DAIM Issue 22 - Is It Worth the Burn?
Welcome to DAIM's Newsletter. DAIM is a licensed Registered Investment Advisor and asset manager for digital assets and Bitcoin 401(k)s. Please enjoy our thoughts below. #Bitcoin #Ethereum
May 3, 2023
DAIM model portfolio
Is it worth the burn?
The FIX is in.
Model Portfolio - Below are the highlights for our managed portfolio that has outperformed Bitcoin alone. There are a couple of key points to share. First, we want to highlight the importance of getting pure exposure to digital assets. Let’s say you had invested in GBTC on the first day DAIM started business (5/31/2018) and held through 4/30/2023. You would have realized a modest 33.71% (6.08% annualized) return. Had you instead put the same amount of money into pure Bitcoin you would have realized a 288.49% (31.76% annualized) return. A Bitcoin investor would have realized almost the same return every year that a GBTC investor had realized over the entire 5-year period! Now let’s say you had invested the same amount into DAIM’s Model Portfolio. You would have realized a 399% cumulative return. There is added alpha in diversifying away from Bitcoin and using a knowledgeable advisor. The DAIM Model Portfolio has taken tactical deviations from Bitcoin, and when this is successful the measure is shown by the increase in units of Bitcoin. That is why it is vital to have an advisor that is plugged into the digital asset marketplace and can expertly steer a portfolio in a direction that offers long-term success.
Is it worth the burn? - The long-awaited Shanghai Upgrade was finally implemented. Thankfully for the crypto community, the upgrade was uneventful. If we look at the tokenomics now that the upgrade has been finalized we see positive developments. Ethereum has been a deflationary asset since The Merge. Circulating supply is down about .6% on an annual basis since early April. See here.
If The Merge can slow the inflation rate or even make ETH a deflationary asset then the ETH fundamentals get stronger. One of the main selling points for investing in Bitcoin is its scarcity. Conversely one of the main reasons for the myriad of altcoins failing was their runaway inflation (see Luna). Ethereum’s supply has always been much larger than Bitcoin’s. If the reduction in supply keeps up and demand increases we likely will get a more positive price response.
Ultimately the long-term investment case will depend on upgrades still to come. Let's look at the most recent Ethereum roadmap.
Without getting into the weeds, the goal of each step (aside from rhyming) is to get Ethereum to a place where transacting is fairer to all users and the network can handle 100,000 TPS (through roll-ups). We are currently at 30 TPS. If Ethereum can accomplish the 100,000 TPS goal then the network can handle spikes in demand much more easily. Paying hundreds of dollars in gas fees to buy an NFT could be a thing of the past. We are still a long way from implementation and deadlines do get pushed back but as more dates become known this could set up a bull case for outperformance vs Bitcoin.
The FIX is in - The Financial Information eXchange (FIX) Protocol is used by modern trading systems to communicate with each other. Traditional assets like stocks and bonds have used standardized ID codes that FIX can recognize and allow intermediaries to accurately track transactions. Until now digital assets did not have a unique identifier that the FIX protocol could incorporate. That just changed with the protocol adopting the Digital Token Identifies (DTI) ISO standard. The ability for traditional systems to accurately track digital asset flows is another step in the right direction for digital asset investors. The development will also help regulators track activity and keep up with money laundering. With tracking and increased regulation, the space will gain the needed legitimacy to attract even more investors and make the marketplace truly efficient. The protocol is also used by other intermediaries, like financial institutions, that accept payments. It's possible that digital assets that are meant to act as true cryptocurrencies can now be better used as a medium of exchange. Whatever the use case is, we think that this development is another step in the right direction.
Forecast - Bitcoin continued to hover around $30K in April, taking a brief pause from its sustained run-up to begin the year. We are optimistic that new levels have been set. Unless there is an unforeseen negative catalyst, dipping below $20K seems highly unlikely. Interest rates seem to be approaching their terminal levels and regulators can’t seem to keep Bitcoin down. For that reason, we see $24K-$30K as the range for the near term until we continue higher.