From a financial diligence perspective, we believe there is likely incremental upside even versus base-case estimates in terms of strategic partnerships, additional price-taking ability, and volume growth. Since CoinFund’s initial conversations with Compass, the team has already delivered 4th quarter sales volumes in excess of what was budgeted while also expanding new revenue opportunities aggressively, while also maintaining a lower cost base and leveraging social media marketing to maximize ROI of spend while still supporting the Compass product launch and filling their funnel in excess of initial projections. Although Compass isn’t yet at the same stage of growth as large scale publicly-traded infrastructure companies, we are reminded of the similarities in business models (recurring revenues, scalable platform model, meaningful barriers to entry) between Compass and the premium valuation multiples enjoyed by data centers such as EQIX or DLR (25x+ EBITDA) and tower operators like AMT or CCI (also 25x+ EBITDA), which we view as aspirational.
One question is whether the assumption that BTC and its SHA-256 algorithm will remain the market leader versus a POS chain like ETH2, or newer base layers like DOT. At this point, we believe it’s unlikely that BTC will lose its central positioning as a ‘digital gold’ asset within the world of digital assets, a position that has only strengthened despite numerous forks such as LTC, BCH, Bitcoin Gold and more, none of whom have been able to take share from BTC’s monetary premia and have mostly lost ground on a price basis versus Bitcoin. While it’s true that current and future generation POS-based layer-1’s will continue to demonstrate better programmability and scalability, the success of wrapper projects like wBTC suggests that BTC’s moat is actually stronger, not weaker in an era of composability and interoperability due to its core properties that cannot be copied easily (immaculate conception and getting past the POW cold start problem, having now reached mainstream awareness and appeal).
Another potential area of concern is that the majority of ASIC supply chains still rely on fabrication processes that heavily involve China, not to mention the reliance on China-based manufacturers such as Bitmain and MicroBT. Historically, the Chinese government has also periodically cracked down on crypto-related businesses, confiscating miners implicated in illegal mining operations, or raiding the offices of exchanges accused of violating securities law. However, while the country-level risk remains an issue, we believe the trend of geographic diversification of hashpower outside of China will only continue going forward, as there are natural incentives both for proprietary miners and hardware suppliers to seek to minimize their own risk in terms of being levered to one country / government regime. Specifically, we believe that the combination of 1) Chinese miners being incented to diversify geographically as a personal/political hedge, 2) increased diffusion of mining equipment + longer hardware cycles (enabling larger capital investment projects), and 3) greater appetite for mining operations as infrastructure investment plays outside of China will naturally result in diversification of hash in the base case, though I’ve highlighted some of the obstacles and sources of variance that are worth watching. There are already examples of ASIC manufacturers diversifying their operations to both reduce the risk of regional Chinese interference and optimize tax liability for buyers, for example with Bitmain having stood up final assembly operations in Malaysia to save US equipment purchasers from a 20% value-added tax levied on ASICs purchased directly from China.