lead Analyst & Head of Content to work as my righthand while we build out our Edge small-cap portfolio.
Please read this description and let me know if you or someone you know could be a good fit!
Onto my thoughts…
Last week in Miami, crypto investors attended the highly anticipated and over-the-top Bitcoin 2022 conference.
Some aspects were business as usual for the tropical gathering, namely strip clubs, colourful Lamborghinis, and teens with enough money to make you hate your own life decisions…
This year witnessed a significant focus on cryptocurrency mining, which typically doesn’t have the sex appeal to attract large audiences.
But crypto mining has been viewed in a negative light, and opposition continues to get more fierce.
If Bitcoin were a country, it would rank in the top 30 worldwide for energy use.
That’s roughly enough electricity to power countries with populations in the tens of millions, with an environmental burden of an estimated 34 megatons of carbon emissions or more, according to Digiconomist’s Bitcoin Energy Consumption Index.
2022 could be the year of “greening” the crypto mining industry and in this article I am going to highlight three ways this could impact your portfolio.
Could ETH take the throne as king of crypto?
Bitcoin (BTC) was the first, but it hasn’t been the best in a very long time.
Its transactions aren’t the fastest, nor the cheapest, and not even the most secure. There are many other blockchains with superior technology.
Bitcoin’s dominance relied on its industry leading number of users and transactions (not to mention it’s first-mover advantage), however, it’s now actually the Ethereum (ETH) blockchain that is the most active, with nearly the entire non-fungible token (NFT) ecosystem relying on it.
And coming soon… the Ethereum blockchain will undergo a major platform upgrade colloquially referred to as “the merge”, but more formally known as the migration from “proof-of-work” to “proof-of-stake” — a system for validating transactions that will reduce electricity consumption by 99% and render mining hardware useless.
This upgrade could be one more step forward for ETH as it grows in popularity versus the increasingly antiquated BTC.
Until now, the world of cryptocurrencies have been primarily reinforced by retail investors.
Worthwhile mentioning, a new survey by Investopedia found that more millennials own cryptocurrencies than own stocks. Some 38% own crypto, ahead of the 37% who own stocks, and 28% of millennials say they are planning to rely on their cryptocurrencies to support them in retirement.
The pioneers of this space have thrived on an anti-institution stance favouring decentralization at all costs.
However, with regulation slowly creeping its head into view, institutional investors are laser focused on a potentially brand new asset class for them to play with (aka an asset which they can squeeze as much money as possible from).
In fact, during the 2022 Miami Bitcoin conference, there was an entire day dedicated to institutional investors, that was SOLD OUT!
While Bitcoin serves its purpose as a store of wealth and method to transfer large amounts of capital, Ethereum’s smart contracts offer these sophisticated investors far more functionality to make use of.
And to top it off… the heightened focus on ESG investing coupled with Ethereum’s green shift to sustainability makes the cryptocurrency all the more compelling for large institutions that invest under the watchful eye of environmentally conscious shareholders.
Crypto mining businesses are scrambling
With energy consumption coming under increased scrutiny, publicly traded crypto miners are trying to appease shareholders while they still can.
Shifting to renewable power, buying carbon credits, improving efficiency through technology such as immersion cooling will all lead to a greener end product. But is that enough?
Kevin O’Leary, also known as Mr. Wonderful, recently stated that institutions like BlackRock demand their companies to have ESG sustainability mandates that can be audited, which could put some Bitcoin miners in a rough spot.
O’Leary said he’s been “selling Marathons, selling Riots, selling all of these public mining companies,” as he is certain they are “going to get crushed” this year.
Though I personally don’t see an immediate disaster for mining companies, my long term view is similarly bleak.
Part of that view involves sifting through mountains of tossed out mining hardware that will inevitably start to pile up.
Much like Apple iPhone launches, the upgrade cycles for crypto miners are expensive and fairly frequent.
However, this is all part of a miners business operations, and is built directly into financial forecasts from day 1.
