ETH Bullet Point Thesis
- Dominant smart contract platform. Ethereum is to smart contracts in 2022 as iPhone was to smart phones in 2010. There's honest debate about whether a cheaper alternative will take share, but Ethereum has already won in 2022 for the same reason the iPhone had already won in 2010 even though we didn't know it yet: all the developers are building on Ethereum just like all the developers were building on iOS. Ecosystem escape velocity.
- Smart contract platforms are valuable because they are the base settlement layer for all internet-native economic activity: DeFi, NFT-based commerce, tokenization of everything, and TBD. They provide: security, trust. They receive: cut of all economic activity on the platform. Perpetual tax on the crypto economy.
- Triple-point asset thesis (h/t @banklesshq): ETH is the first asset that is simultaneously a capital asset (like a stock or bond), a consumable asset (like oil) and a store-of-value asset (like gold or fiat). In this way, it is arguably the best "money" ever invented. For it's role as the native currency to the Ethereum ecosystem, it has a chance at being one of the few global assets to earn a monetary premium.
- Triple-halving thesis (h/t @squishchaos): EIP-1559 (already implemented - burn mechanism) + Eth 2.0 upgrade (shift to Proof-of-Stake) = 90% reduction in issuance, equivalent to 3 bitcoin halvings. Additionally, steady rise in % of ETH staked as we approach PoS (Q3 2022 est) takes circulating supply off the market. Contracting supply + growing demand = number go up.
- Adoption: crypto is the fastest adopted new technology in history, faster than the internet (h/t @raoulgmi). The growth in total wallets continues unabated despite the recent price action. Historical correlation to Metcalfe's Law suggests current support for a $600 billion market cap (+85% from current levels), rising exponentially.
- Non-demanding valuation for exponential asset at 42x network fees (comparable to revenue), which grew 47% YoY in Q122 and 49x annualized ETH burned (comparable to earnings).
- Price target: $20,000/ETH (~$2-2.5 trillion market cap) within 18 months of Eth 2.0 upgrade (expected mid-2022, so $20k ETH price by year-end 2024).
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Great memo! My only concern with Ethereum is that their hesitancy to connecting with other blockchains (or even with Layer-0 chains like Cosmos and Polkadot) are why I see innovation on the Ethereum platform being hindered in the long run. Many developers are going on other platforms because the coding language isn't as complicated as Ethereum's Solidity.
I keep my coins on a Ledger so I can't link any brokerage or exchange here but I'll try to be transparent on my cryptocurrency transactions as well.
I've dabbled in many altcoins (never shitcoins) but in the interest of time, I recently re-allocated all crypto funds to Bitcoin and Ethereum (I used to have 25% in BTC, 25% in ETH, and the other 50% spread amongst 8-10 coins). Currently, Bitcoin is 0.41% of my overall portfolio and Ethereum is 0.26%. ETH was equal to bitcoin until I used some to buy an Animal Spirits NFT, of which all funds went to No Kid Hungry. Interested? Go buy one. It's a great cause. DM if you want the details. It's legit.
Yesterday, I increased my Bitcoin position by 4% and my Ethereum position by 4.6%. My goal is to get BTC and ETH to in total be ~3% of my overall portfolio. I add on the first day of each month, regardless of where either is trading. DCA!
Thoughts on Crypto?
I haven't invested in any cryptos other than $ETH.X & $DOGE.X for a bit, after dogecoin, i feel like the space became congested with memecoins and it lost my attention.
Do you see potential in the future of cryptocurrency? If so, how soon?
Which cryptos do you think could be most beneficial to our society?
$HNT.X is one I have been researching recently, and will start mining for it at my job. (my boss has been very interested in mining, and I get to get the miners started, lol.) They are creating a network tethered by radio hotspots that are owned by consumers, its called the peoples network. People who own miners get paid in $HNT.X when their miners complete tasks, this is called Proof-of-Work(PoW) , and the more miners there are around you, the more tasks can be accomplished.
There are multiple interesting resources already built onto this network, I suggest hitting up Heliums website if you would like to read more about it.
Feel free to hit me up anytime if you are interested in the mining aspect of cryptocurrency. thats where i can help ya out. Would love to learn about more cryptos though and maybe start investing in some.
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I really enjoyed this post from @mikemcg on Commomstock about a year ago:
Compound Collaboration, Month #21 — Texas Pacific Land
Every month I put aside some money into a portfolio aimed at long-term bets over the next 20 years. I will be gifting this portfolio to my future kids someday. I hope to use these memos as an educational tool to teach them about the world. With any luck, managing the portfolio will become a shared activity to collaborate on as they grow up.
It is one of the main reasons why I invest.
