In this episode, Anthony Pompliano talks with VanEck's head of digital asset research, Mattew Sigel, discussing investment strategies for crypto-related stocks, new staking regulations, and market cycles.
The NODE ETF he manages has achieved a return of 28-30% in less than four months since its launch in May, far exceeding Bitcoin and the S&P 500, employing a diversified 'barbell' strategy that covers dealers, infrastructure, and fintech companies.
In the interview, he detailed the current investment portfolio and specific targets of the NODE ETF, analyzing the potential of companies like Entergy and TEPCO in Bitcoin mining, emphasizing the risks of leverage in investing, and discussing the SEC's decision on staking not being considered securities for Ethereum, Solana, etc.
He believes that the four-year cycle of Bitcoin may continue but in a more moderate manner, sharing market top indicators such as funding rates and unrealized profits, and commenting on current regulatory dynamics in the crypto market.
The following are excerpts from the conversation, translated by Blockchain in Plain Language.
Q1: The NODE ETF has been launched for over three months, achieving a return of 28-30%, which is twice that of Bitcoin and far exceeds indices like the S&P 500. How do you construct a portfolio of cryptocurrency-related stocks?
Matthew Sige: Thank you for the invitation. We have been running cryptocurrency stock strategies for nearly five years and have observed their extreme volatility. At market tops, high-leverage stocks perform best, with the largest gains; however, leverage is toxic to cryptocurrencies, as proven by past cycles.
At market tops, cryptocurrency stock indices are filled with high-leverage assets, experiencing significant declines during shakeouts. Many cryptocurrency stock products have performed poorly, and from an investor's perspective, investing heavily in Bitcoin-related products has not yielded ideal returns. Therefore, the goal of the NODE ETF is to broadly invest in companies that clearly profit from the on-chain economy, such as dealers and infrastructure providers like Coinbase and Bullish.
Bitcoin's dominance is about 65%, and large infrastructure companies are involved in electricity, electrical equipment, and industrial infrastructure, which is significant for earnings growth and valuation multiples. Additionally, fintech e-commerce companies, similar to the Magnificent 7 but focusing on Latin America or Asia, are beginning to adopt stablecoins at scale, leading to cost savings. Our investment scope covers over 150 companies with digital asset strategies.
We employ a barbell strategy, with one-third of the fund allocated to pure cryptocurrency stocks, along with e-commerce, fintech peripheral sectors, as well as low-volatility sectors like utilities, energy, and infrastructure for stability.
Avoiding large drawdowns through high diversification is particularly important when Bitcoin is near historical highs. A rising tide lifts all boats, but one might miss out on ten-baggers, which was a strategy from a year ago. During market drawdowns, we sell low-volatility portions and increase volatility. Since inception, excess returns have accompanied lower volatility, with returns being twice that of Bitcoin and with lower volatility, which is our sweet spot. We cannot guarantee repeating this performance, but it is the goal.
Q2: You mentioned utilities and electrical hardware companies; what specific examples are there? Do they only serve Bitcoin miners, or are there other intersections with cryptocurrencies?
Matthew Sige: Some utility companies operate in regions experiencing growth in Bitcoin mining, such as Arkansas and Oklahoma.
This is similar to how public stock investors think, studying the entire system's vertical integration. The growth of Bitcoin mining indicates a demand for hardware, energy, and geographical locations. We analyze the supply chain, identify growth areas and electricity suppliers, and assess their businesses. The cryptocurrency portion is layered on top to help identify opportunities, followed by fundamental analysis of companies to determine if they are overpriced or align with our strategy.
Unless a company explicitly mentions Bitcoin, blockchain, or cryptocurrency as a business driver, it will not enter the investment scope. We manage the portfolio based on volatility levels relative to Bitcoin and the S&P 500, focusing on the entire supply chain. For instance, Solaris SEI produces generators suitable for co-location data centers, used for Bitcoin mining and hybrid AI purposes. Bitcoin miners are shifting from single mining to allocating some capacity to AI, which requires upgrading equipment; we are also paying attention to this area.
Q3: In the industrial and energy sectors, which companies are within the investment scope? What are the screening criteria for cryptocurrency companies?
Matthew Sige: We lean towards holding companies that we are optimistic about, as we are optimistic about the cryptocurrency space. A diversified approach provides investors with a more moderate volatility experience. Screening criteria include the leverage ratio of companies relative to their profitability.
For example, MicroStrategy accounts for 10% of the pure cryptocurrency stock index, but our holding is only 3% or lower due to its high leverage. When the market is at the top, indices are overallocated to high-leverage companies, posing the greatest risks. In the last cycle, many tech companies became Bitcoin banks and then went bankrupt. This cycle's leverage is generated more professionally, but assets like Bitcoin still have higher volatility than stocks. We pursue compound growth and reduce drawdowns by seeking companies with strong balance sheets, which is our fundamental investment philosophy.
Q4: TEPCO's stock has risen 50% recently, driven by Bitcoin and cryptocurrency, or is it due to increased demand for AI in Japan? How do you view its potential?
Matthew Sige: TEPCO has invested in the Bitcoin mining company Agile X, with limited information and little media coverage. France's EDF has also begun Bitcoin mining, with Marathon acquiring three-quarters of its data center business. The French parliament has proposed to formalize Bitcoin mining for debt repayment, as excess power from France was previously exported to Germany. Japanese lawmakers are also discussing increasing mining efforts as the story of nuclear power resumption heats up.
