Crypto Market Commentary
23 February 2020
Doc's Daily Commentary
The 2/19 ReadySetLive with Doc and Mav is listed below.
Thoughts On 2020 Portfolios
Portfolios to Consider for 2020
Last week we explored some of the powerful narratives I see coming in 2020. This week we look at the projects with the most ACTUAL fundamental value that hopefully will catch the wind and capture maximum value from these narratives.
As always, nothing in this should be considered financial advice, instead use this as a springboard into designing a risk and narrative profile which you believe in. There is also a risk that no matter how fundamentally sound a project is…the market works in strange ways and can ignore it.
Sometimes this is because your thesis is wrong, other times it’s because of genuine undervaluation. This is where you can combine the skills from Doc’s TA and reading the charts with the fundamentals to identify powerful assets and only enter when the trend is in your favor.
Narrative #1 – Sound Money / STore of Value
At the end of the day, re-establishing the basis of money is what blockchains are best at. The narrative of sound money and digital stores of value are still very likely to be the ultimate winners of this market.
Bitcoin remains king. The market remains adamant that it is the superior project in terms of value capture, longevity and monetary properties, most importantly liquidity and reputation. A portfolio should still carry BTC as the dominant portion, somewhere north of 60% and ideally up around 75%+. Any allocation less than this is taking on elevated risk.
Decred is the only other sound money candidate that holds up to any genuine scrutiny. Now the biggest problem with Decred is that nobody knows about it and the liquidity stinks. It remains a speculative bet on a very strong set of undiscovered fundamental values. DCR is, in theory, primed to benefit from almost all the narratives including privacy, scalability, sound money and even DeFi (actual DeFi too!).
In my personal opinion, DCR is the type of asset that you should ‘forget’ you hold, looking at the price too often will drive you mad and test your patience (I say this from experience). One of those lock away in a drawer types only find it in 5-10 years and thank your lucky stars you forgot about it. The biggest risk is that the market just forgets Decred exists and it wilts away to nothing. You all know I am an avid supporter and am working where I can to build awareness but this remains a very real risk.
In a portfolio solely devoted to sound money as the dominant narrative, a BTC/DCR split of 90/10 or up to 80/20 for those who really believe in the Decred mission. In a safe long hold portfolio, DCR really should not exceed a 10-20% allocation, simply due to liquidity risk. This can be revised as more data and market pricing comes to light.
Overall, I believe the Sound Money narrative should represent 60% to 75% of all crypto portfolios (depending on your opinion of smart contract platform coins, you might consider them here, however I do not).
Narrative #2 – Privacy
Privacy of individual data and financial privacy will be significant topics and Bitcoin is not prepared for the surveillance it will be subjected to by governments.
Monero remains the most valuable privacy coin by market Cap and really does come from good bones. It has a super cypher-punk origin story and carries probably the most robust privacy solution, being fully confidential transactions and ring signatures. XMR is in my opinion the closest asset to digital cash on the market. I consider a reality where BTC and DCR act as savings whilst XMR replaces cash in your wallet as a genuine outcome from the digital money revolution (with swaps supported by the Decred DEX).
ZCash is basically Bitcoin with an optional privacy layer. There remain fears that ZEC has in inflation exploit in the shielded pool and a centralised development and governance layer. That said, it has been extremely oversold of late and given one of Bitcoins biggest risks is privacy and surveillance, ZEC which just adds privacy as a feature is a solid combination.
In fact, if you have followed some of the block subsidy models which sum up all block rewards paid in USD terms, it usually provides strong fundamental support. Market cap rarely ventures below this value as it means the whole network of miners is underwater. For ZEC (yellow) price is trading at a fraction of the cumulative block rewards. This either means it is massively undervalued…or…perhaps there is more supply than we know about…Something to keep an eye on. ZEC also halves in November so expect volatility in the lead up to this.
Horizen has seriously outperformed my expectations on price appreciation and has almost returned from the dead. As I detailed in my review paper, ZEN is building a sidechain solution whilst also capturing the technology stack of ZCash. Horizen is a full privacy solution that whilst far from finished, is a sound fundamental problem that needs to be solved. The privacy narrative combined with the speculative fixed supply and a halving event coming up end of the year, makes ZEN a coin to keep an eye on.
Grin and Beam. I admit that my research into these two is minimal and I have heard both praise and condemnation of the MimbleWimble technology. Grin has a shocking inflation schedule that will continue to add supply which is worth in mind. I did see a research paper that talks through some limitations in MW privacy but was also understood from launch. This one needs more attention but if privacy attracts a bid, it is likely these two will benefit.
Overall, these privacy coins are in my opinion the most likely to capture value from this narrative. I consider a total allocation of around 5% of a portfolio to this narrative which I split between XMR / ZEC / ZEN in proportion 50 / 25 / 25.
Narrative #3 – Decentralised Finance
Similar in scope to the money narrative however this one relies on development of applications via smart contracts to ‘use’ your money. One could also consider this as programmable money.
