DAiM Issue 43
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.
Jan Recap
Ripple Making Waves?
MSTR’s Premium
Infinite Assets, Finite Opportunity
January was an interesting month. Bitcoin touched $109k, the leader of the free world and first lady launched memecoins, and we had some China fud that had people calling for the cycle top. While market sentiment seems to vacillate every day between panic and euphoria we still think the bull run remains structurally intact.
The Trump presidency has provided regulatory clarity for the space which has brought some projects back into the limelight. Chief among them is Ripple. Ripple, as a reminder, is a digital asset designed for fast and low-cost cross-border payments. It was created by Ripple Labs to facilitate transactions on the XRP Ledger (XRPL), a decentralized blockchain. Unlike bitcoin, XRP does not rely on mining; instead, it uses a consensus mechanism through independent validators.
Back in 2020 Garry Gensler and the SEC sued Ripple claiming that Ripple Labs and its team conducted unregistered securities sales by selling XRP. Eventually a judge ruled the sales were not securities and therefore not illegal. That ruling clarified the legal aspect. The new administration has now provided regulatory clarity and could pave the way for a Ripple spot ETF and inclusion into the digital asset stockpile among other things.
Does that mean Ripple is a buy? We don’t think so. These developments are good but we don’t think it makes the token stand out from the underlying tech. The Ripple network, RippleNet, can function independently from the Ripple token. The ability to move other financial assets bank to bank on the network is a key feature of the tech and not the token. While the popularity of the coin and the backing of the “Ripple Army” cannot be denied, retail buying and selling on exchanges will not push XRP to overtake the marketcap of BTC. It could overtake the ETH marketcap, which it has done in the past. But we think that too remains unlikely.
Even though traditional finance (TradFi) investors now have access to spot bitcoin ETFs, many still prefer to gain bitcoin exposure through MicroStrategy stock (MSTR) for the opportunity to juice their returns. Historically, this approach has provided built-in leverage, as MSTR’s stock has often outperformed a direct bitcoin investment or a bitcoin ETF during bull markets.
MicroStrategy’s Executive Chairman, Michael Saylor, has aggressively accumulated bitcoin using cash reserves, equity raises, and debt financing. This strategy has paid off—MSTR has soared over 2,000% in the last five years, and the stock currently trades at a 1.76x premium to the underlying bitcoin it holds. But can this strategy continue to deliver outsized returns?
We don’t think so. While the strategy benefits existing shareholders by increasing the company’s bitcoin holdings per share, there are limits to how long it can remain effective. Bitcoin is one of the scarcest assets on the planet. As MicroStrategy continues buying in large quantities, it will require enormous capital inflows to maintain the pace. The company, while profitable, does not generate enough cash flow to fund continuous bitcoin accumulation at this scale. This leaves only equity and debt financing, both of which have drawbacks. Equity raises by issuing new shares dilutes existing shareholders, reducing their ownership percentage. And debt issuance isn’t a better long-term solution. MicroStrategy primarily uses convertible notes, meaning future debt conversions will lead to dilution as well. At some point, the cost of raising capital will outweigh the benefits of acquiring more bitcoin.
As we mentioned, MSTR trades at 1.76x the value of its underlying bitcoin. This means the stock could theoretically fall by 43% (1/1.76) before it aligns with its net bitcoin holdings. If the company isn’t actively reinvesting capital to grow its core business, why should MSTR trade at a premium to bitcoin? The only way this valuation makes sense is if Saylor can monetize the company’s bitcoin holdings—perhaps through a bitcoin-backed lending business. But that remains speculative at best.
For us, owning bitcoin directly remains the best option. While MicroStrategy has been an effective bitcoin proxy in the past, its reliance on debt and dilution to fuel continued accumulation has a shelf life. At some point, the market will recognize these limits, and the stock’s premium will compress. Until then, MSTR remains an interesting—but increasingly risky—way to gain bitcoin exposure.Some market participants think that the current administration’s focus on deregulation will turn investing into the wild west, spawning innumerable assets that don’t really serve anyone outside of the issuer. In reality this has been going on for years. Check out the ETF launches and see how many are being created every month. Traditional capital markets aren’t so different from internet capital markets. The sheer volume of investible assets, from ETFs to memecoins created daily, is beyond human comprehension.
With seemingly infinite options to invest in, you might wonder how humans can make these markets. The truth is markets are increasingly dominated by AI trading bots, which handle most of the trading volume, price action, and bid-ask movement.
However, despite the speed and efficiency of these AI-driven markets, the question of whether they are an improvement over humans is debatable. First, AI bots don’t evaluate projects based on strong fundamentals, a dedicated team, or long-term viability. Instead, they chase short-term trends, reacting instantly to newly launched assets. This happens at a speed humans cannot compete with. In fact simply listing new crypto assets is something humans struggle with as Brian Armstrong pointed out in a recent tweet. Many retail investors attempt to deploy AI bots for trading, hoping to compete. But anything publicly available will not consistently generate profits. Why? Because large firms like Citadel develop and deploy their own proprietary AI bots—not only to trade these events but also to analyze and outmaneuver retail bots. The result? Retail traders lose while institutions profit.
The best way to navigate this AI-dominated market is through a long-term fundamental investment strategy, with a primary focus on bitcoin and a small allocation to utility-driven projects that facilitate AI activity.
How DAiM benefits clients
Model Portfolio: Our meticulously managed portfolio has consistently outperformed the simple strategy of buying and holding bitcoin alone by more than 590% since inception on 5/31/2018.
Wealth Management: As a licensed Registered Investment Advisor (RIA), we cater to clients with diverse financial needs, including Trust accounts, brokerage accounts, and IRAs. Our services encompass comprehensive tax strategies and audits to optimize your financial outcomes.
Tailored Solutions for Various Investors:
Individual Professionals: Busy individuals like doctors who lack the time to stay updated on market trends.
Altcoin Exposure in Retirement: Investors seeking exposure to alternative coins within their retirement accounts.
Intergenerational Wealth Planning: Large families aiming to create and manage intergenerational wealth, including gifting in bitcoin across multiple generations.
Simplified Management: Investors overwhelmed by the complexities of managing multiple wallets and decentralized exchanges (DEXes), finding it challenging to track or rebalance their assets promptly.
Bitcoin Options Trading: Investors looking to manage risk or generate additional yield through advanced strategies like bitcoin covered calls and zero-cost collars.
Bitcoin Lending: Investors seeking opportunities to lend their bitcoin and earn interest while retaining ownership of their assets.
Enhanced Support and Communication: We understand the frustrations of navigating communication with crypto exchanges. At DAIM, we provide easy access to expert guidance, ensuring seamless communication for our clients.
Curious to Learn More About Investing with DAIM? Contact us at hq@daim.io
