Author: Anthony Pompliano
Compilation: Vernacular Blockchain
In this episode of the podcast, Anthony Pompliano talks with Mattew Sigel, the Head of Digital Asset Research at VanEck, to discuss 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 surpassing Bitcoin and the S&P 500, utilizing a diversified “barbell” strategy that includes traders, infrastructure, and fintech companies.
In the interview, he detailed the current investment portfolio and specific targets of the NODE ETF, analyzed the potential of companies like Entergy and TEPCO in Bitcoin mining, emphasized the leverage risks in investing, and discussed the impact of the SEC’s decision on staking non-securitized assets on Ethereum, Solana, and others.
He believes that the Bitcoin four-year cycle may continue but in a milder way, sharing market top indicators such as funding rates and unrealized profits, and expressing his views on the current regulatory dynamics in the crypto market.
The following is an excerpt of the dialogue content, compiled by the vernacular blockchain.
Q1: The NODE ETF has been launched for over three months, with a return rate of 28-30%, which is double that of Bitcoin and far exceeds indices like the S&P 500. How do you construct an investment portfolio related to cryptocurrency stocks?
Matthew Sige: Thank you for the invitation. We have been running cryptocurrency stock strategies for nearly five years and have observed that they are extremely volatile. At the market peak, high-leverage stocks perform best and have the largest gains, but leverage is toxic to cryptocurrencies, as has been proven in the past few cycles.
Market top, the cryptocurrency stock index is filled with high-leverage assets, and the decline is significant during the reshuffle. Many cryptocurrency stock products have performed poorly, and from an investor’s perspective, investing a large amount of funds into Bitcoin-related products has not yielded ideal returns. Therefore, the goal of the NODE ETF is to invest broadly, covering companies that clearly profit from the on-chain economy, such as Coinbase, Bullish, and other traders and infrastructure providers.
Bitcoin’s dominance is around 65%, with large infrastructure companies involved in power, electrical equipment, and industrial infrastructure, which is meaningful for earnings per share growth and valuation multiples. Additionally, fintech e-commerce companies, similar to the Magnificent 7 but focused on Latin America or Asia, are starting to adopt stablecoins on a large scale, resulting in cost savings. Our investment scope covers over 150 companies with digital asset strategies.
We adopt a barbell strategy, with one-third of the fund allocated to pure cryptocurrency stocks, as well as peripheral sectors such as e-commerce, fintech, and low-volatility sectors like utilities, energy, and infrastructure to provide stability.
Avoid major drawdowns through high diversification; diversification is particularly important when Bitcoin approaches historical highs. A rising tide lifts all boats, but you might miss out on ten-baggers, which was a strategy from a year ago. During market pullbacks, we sell low-volatility parts and increase volatility. Since inception, we have achieved excess returns with lower volatility, yielding twice that of Bitcoin with lower volatility, which is our sweet spot. We cannot guarantee repeating this performance, but that is the goal.
Q2: You mentioned utility and electrical hardware companies; what specific examples are there? Do they only serve Bitcoin miners, or are there other intersections with cryptocurrency?
Matthew Sige: Some utility companies operate in areas with increased Bitcoin mining, such as Arkansas and Oklahoma.
This is similar to the way public stock investors think, studying the entire system of vertical integration. The growth of Bitcoin mining indicates a demand for hardware, energy, and geographic locations. We analyze the chain to identify growth areas and power suppliers, evaluating their businesses. The cryptocurrency part is overlayed, helping to identify opportunities, and then performing fundamental analysis on the companies to determine if they are expensive or align with strategy.
Unless the company explicitly mentions Bitcoin, blockchain, or cryptocurrency as a business driver, it will not enter the investment scope. We manage the portfolio based on the volatility levels of Bitcoin and the S&P 500, focusing on the entire supply chain. For example, Solaris SEI produces generators suitable for co-locating data centers, used for Bitcoin mining and AI mixed purposes. Bitcoin miners are shifting from single mining to allocating part of their capacity to AI, requiring equipment upgrades, and we are also paying attention to this field.
Q3: Which companies in the industrial and energy sectors are included in the investment scope? What are the selection criteria for cryptocurrency companies?
Matthew Sige: We tend to hold optimistic companies due to our positive outlook on the cryptocurrency sector, and a diversified approach provides investors with a milder volatility experience. Selection criteria include the leverage of companies’ relative profitability.
