April 19, 2023

Insights and analysis for the professional investor

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Welcome to Crypto Long & Short!

This week, Todd Groth of CoinDesk Indices quizzes ChatGPT about crypto and then thinks investment thoughts about the results.

Then, Christophe Morvan of Drake Star explores crypto valuations and M&A to argue things are actually going pretty well in the industry.

Also, check out – and bookmark – the beautiful (and useful!) new CoinDeskMarkets.com to get the latest crypto data and news.

– Nick Baker

From the Analyst

Asking a Bot What It Thinks About Bitcoin

One of the perks of living in Los Angeles is the easy access to great hiking trails. Within 30 minutes (assuming you're not trying during rush hour, which is key here) it's possible to disconnect from La La Land on a canyon or ridge trail with only the occasional interruption from a fellow hiker and/or fitness influencer. Here, conversations can flow freely, punctuated with the occasional Google fact check when cell service allows.

"Do you think ChatGPT will replace your role?" I asked my data scientist friend, who works for a large tech firm in the midst of layoffs. "No, my job requires too much specific context," she responded succinctly, acknowledging the protective barriers and moats created by proprietary corporate datasets.

Anyway, what does ChatGPT think about crypto – and does that thinking pose a threat to investment writers and strategists?

Let's make an assumption: Its views ought to reflect the "average" opinion of the information and sentiment embedded in the data sources on which it was trained. The AI bot should give some sense of the consensus view on digital assets, a collective zeitgeist constructed from an advanced statistical exercise.

Or at least that's the idea. I decided to find out what ChatGPT thinks.

Prompt: Explain bitcoin to a high school student.

Decentralization, disintermediation, store of value, not controlled by any government, like gold – all common and consistent themes supporting the bitcoin narrative. Let's keep going:

Prompt: Are cryptocurrencies useful? Please explain in simple terms.

It sang a similar song of decentralization, disintermediation and transparency, albeit with an inclusion of smart contracts, a global perspective and a healthy financial risk disclaimer. It's useful to remember that ChatGPT's training data included information up until September 2021, coincidentally around the peak of the last bull market. A quick prompt of "What is FTX and who is Sam Bankman-Fried?" confirms a lack of awareness of, well, you know what happened a few months ago.

ChatGPT's reference to the global nature of cryptocurrencies is a good reminder that digital assets make it easier to make cross-border remittance payments and provide a decentralized and trusted open-source alternative for regional or local financial services and infrastructure. It's all too easy to overlook these critical use cases, because people like me mostly take them for granted as part of modern life in a developed economy, absent the infrequent banking crisis. Preference for this more banal use case can clearly be seen when comparing Google Trend search data for Bitcoin versus Ethereum (see below).

Here, the search activity for Bitcoin and Ethereum have been combined to create a relative ratio of activity, with the intent to proxy user interest. A value of 1 would suggest an equal amount of search activity within a country is spread across Bitcoin and Ethereum; 10 means 10 times more searches for Bitcoin than Ethereum. Given that BTC currently has about 2.3 times more market capitalization than ETH, it's not surprising that no ratio in the chart above is much below that number. Switzerland at 2.3 is neutral (as usual), aka in line with market cap expectations.

Russia, Egypt and Nigeria show substantially more interest in bitcoin over ether, while Serbia, China and Switzerland (the Ethereum Foundation is based in Switzerland) are relatively more interested in Ethereum. From a glance at the countries within the top and bottom of bitcoin/ether search activity bins, we could conclude that developing and frontier economies are more focused on store of value and decentralized payment system utilities, whereas developed economies are more interested in refining and upgrading existing financial technology infrastructure via blockchain rails and smart contract platforms.

– Todd Groth, CFA, head of index research at CoinDesk Indices

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Institutional Outlook

Valuations and M&A Show Things Aren't So Bad for Crypto

Recent troubles in crypto (the collapse of FTX in November, runs on crypto-friendly banks in March, etc.) have brought into question the viability of the entire asset class. However, a closer look at the long-term performance of blockchain companies and crypto miners mitigates those doubts. Financial investors have remained active and M&A activity is still strong.

This article will focus on two engines of the crypto world:

Blockchain tech companies and exchanges: Bakkt, Block, Coinbase and PayPal
Crypto miners: Canaan, Marathon Digital, Riot and Hive

Both sectors have performed dismally over the past 12 months relative to the Nasdaq Composite Index – which has also done terribly. The chart below shows the plunge in all their market caps (with a starting value of 100 for each in April 2022).

However, this observation must be put into perspective.