Performance from the first 20 months:
Month #18 Jan. 2022: Cash 0%
Total portfolio return: -1.02%
Return if every month I had just bought the S&P 500: +2.69%
Well this is humbling
For the first time, the total value of the portfolio has now gone negative— meaning if I needed to withdraw the money today, I would have been better off saving.
Fortunately, my kids aren't even born yet so I don't need the money today. Hopefully this memo will be a humorous stop along the journey. We shall see.
Many years from now, I hope my kids will get the chance to read this and take away the following lessons:
- After 20 months of building this portfolio, all the work that has gone into it has cost me 1.02%. This illustrates the argument for putting your money into an S&P 500 index and calling it a day. It's way less work, and you may just come out ahead in the long run.
- In the short term, you never know where the stock market is going to go, especially individual stocks.
- 1-2 years is considered "short term." Investing really is played on long time-horizons.
- Expect to be wrong a lot in investing. So far 12 of the 20 picks I've made have lost money. My hit rate at the moment is 35%.
Things may keep getting worse before they get better. The extremely long time horizon intended for this portfolio allows me to sit tight. It's not fun to be down vs. the S&P 500 or in general, but for now, it's one stop along the way.
This month's addition:
Texas Pacific Land
Market Cap: 10.66B
Should tip the hat to Horizon Kinetics who have been big believers in $TPL for a long time (decades).
Texas Pacific land started out as a railroad 1871. The idea for the railroad was to connect West Texas with the coast of California. A federal charter granted land to the company for every mile of railroad it built. The company earned three and a half million acres of West Texas land from building the railroad. But guess how many people lived in West Texas in 1871? Pretty much no one! So the railroad went out of business— but the company still owned all that sweet land. So the Texas Pacific Land Trust was formed to manage the land, which it would sell and then return the money to owners of the trust certificates. In 1920, they stopped selling the land because, you guessed it: they discovered oil. Texas Pacific sold over 75% of its original landholdings. But even after all that, it is still the largest landowner in Texas. The remaining land is in the Permian basin of west Texas, the most productive oil field in the world right now. Texas Pacific now leases its land to oil companies and collects royalties from them.
- The Dividend payout ratio is about 65%. Part of the thesis is that this will increase.
- The company doesn't have any debt. It doesn't need to take in capital to grow.
- It's all about the royalties. They are the biggest catalyst going forward for dividend growth. They don't have to drill the traditional oil. Companies lease land from Texas Pacific and pay them about a one 16th of royalty on the oil they extract, not to mention any water, right usage and other usages.
- Texas Pacific's gross margin is always close to 100% EBIT and EBITDA margins are usually around mid 90%.
- Free cashflow margins can run the high sixties, but in recent years this has dipped down into the low forties.
- Texas Pacific has great operational leverage to rising oil prices and with no need to retain cash, the company returns the bulk of it to us, the shareholders.
Another part of the thesis is that in January 2021 Texas Pacific Land went from being a Trust to a Corporation. The reason this is important is that as a trust, $TPL was not part of the 'investable universe' for a lot of funds and ETFs. Now that it's a corporation, many more entities have access to invest in it.
The Main Thesis:
Texas Pacific Land is a way to get exposure to the price of oil without all the operational execution risk of an oil company. If the price of oil goes up, more oil companies will want to drill on $TPL's land, and the more royalties they will be able to collect.
I think oil demand will stay strong for years, and even in a world where we move primarily to renewables, there will still be a lot of uses for oil in the making of solar and renewable energy infrastructure. Even if oil prices stay where they are now, Texas Pacific is going to be highly profitable and flush with a ton of cash to return to shareholders.
Texas Pacific's estimates that the breakeven oil price for the bulk of their reserves is about $40 per barrel. If the price of oil stays above $40, Texas Pacific should see increased drilling activity on their land and increased revenue growth.
Now, oil reserves are a declining asset. One day Texas Pacific's oil reserves will be gone, or at least only economically viable with a really high price of oil. Right now, Texas Pacific projects that they have 19 years of reserves at a $40 per barrel breakeven price.
- Oil Prices decline below $40 a barrel.
- $TPL's reserves are depleted quicker than the expected 19 years
Things that aren't as big of a risk as people think
- A fracking ban — fracking bans usually only apply to public land owned by the government. Texas Pacific land is private land. They own it and they can do what they want with it. And with their mineral rights, they would not be effected by a fracking ban. They'd actually be affected positively because other sites going offline means $TPL's resources are more valuable.
