SwissOne Capital: How To Play The The Digital Gold Rush

(Photo by Dmitry Moraine on Unsplash)

by Kenny Hearn, Head of Research and Fund Manager SwissOne Capital

Baar – There have been many comparisons made between Bitcoin and Gold mainly due to Bitcoin’s digital age properties of storing of value relative to Gold. Heck, there are now massive Bitcoin “mining” operations spread across the globe. Their similarities are uncanny: a limited supply, value born out of pure human demand for something shiny (digitally innovative in BTC’s case), transferable, huge physical supply chain operations that support the mining of the commodity, a store of value, early exponential growth creating entirely new industries (the gold rush?!).

While there are some critical differences that we have discussed in previous research reports (that only make BTC a more favourable store of value in this day and age relative to Gold), we believe the support products and services industries that are being built around Bitcoin and the decentralisation of the global financial industry (a.k.a Defi) pose significant growth opportunities well beyond the price of Bitcoin.

Therefore, if one is looking to take some portfolio exposure to Bitcoin mainly because it is still likely to be around in 10 years (with massive potential upside) then it would make a lot of sense to also gain exposure to the Blockchain industry as a whole. If one takes a look back at the history of the gold rush, you don’t have to look far to find completely new industries created out of nothing that showed large exponential growth over the following 10-20 years.

The price of Bitcoin is more likely than not going to retest previous highs (double from here) but the decentralised financial and blockchain industry will show higher growth if this does occur. This price has already started in 2020.

Uncanny Parallels
In the wake of the gold rush, large new infrastructure was built to support the ever-growing demand for Gold. New innovative tools were developed for more effective mining. A leap forward in underground construction and architecture was achieved. Exchange houses and trusted network of operators were developed. Security industries and routes for delivering commodity safely were established. The list goes on.

While the price of gold increased exponentially in the early years, the growth shown in these support products and services industries were in many cases performed 10x that of the Gold price and in some cases 100x. The opportunities presented by decentralised finance and the internet-of-things (IOT) using cryptography to build trust(less) ecosystems in the blockchain that support peer-to-peer transacting pose a massive shift and/or turning point for humanity. Therefore, the associated growth should also not be ignored.

Portfolio Strategy
We believe the Top50 projects ranked by market capitalisation in an equally weighted portfolio provides the smartest solution for gaining exposure to these blockchain industry support products and services. The time to get some of this exposure is pointing to 2020 and has been for a while.

One should of course exclude stable and asset backed coins because the underlying price movements are not linked to the blockchain industry’s growth. These assets, rather, are linked to traditional asset classes. If one is looking for pure exposure to the aforementioned growth then these assets should be excluded.

The age-old diversification strategy is critical in this emerging asset class but more so for the significant growth and relative outperformance already shown by the top 30-50 ranked assets this year. This was exemplified in May 2020.
During May, 10 out of the 30-50 ranked assets increased more than 20% and THETA increased over 90% (while BTC grew below 10%). Omisego and Digibyte increased over 90% in April 2020. Furthermore, during March 2020 holders of STEEMIT (top 30-50) were issued with a 1-for-1 ratio of HIVE coins that traded at a value equal to that of the STEEMIT value in the proceeding days of issuance (i.e. a 100% dividend yield recorded). This sort of action is imperative inside a holistic blockchain or decentralised finance portfolio.

2020 can be dubbed as the year blockchain projects “went live”. The number of projects launching next critical phases on their roadmaps is accelerating and will do for the rest of the year.
Furthermore, the momentum in technological developments related to blockchain is only increasing. Evidence of this is clear in the price action of coins that announced new phases, version upgrades and developments in their respective projects. Therefore, we correlate strong price action with new project developments.

Here is a list of the coin prices that grew more than 50% in the past 30 days that recently made important announcements relating to their projects in the top 50 ranked assets:

The majority of these strong positive increases happened outside of the top 30 coins ranked by market cap. The performance differential is summarised in the table of below comprising of the TOP 50 coins equally weighted in a portfolio since the start of the year.

While the bulk of the outperformance by the equally-weighted top 50 coin during January this year, it has outperformed BTC by 13.3% since the beginning of February 2020. We expect this outperformance to accelerate for the remainder of the 2020 in line with project development and updates.

Sufficient Industry Depth?
When investing in the Blockchain and decentralised tech industry it is ideal to have a broad exposure to a variety of products and support services. However, if one invests merely in the top 10 or top 20 crypto assets by market cap then this exposure is limited to mainly Currencies, Exchanges and Platforms.

The following tables show a breakdown of Blockchain product or services exposure in the top 10 and top 20 constituents:

In the top 50 coins, “Other” support services and products falling outside Currencies, Exchanges and Platforms make up 35%.

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