First, despite the pain, investors are now assigning a similar revenue multiple to those two crypto-related sectors and the Nasdaq. (We track that using enterprise value, or EV, divided by revenue.) The mining group especially has seen a massive rebound in that metric since the beginning of the year, coinciding with bitcoin's (BTC) large rally.

Second, if we look at a wider time horizon (as illustrated below), the mining group still outperforms the Nasdaq between April 2020 and April 2023., winning 90% to 63%. The blockchain group is down 12%. Crypto miners benefitted from a huge bubble in the first half of 2021 (traded between 30x and 70 EV/revenue). From early 2022 to mid-2022, those extreme valuations normalized and converged around 3.5x EV/revenue. The Blockchain group, meanwhile, pretty closely tracks the Nasdaq, though with less volatility.

There are still a number of very active financial investors in the crypto space. In 2022, there were 2,541 venture capital (VC) investments totalling $26.2 billion in crypto or blockchain companies. Some highlights: Celestia raised $53 million in a Series B round, Matter Labs raised $200 million in a Series B and Fenix Games completed early-stage rounds and raised $150 million.

As of the fourth quarter of 2022, the top 10 VC-backed companies have raised approximately $8.45 billion during their lifespan. Coinbase topped the ranking of the most active financial investors in crypto in the first quarter 2023 with 340 investments (including Amber, CoinDCX and CoinTracker), while NGC Ventures was in second position with 258 investments (Parami Control, Resource Finance, etc.). The top 10 financial investors are based in the U.S. (six of them), China (three), and Singapore (one).

Despite the shockwaves from the FTX bankruptcy filing in November, the ecosystem is still quite dynamic. Notable M&A deals closed in the fourth quarter include Gleec BTC Exchange acquiring Blocktane for $1.5 billion, Binance buying TokyoCrypto for $225 million and Bankless purchasing Earnifi for $150 million.

The valuation of crypto-related companies has converged with the rest of tech, a sign that the digital-asset industry is maturing. The recent crisis has pruned out non-viable players and investors are adopting a less speculative stance on this asset class. As crypto mining exemplifies, there may be room for certain subsectors of crypto to deliver superior performance compared with peers. Of particular interest are the blockchain security platforms – such as Fireblocks, Taurus or Copper – that offer solutions to protect digital assets like crypto. Valuations will be supported by specialized private investors and M&A activity driven by consolidation plays at the international level, either by geographic or technology consolidation.

– Christophe Morvan, managing partner at Drake Star

Takeaways

From CoinDesk Deputy Editor-in-Chief Nick Baker, here's some news worth reading:

BIG RELIEF: With last week's big Ethereum upgrade, the scary narrative in the runup was this: The change enabled people to unstake ETH they'd staked to run the network, so what if there's a rush for the exits? Won't that tank ETH's price? It didn't happen. In the initial moments after the upgrade went live, the cryptocurrency held steady just above $1,900. Hours later, ETH zoomed above $2,100. What's more, there's evidence there was an inflow, not outflow, of money into ETH in the aftermath. This raises a question: Does the ability to stake and then unstake any time improve the case for investing in ETH? Is it more alluring to investors now the barrier to getting your money back is gone?
BULL MARKET: Given how ugly the regulatory news is around crypto, it's hard to believe there's talk that a bull market is upon us. And yet that's just what analysts at brokerage firm Bernstein proposed this week. To them, the November collapse of FTX got rid of "toxic" leverage from the industry, and the macro environment looks favorable for bitcoin (BTC). "Any potential dislocation, whether on the bank's credit side, or on the sovereign side … positions bitcoin perfectly as a safe-haven asset alongside gold," analysts Gautam Chhugani and Manas Agrawal wrote. BTC has nearly doubled since New Year's Eve, so this – surprisingly – doesn't feel outlandish.
SPEAKING OF FTX: An attorney representing FTX in bankruptcy court said one option being explored as the firm tries to recover money for creditors is relaunching the formerly large crypto exchange. FTX's FTT token doubled in price in reaction to the news. I'm reminded of a nice recent story from my colleagues Oliver Knight and Helene Braun that argued reopening FTX faces an uphill climb given how poorly regarded its technology was.
PEPE COINS: Elon Musk recently generated interest in tokens with Shiba Inu mascots. Why, like so much in crypto, doesn't matter. But those dog coins are old news now, CoinDesk's Shaurya Malwa reports. Degens have moved on to coins with Pepe the Frog logos. If there was a punchline or takeaway, it would go here.

To hear more analysis, click here for CoinDesk's "Markets Daily Crypto Roundup" podcast.

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