- Electric vehicles — The expectation is the electric vehicle will cause oil demand to fall off a cliff. Today EVs are an expensive niche product. They are a small percentage of total auto sells. If EV sales were to double, they'll still only account for less than 10% of all automobile cells. We need a step change in battery technology to bring the cost per vehicle down and to increase our range, to make it a daily driver for the average person. Personally, I hope this happens, but I think it will take longer than most people anticipate. I'm assuming that in the medium term oil demand will go up, and in the longer term (30 years) oil demand will remain relatively flat.
Here's my trade— bought at $1,390. Currently at $1,366.
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Noticing some other Commonstock users who hold Texas Pacific Land. Nick Rasmussen @nras00 has been holding for 564 days and Ram V @sirthroedness for 409 days, impressive! Would love to hear ya'lls thesis as well.
Same with @joryko — how long have you been holding $TPL and what's your main motivation for holding?
Observations about investor sentiment amid the market decline
Today, $QQQ fell 4.5%. Other indexes fell more than 2%. Amid the decline in the stock market bull market, it seems like people on Twitter and other platforms aren't that concerned about the markets. There seems to be no panic. It's like people expect the market to go back higher sometime soon.
Even if oil prices surge, tensions rise in the Middle East, and consumer confidence continues to hit new lows, people are still bullish on the markets. The Fed is hiking interest rates, and while the market looks concerned, people aren't. In the crypto markets, people continue to buy into $BTC.X $ETH.X and even $APE.X.
The sentiment that I'm sensing among investors seems to hint that the market decline will continue until people start panicking. Usually, markets bottom when sentiment is highly negative. The COVID bottom, the late-2018 trade war fears bottom, etc. all happened when sentiment was highly negative.
Some will say that because it is Friday, people aren't in the mood to panic. But looking back, we even had panicking on Fridays during the rapid COVID crash.
Even with $AMZN down 14%, it doesn't seem to have done anything to create panic.
Is anyone truly concerned about the market crash, or is everyone expecting markets to rebound higher soon?
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From a long-term perspective, it feels like the best of both worlds -- getting to add constantly at lower prices, despite not getting that true "the sky is falling" crash feeling.
My Portfolio: 04/25/22
I don't believe I have ever posted my entire portfolio after adding one final account here on Commonstock.
I also have a 5% allocation in $ETH.X that I have staked, so it does not show up here.
All in all, I'm happy with this blend of low payout, ratio dividend growers, and market leaders in high-growth, niche areas.
Crypto accounting for about 20% is somewhat terrifying, so I'll add a poll to see what you all think.
Other than that -- does anything on here scare you all at the moment?
Should I lower my 20% crypto exposure?
27 VotesPoll ended on: 04/27/22
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Growth in crypto adoption = Lower confidence in central banks
Some call the rising adoption in cryptocurrencies as a correlation to the declining public trust in central banks. In my view, I think it could be a causation.
In this chart from Statista, Nigeria leads the adoption of cryptocurrency. Most of the countries that lead in crypto adoption are countries that are less developed and are dealing with many economic problems. Inflation is the largest economic problems in those countries.
When the Taliban took over Afghanistan, the Afghanistan economy plunged into a massive recession. Inflation was through the roof. Amid the chaos, many Afghans resorted to cryptocurrency to escape the economic issues in their country.
Economic sanctions in Afghanistan, Russia, etc. all promote crypto adoption as a way for individuals to evade them. Some use crypto as a way to launder money. Hence why Switzerland has a higher crypto adoption rate than India, China, and the US.
As inflation continues to roar throughout the world, more people are going to turn to crypto. At least with crypto, there are no people printing coins there (unless you own $ETH.X or $DOGE.X) .
With that, going long $COIN and cryptocurrencies is like betting on the declining trust in central banks.
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Very interesting… Nigerians for sure have a very different reason than Swiss or American people for owning or transacting with Crypto.
I believe in many countries with challenging economies crypto is a safer way to transact while here it is all about investing.
My Portfolio: 04/08/22
Not much change here from the previous month (see link below).
I will continue to use the $VOO as a barbell to my crypto exposure.
$ETH.X is getting a major update this coming summer that will reduce issuance by 75-90%.
Due to this upcoming reduced issuance, I'm debating transferring some of my $SOL.X over to ETH.
This update will likely lead to an opportunity for long-term investors to earn 8-12% yield via ETH's proof-of-stake mechanism. Given the potential for steady yields, institutions may become more long-term holders.
Risks here include (but aren't limited to): technological implementation and competition ($AVAX.X ecosystem is heating up, $SOL.X is becoming more widely adopted via OpenSea, and $DOT.X is the most widely held crypto asset by hedge funds as of Q4 21).
What are you all looking at within the crypto space?
Source: Bitwise Notes from CIO April 5th
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fyi... from my miner networks.. they found a major exploit in the proof of stake... we now think proof of stake will be early to mid 2023... mine on!
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