TEPCO's market value has dropped from $30 billion to $6 billion, high risk but low price. Acceptance in France is increasing; if Japan follows, TEPCO could benefit. Even without this trend, the risk-reward is attractive.
We tweeted encouraging TEPCO to talk more about its mining business, believing this will enhance its valuation multiples. The fundamental story combined with Bitcoin consolidation could lead to a significant stock price increase if the business expands. We leverage our internal expertise in utilities and energy, collaborating with analysts from our natural resources strategy, yielding good results.
Q5: You mentioned leverage as one of the investment risks, especially in Digital Asset Treasury companies (DATs). What traps should we be wary of if entering a bear market?
Matthew Sige: Leverage is the main risk. Our exposure to digital assets shows that position size is key, especially when dealing with assets that have volatility levels of 80%, 90%, or 100%. We support some companies, but are more cautious than competitors. In public equity funds, we look for valuation arbitrage opportunities; valuation is important for DATs, especially small-cap companies, where management can influence market signals through actions like share buybacks.
I am not particularly bearish; some companies will succeed, similar to MicroStrategy, which continues to trade above net asset value. However, many companies may fail, with capital trapped and executives earning millions in salaries. If trading at 0.8 times NAV, it's difficult for shareholders to make the right decisions. In future discussions on corporate governance, we may explore this further.
Q6: The SEC has clearly stated that staking does not constitute a security. What impact does this have on the staking strategies of individuals, private funds, and public companies?
Matthew Sige: The Solana ETF is set to launch this fall, and we are working hard to support staking and on-the-spot creation of redemptions. Market makers are creating shares with Solana to reduce friction and specialize in staking. Due diligence thresholds for staking coins in ETFs are high; organization recognition is required, regulatory attention is on partners, SOC certification is important, and it may require a collection of U.S. validators. Three years ago, overseas validators were safer, and now domestic ones may be more advantageous.
The importance of staking has not changed significantly, as many altcoins have high inflation rates, diluting investors. Locking up staking is necessary to maintain network share, and returns only offset inflation. The dollar has depreciated an average of 4% annually over 50 years, and Treasury returns are flat or negative. If staking Ethereum or Solana only offsets dilution, non-stakers are harmed, resulting in near-zero real returns. Ethereum and Solana have positive yields in active blockchains, with reasonable positions. This field is early; most blockchain fees are low, and the mechanisms for token holders are immature, similar to high liquidity risk investment assets.
Q7: The government has a positive attitude towards Bitcoin and cryptocurrencies, with the Treasury Secretary mentioning 'budget-neutral' purchases. What regulatory dynamics are you paying attention to in Washington?
Matthew Sige: I have been paying less attention to Washington lately, as the groundwork has been laid; investment bank cases show that capital formation catalyzes. My expectations for the federal government buying Bitcoin are low; Bessant's comments may reveal the truth—they will not sell. Large-scale budget-neutral acquisitions of Bitcoin require legislative support, and significant financial issues need legislation even if they are neutral.
Q8: There are speculations that the government may nationalize companies like MicroStrategy that hold a large amount of Bitcoin. How do you view this possibility?
Matthew Sige: There are people on Twitter suggesting that he is buying Bitcoin for the government, which may be a matter for a generation later; rational investors will not base their investments on this. We consider this possibility, but buying and selling companies or Bitcoin is not based on this.
If the government considers Bitcoin important, there are listed companies and ETFs in the U.S. holding a large amount of Bitcoin. A century ago, the government required asset surrender; today, the internet and government-citizen relations make this difficult. The Treasury Secretary mentioned confiscation in criminal procedures, which can easily lead to misunderstandings in the internet age. If Bitcoin supports 20% of new Treasury issuance, considering moral hazard is reasonable, such as a 99% drop. In the current and coming years, the government is more likely to profit through financial repression, such as taxing Bitcoin mining franchises or self-custody trades, which are simpler operations.
Q9: The issuance of stablecoins may partially privatize 'currency production'. What related opportunities or risks are you paying attention to?
Matthew Sige: Opportunities lie in the trading and clearing of stablecoins. The federal government will not issue stablecoins, and legal issues may make CBDCs impossible. Individual states may try, with Wyoming leading the way.
Merchant acceptance is an issue, such as whether Wyoming stablecoins are usable in Miami. State-chartered banks can issue dollar-backed stablecoins, similar to branded electronic dollars. VanEck Ventures has recruited a team from Circle, and Wyatt is investing in next-generation stablecoin clearinghouses.
Q10: Will the four-year cycle of Bitcoin continue, or will it change due to ETFs and corporate purchases?
Matthew Sige: I believe it will continue, but in a more moderate way. The cycle has been present for a long time and is trustworthy. With mid-term elections heating up next year, progress in Washington is slow, and interest rate cuts may have already been implemented. It's early, but I'm paying attention to down years; the cycle will recover, and ETF and corporate purchases provide balance.
Q11: What data points do you use to determine if the market is close to its top? Do you have any unique indicators?
Matthew Sige: We use funding rates to judge short-term tops. If the cost of leveraged positions hits double digits for several weeks, it indicates the end is near, supported by historical data. Currently, there is no such situation, though there have been occasional spikes in rates followed by washes, which did not persist. The ratio of unrealized profits in blockchain has slightly increased but has not reached a danger zone. Anecdotal data, such as app download volumes or ex-wives sending Ethereum texts, also indicate risks; I received one and felt slightly concerned.
