BLOK-Chain Monthly Commentary May 2023

The Fund increased 2.77% in April and is up 30.40% YTD in 2023. While we are pleased to be writing about such strong performance at the start of the year, we are even more optimistic about the long-term future of the companies we are invested in. We are pleased to be delivering such strong performance at the start of the year, despite the banking crisis headlines, economic uncertainty, and the newness of the technology and digital asset value. This performance came as we strategically increased the portfolio’s net exposure to the Bitcoin Miners (22%), a category which has a very high correlation to Bitcoin.

The activity in April was higher than in typical months. Our process requires us to trim positions and take profits when they exceed a certain threshold. This was the case for MicroStrategy (MSTR) and RIOT Platforms (RIOT), which at the conclusion of April were still our top two positions. Since, by design, Bitcoin serves as a natural hedge to a banking crisis, we then offset these sales by increasing exposure in both Cleanspark (CLSK) and Bitfarms Ltd (BITF). During the month we also increased exposure to the Semiconductor industry through additional purchases in Advanced Micro Devices (AMD) and Taiwan Semiconductor Manufacturing (TSM). Paypal (PYPL), Nu Holdings (NU), and Splunk (SPLK) were also increased during the month. The portfolio’s exposure to the banking sector is very small, at about 3%. We believe the banking sector will ultimately be meaningfully changed by digital assets and blockchain, but these are not times to be overweighted. Nevertheless, we took a victory lap on New York Community Bancorp (NYCB), which ended up striking a sweetheart deal with the FDIC for Signature Bank deposits. We added DBS Group to the portfolio after the sale of NYCB, and on a net basis, reduced the banking sector exposure by about 100 BPs (1.0%).* Buying DBS Group also diversified the portfolio into Singapore, where bank regulation is friendlier towards digital assets. DBS’s CEO, Piyusha Gupta, is very forward thinking towards Blockchain, digital assets, and Web3 technologies in general (Piyush Gupta How Web3 technologies will shape finance in 2023). We would also highlight that while this is a trade blotter of the actions taken in the portfolio during the month, we also were very active on the due diligence front by adding companies to the proprietary database.

We have been mostly pleased by the financial results reported by the companies in the portfolio during this first quarter, but recognize that the near term growth outlook of companies today is fuzzy and challenging. The good news on this front is that growth is looking cheaper today than in years past, which is a nice setup for upside surprise in operating metrics and will leave room for multiple expansions. Moreover, we expect that management teams who will remain focused on their core objectives and view themselves as disruptors will not be deterred by challenges. Jack Dorsey, CEO of Block Inc. (SQ) said during their First Quarter report, “There are three macro challenges affecting all businesses now and over the long term. Number one, constant state of global crisis. Number two, regulatory fragmentation. Number three, global financial systems shifts. The world seems to be moving from one global crisis to the next and suffering from an overwhelming amount of information, which is causing people and organizations of all sizes to be distracted and reactive to the moment. From COVID to inflation, to the war in Ukraine, to bank failures, the number of things we all need to pay attention to grows unbounded.” Under these conditions, we believe disruptor companies are on sale for now, and long-term investors who are not looking closely to capture the inevitable transformational change from blockchain and digital assets are simply missing out on the most important paradigm shift in decades. We note that even Warren Buffett and Charlie Munger, two skeptics of digital assets, agree that an allocation, when sized appropriately to Fintech and innovation, has a place. Don’t believe us? Berkshire holds 107 million shares of Nu Holdings, worth about $600 million. As noted above, we recently added to the position. NU is an on-ramp for digital assets and an emerging market NEO bank with over 80 million customers. To this point, we would also point out that NU stock trades at close to $6 and has a market cap of some $25-$27 billion dollars versus Coinbase (COIN), at $14 to $15 billion. We would like to think that COIN is undervalued according to Warren Buffett’s metrics for valuing NU, but even bulls have to be concerned that either the regulatory pressures in the U.S. are suppressing Coinbase’s valuation (smell a discount), or worse – Coinbase’s management will be discouraged from innovating. Time will tell, but we feel confident that Coinbase’s management will be discouraged or unfocused in achieving its core mission. As a reminder, the U.S. is strengthened by the optimism and leadership from entrepreneurs like Michael Saylor, Jack Dorsey, Michael Novogratz and Brian Anderson, who willingly welcome regulators. As Brian Armstrong says, while Coinbase is being suited by the US government, “The rule of law does exist in the U.S, we do reach the right outcome eventually.”