Occasionally at The Digital Decrypter, we’ll come across an opportunity in our travels that we think is good enough to share with would-be investors. We met Rodney Stevens from Digital Asset Management Co at the XFutures tech conference in Vancouver a few weekends ago, and started a conversation about cryptocurrency and its effects on the world. You’ll notice there’s no ticker at the end of the company name, which is standard protocol around here, and that’s because they’re not public. Yet. They’re in the midst of raising funds to do just that, and that’s of course, where the opportunity lies.
The below conversation is a truncated version of some of the talks we’ve had over the past few weeks. It’s not exactly the whole enchilada, but it has the crux of the operation.
And now, for your consideration, here is Rodney Stevens from Digital Asset Management.
Good afternoon everyone,
Rodney, what is your background?
My name is Rodney Stevens, president and CEO of Digital Asset Management Corp. My background is finance, however. I have the CFA designation and am a former gold mining analyst for institutional clients.
What is the Theory of Investment Value?
The Theory of Investment Value was defined by John Burr Williams, in his 1938 book “The Theory of Investment Value”. In it, he defines the investment value of a producing asset as the present worth of all the future dividends. Divide the investment value by the shares outstanding and you get an estimated investment value per share. The investor, then compares the investment value per share to the current share price to determine whether or not the investment is over or undervalued.
In his book, Williams says wise investment requires buying investments far below their investment value and holding them for the long term.
How do cryptocurrencies turn the theory of investment value on its head?
Cryptocurrencies are non-producing assets. They do not generate any cash flows and therefore have no investment value, as defined. Their value is based solely on what someone is willing to pay for the asset. Consequently, the only way to value these assets is by using relative valuation, such as by looking at how comparables are priced in the market.
But how could owning a portfolio of undervalued non-producing assets be considered to have no investment value? I would argue that investment value should be defined as the appraisal of an investment’s long-term value. Discounting future cash flows is only one method of determining true worth.
It’s ironic that discounting cash flows is given such high regard for two reasons:
It’s rare to find a company that future dividends can be forecast with any certainty.
Money itself has no intrinsic value, and the destiny of all money is extinction.
In essence, the value of any asset is based solely on what someone is willing to pay.
Why does this alternative definition of investment value matter today?
Traditionally, non-producing assets were never a large portion of an investment portfolio for a few reasons:
most lack liquidity
Non-producing assets, as a group, if not undervalued, do not yield a worthwhile return – they only keep up with the inflation rate over the long term.
This is why traditional investors like Warren Buffet stay away from non-producing assets.
But now that cryptocurrencies exist, and are larger and more liquid than some of the largest companies on the stock market, they will become impossible to ignore. Indeed, the portfolio of the future will be stocks, bonds and cryptocurrencies.
Ironically, cryptocurrencies are a dirty word in some circles, but they are the very thing that must be invested in to benefit most from this new technological revolution under way. For example, bitcoin, the largest cryptocurrency, has a market cap which is 20 times that of Coinbase, the largest cryptocurrency company.
How do you appraise the long term value of a cryptocurrency?
The process of using comparables for any asset, whether it produces cash flows or not, is to first collect a group of comparable assets. Then you estimate a measure of standardized value for this group. Then you control for differences between assets in this group and the asset being valued to arrive at a measure of reasonable value. We have all done this type of comparable analysis when analyzing real-estate.
Applying this methodology to bitcoin as an example, without going into too much detail, bitcoin competes with gold as an inflation hedge. Gold’s market cap is $8 trillion compared to bitcoin’s market cap of $145 billion. No other cryptocurrency that competes with bitcoin will be able to dislodge bitcoin, because bitcoin is the most decentralized and has the longest and strongest blockchain of all cryptocurrencies. Furthermore, no other cryptocurrency receives the same free marketing that bitcoin receives such that cryptocurrency exchanges have to trade it or lose money.
If you take the value of all the gold in the world and divide it by all the bitcoin that will ever be created, of 21M coins, you get a target price of $380,000 per coin. So we still see bitcoin as free money, undervalued relative to gold by a factor of 40 times.