The challenge with this narrative is that it relies on the application layer and oracles for value accrual as most tokens in this category are Proof of Stake and cannot rely on the easily digested ‘fixed supply’ narrative. The big risk here is one of a banking collapse due to unsound protocol primitives. Due to this, holding the native protocol tokens like ETH and XTZ without locking it in apps is the safest approach.
Ethereum is the clear leader here. Almost all ‘DeFi’ application is built on the Ethereum layer and ETH is the token essentially a global bet on this narrative. Once could confidently hold a whole allocation to DeFi in ETH only and sit tight. The value comes from locking up ETH as collateral to power finance which creates an artificial scarcity component. Additional mechanisms like the EIP1559 fee burn and 2.0 launch will also drive hype and attention.
More and more DeFi applications are being developed and most use ETH as collateral in the system. A massive caveat however, highlighted by the recent Fulcrum drama, don’t leave a significant sum of value in any dapps just yet. There is a non-zero risk of collapse and attack in these nascent protocols so use with caution.
Tezos is the new kid on the block and to date has very little competitive edge on Ethereum. However, Tezos is already a PoS blockchain and is in my opinion the most legitimate one worth paying attention to. I will cover Tezos in an updated research report soon. More developers will start building on Tezos if it gains attention and the foundation has hundreds of millions to pump prices (which I believe is occurring at the moment).
There is talk of Tezos holding a role in the Security Token space however I honestly don’t believe this is anything more than coordinated narratives, marketing and propaganda by the foundation. Right now, there is far more support for Ethereum on STOs and some issuers simply integrate Tezos to allow client choices. Now in a similar manner to Decred, Tezos on-chain governance and ability to self-upgrade may be a benefit to STOs long term and somewhat hedges Ethereum 2.0 risk.
In terms of allocating to Tezos, one approach I have considered, given the cheaper nominal price, is to match my share of the XTZ supply to my share of ETH supply. For example, owning 10 ETH out of 109.7M supply means you own 0.000009% of the supply. For a Tezos with a total supply of 694M * 0.000009% gives 63 XTZ. That way, you own the same stake in each network and can adjust to your risk tolerance accordingly.
MakerDAOs governance token MKR is the premier DeFi token that captures value by a burn mechanism as people take out loans for DAI. Now this technically crosses into another key narrative that is less attractive, stablecoins. Now despite my critiques of Ethereum and DeFi, if DAI manages to secure a position as a viable stablecoin on the world stage, it will drive immense MKR value. It is a risky bet and MKR is very illiquid, but the fundamental and narrative support is there.
Ethereum Classic is purely a speculation on Ethereum 2.0 failing and PoS collapsing. Both need to occur for the jackpot but stranger things have happened.
Speculation on DeFi tokens as a swing trade are also possible on the likes of SNX, LINK and KNC although I wouldn’t hold them through a bear market.
For the programmable Money narrative, I personally see an allocation of 15% to 20% total to be more than sufficient however I err more to the side of a Bitcoiner so others may allocate more. If you believe smart contracts and DeFi are real killer applications, this allocation may increase.
Narrative #4 – Gambling and Speculation
Gambling is still the #1 use case in this market. Absolutely none of the following coins are fundamentally good long holds in my perspective, but it doesn’t mean there won’t be narratives that drive insane speculation. These are not buy and hold, instead get in, scalp the news and then run.
RVN – Bitcoin clone, cheap coin, past price runs and now leverage on Binance.
BCH – Likely to halve before BTC and potentially even fork split due to upcoming dev tax leading to two forked coins.
ALGO and HBAR – both have VC backing who need an exit. They may pump the price to sell.
DASH – have near infinite money to spend on marketing and price pumps (and do so regularly). The masternode narrative will still attract new punters despite it’s poor design mechanics for decentralisation.
BNB – It’s a bet on CZ, that dude will pump BNB until he retires.
FTT – The new kid on the block, the FTX derivatives exchange, similar model to BNB with burn model and actually, likely a stronger bet than BNB given the quality of the product they have built.
DOGE – everyone loves abit of Doge. It’s not altseason until Doge starts moving upwards.
So you can see that in general, there still is not a great deal of difference to the core portfolio we developed in early 2019. Almost all of the coins above we have a previous RSC research report to use as a baseline and I plan to revisit Tezos in particular in the near future given recent price action.
This still represents a consolidation to quality but the difference here is that there are narratives growing up around them with the added fuel of leverage. Don’t forget, the strongest emotions are greed and fear and in a bull market, powered by leveraged gambling, FOMO is the max pain scenario.
Fundamentals may not matter in the short run, but long term, leverage works both ways and many coins will get short and attacked into oblivion in the next bear market. Capturing the maximum value from coins with the least risk of collapse will help you sleep soundly whilst enjoying the ride!
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An Update Regarding Our Portfolio
We are pleased to share with you our Community Portfolio V3!
Add your own voice to our portfolio by clicking here.
We intend on this portfolio being balanced between the Three Pillars of the Token Economy & Interchain:
Crypto, STOs, and DeFi projects
We will also make a concerted effort to draw from community involvement and make this portfolio community driven.
Here’s our past portfolios for reference:
RSC Managed Portfolio (V2)
RSC Unmanaged Altcoin Portfolio (V2)
RSC Managed Portfolio (V1)