On the other hand, with a much more significant industry shift such as Ethereum’s move to proof-of-stake, this leaves a lot more than just hardware sitting idle and worthless.
Crypto miners warehouse leases, fans and cooling systems, electrical wiring and network systems will soon no longer be needed for mining. Many of these items can be resold, but that’s quite a large undertaking.
Miners focused on ETH are due for a rude awakening, and I am very hesitant to put money into stocks that have significant exposure to this impending headache.
The future of mining is friendly… for some
When we do reach “the merge” all eyes will be on the future of mining.
It will be a high stakes moment, as a smooth transition to the new blockchain protocol will not come without risks.
Ethereum will also be sharing some of its spotlight with other tokens that already have leveraged proof-of-stake mining.
Solana (SOL), Avalanche (AVAX) and Cardano (ADA) are great examples of cryptos that are gaining market share rapidly due to their fee and cost structure, all of which are positioning themselves as “ETH Killers”.
Solana is perhaps the cheapest and fastest of the group. Utilizing a unique proof-of-history variation of proof-of-stake validation, Solana has the ability to do an eye-popping 50,000 transactions per second. Most transactions can be done at a fraction of a penny.
Avalanche is an optimized network, working on building out its decentralized App ecosystem, luring developers in with speeds up to 4,500 transactions per second and fees around one-tenth of Ethereum.
The Cardano (ADA) network separates its computational layer from its transaction settlement function. By separating transactions and the computations that go into validating these and putting them on the blockchain, Cardano is able to do multiples of Ethereum’s existing volume.
How am I positioning my portfolio?
How I’m playing this coming trade is quite simple.
I won’t be taking a position in any publicly traded mining companies for the time being.
I’m open to persuasion…if there are projects leveraging renewable power and either don’t mine ETH or have a rock solid plan for transitioning to a staking model (pitch me if you’ve got something!)
At this point, I also won’t be bearish enough to take a short position in any of these mining stocks. Many of them have held mined crypto on their balance sheet and now trade with high correlation to underlying crypto prices.
This level of unpredictable risk doesn’t feel reasonable and I don’t love the idea of shorting companies trying to build legitimate businesses; even if I don’t like their business model.
It should be clear at this point I’m a large fan of ETH, and I have been for years!
In fact, I found a video on LinkedIn I posted in 2017 where I spoke to the M&A team at PWC all about cryptocurrency and even back then ETH was my top pick!
Sitting at roughly half of the market cap of Bitcoin, I think there is a legitimate thesis to be made arguing the case for the Ethereum blockchain to overtake the Bitcoin blockchain in market value.
Even aside from that, it better aligns with my personal environmental views, with is something I always take into consideration while investing.
Last of all, when it comes to the other proof-of-stake tokens I mentioned – who will come out on top?
WHO KNOWS!
In the early days of Microsoft (MSFT), Alphabet (GOOG) and other software providers, it was likely near impossible to predict as well.
The main difference is that crypto is unregulated and new projects are notorious for misleading investors, making it literally impossible to know the outcome.
Instead, I will take small positions in each of these highly speculative projects and forget about them for a few years.
And in the near term, I will have my popcorn ready as we prepare for “the merge”!
This newsletter is written by Kevan Matheson, Founder & CEO of Edge Investments.
Prior to starting Edge, Kevan was an Institutional Analyst at RBC Global Asset Management, one of North America’s largest fund managers, with assets under management in excess of $400 billion.
After spending the majority of his career focused on large market capitalization public companies, Kevan became attracted to the risk/reward proposition of growth stocks and cryptocurrency.
In 2017 Kevan published a book on investing in cryptocurrency, where he speculated on the coming growth in NFT’s and the underlying tokens that power their ecosystems.
Known in the growth stock community as Small Cap Kev, his current passion is finding stocks in disruptive industries like blockchain, psychedelic medicine, plant-based meat alternatives & much more.
Follow Small Cap Kev & his team on Instagram, TikTok, YouTube, and LinkedIn.