Can you give another examples?
Sure, Ethereum, for example, is the second largest cryptocurrency by market cap. Just as bitcoin is a better version of gold, ethereum is a better version of the internet. It’s essentially a decentralized internet. The value of all the internet companies in the world is $7 trillion. But because Ethereum is a platform for decentralized applications, ethereum might take only capture 30% of this value or $2 trillion. Assuming ethereum captures 30% of the platform market, we have a long-term target market cap for ethereum of $630 billion. That is still a huge discount to ethereum’s current market cap of $18 billion.
Most cryptocurrencies are highly undervalued because they are all global, everywhere the internet is, and are going after billion to trillion dollar markets. So, you are likely to do quite well if you pick a portfolio of reputable cryptocurrencies and hold them for the long term.
What do you say to those that believe bitcoin was a bubble that burst?
The chart which looks like a bubble that burst is on an arithmetic scale. But the proper scale is the log scale which shows percentage changes rather than absolute changes. The log scale does not depict a bubble bursting. In fact, bitcoin’s price just keeps going higher and higher. This is exactly what we would expect to see if bitcoin were as undervalued as we suggest.
Bitcoin actually moves in four year cycles three years up and one year down. This cycle is no accident. It is related to what is called the bitcoin halving event. Every four years, the supply of newly minted bitcoin gets cut in half. When this happens, it causes a large supply/demand imbalance that sends the price of bitcoin soaring for the subsequent two years. Bitcoin begins moving up approximately one year before the next halving, which is where we are now.
There are two major catalysts for bitcoin coming up. The first is the next halving and the second is the launch of the very first bitcoin ETF. Once a bitcoin ETF is approved, it will unleash institutional and retail demand, increasing bitcoin’s price to its fair value relative to gold within the next few years. I saw this in my analyst days when I initiated research on the silver sector just prior to the launch of the first silver ETF. Silver wildly out-performed gold as a result and I became the number one rated precious metals analyst at the time.
Ok great, if you’re sold on owning a basket of undervalued cryptocurrencies, now what?
Most people still do not understand cryptocurrencies and their target markets, let alone being willing or able to sift through the good, the bad and the ugly. In addition, then comes the problem of acquiring the cryptocurrency and storing it safely.
Digital Asset Management Corp will take care of all these challenges for you. We have devised a way to allow you to conveniently buy an unmatched portfolio cryptocurrency through investing in our soon-to-be publicly traded company. The performance of our share price will be based primarily on the performance of our cryptocurrency holdings. We are currently raising money, from qualified investors, to acquire a portfolio of cryptocurrencies, followed by a going public transaction. We must, however, caution, that there is no guarantee that any such application to list on an exchange will ultimately be made, or that if made, would successfully result in the company’s being granted a listing on any exchange.
We have done extensive research on numerous coins and our vetting process has come up with some amazing starter holdings, which we will ultimately increase to 20 holdings once we are a public company. In addition to diversification, another advantage to having a portfolio of cryptocurrency is that the smaller coins tend to significantly out-perform bitcoin by a factor of 4:1 in bull markets.
We have also assembled a top notch team to manage your digital assets.
Albert is a computer scientist with a masters degree in digital assets and has been trading, mining and staking cryptocurrencies since 2012.
Dr. Peter White is a professor at SFU, where he studies use cases for blockchain and big data.
Dr. Sandy Green, an adviser for the company, has a PHD from Harvard in business and is a leading expert on blockchain business models. He has 10 years of experience as a hedge fund manager, and also manages a regulated private cryptocurrency fund.
I would urge your viewers to contact us to see if they qualify for investing, otherwise they may miss the opportunity to make the extraordinary profits that the blockchain revolution promises. We believe we are still in the early innings of a technological revolution and the time to get exposure to the cryptocurrency sector is now, before the next halving even and the launch of the first bitcoin ETF.
Thank you.
If you’re interested in finding out more about Digital Asset Management, then you can go here for more information.
—Joseph Morton