For example, MicroStrategy accounts for 10% of the pure cryptocurrency stock index, but our position is only 3% or lower due to its high leverage. When the market is at its peak, the index is overly allocated to highly leveraged companies, which poses the greatest risk. In the previous cycle, many tech companies went bankrupt after becoming Bitcoin banks. This cycle generates leverage more professionally, but the volatility of bare assets like Bitcoin is still higher than that of stocks. We pursue compound growth and reduce drawdowns by looking for companies with strong balance sheets, which is our fundamental investment philosophy.
Q4: TEPCO’s stock has recently risen by 50%, driven by Bitcoin and cryptocurrency, or is it due to the increasing demand for AI in Japan? What is your view on its potential?
Matthew Sige: TEPCO has invested in the Bitcoin mining company Agile X, with limited information and few media reports. France’s EDF has also started Bitcoin mining, and Marathon has acquired three-quarters of its data center business. The French parliament has proposed to formalize Bitcoin mining to repay debts, as France previously exported excess electricity to Germany. Japanese lawmakers are also discussing increasing mining efforts, and the narrative around nuclear power restart is gaining traction.
TEPCO’s market value has dropped from 30 billion USD to 6 billion USD, presenting high risk but low prices. Acceptance in France is increasing, and if Japan follows suit, TEPCO may benefit. Even without this trend, the risk-reward ratio is attractive.
We tweeted to encourage TEPCO to talk more about its mining business, believing this will enhance its valuation multiple. The fundamental story combined with Bitcoin consolidation suggests that if the business expands, the stock price could soar. We leverage our internal utility and energy expertise, collaborating effectively with analysts from the natural resources strategy.
Q5: You mentioned that leverage is one of the investment risks, especially in Digital Asset Treasury companies (DATs). In a bear market, what traps should be wary of?
Matthew Sige: Leverage is the primary risk. Our exposure to digital assets shows that position size is crucial, especially when dealing with assets that have volatility of 80%, 90%, or 100%. We support some companies, but are more cautious than our competitors. In publicly traded equity funds, we look for valuation arbitrage opportunities; valuation is important for DATs, especially for small-cap companies, as management can influence market signals through actions such as share buyback authorizations.
I am not particularly bearish; some companies will succeed, similar to MicroStrategy, continuously trading above net asset value. However, many companies may fail, capital gets trapped, and executives are taking millions in salaries. If traded at 0.8 times NAV, it is difficult for shareholders to make the right decisions. In the future, we may further discuss corporate governance topics.
Q6: What impact does the SEC’s clear stance that staking is not considered a security 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 professionalize staking. The due diligence threshold for ETF staking coins is high, requiring organizational recognition and regulatory scrutiny of partners. SOC certification is important and may require a collection of U.S. validators. Three years ago, overseas validators were safer, but now domestic ones may be more favorable.
The importance of staking has not changed significantly. Many altcoins have high inflation rates, diluting investors, who need to lock up their stakes to maintain a share of the network, with returns only offsetting inflation. The US dollar has depreciated an average of 4% per year over the past 50 years, and government bond returns are flat or negative. If staking Ethereum or Solana merely offsets dilution, non-stakers will be at a loss, resulting in nearly zero actual returns. Ethereum and Solana have positive returns in active blockchains with reasonable positions. This field is still early, with most blockchain fees being low and the token holder mechanisms immature, resembling high liquidity risk investment assets.
Q7: The government has a positive attitude towards Bitcoin and cryptocurrencies, with the finance minister mentioning “budget-neutral” purchases. What regulatory developments in Washington are you paying attention to?
Matthew Sige: I have been paying less attention to Washington recently, as the groundwork has been laid, and investment banking cases show that capital formation is catalyzing. I have low expectations for the federal government to purchase Bitcoin; Bessant’s comments may reveal the truth—they will not sell. Large-scale budget-neutral purchases of Bitcoin require legislative support, and significant financial issues need legislation even if they are neutral.
Q8: Some speculate that the government may nationalize companies like MicroStrategy that hold large amounts of Bitcoin. What is your view on 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 would not invest based 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 US that hold a large amount of Bitcoin. A hundred years ago, the government required assets to be surrendered, but today the internet and the relationship between the government and the public make this difficult. The Treasury Secretary mentioned confiscation in relation to criminal proceedings, which can easily lead to misunderstandings in the internet age. If Bitcoin supports the issuance of 20% new national debt, considering moral hazard is reasonable, as it could drop by 99%. Currently and in the coming years, the government is more likely to profit through financial repression, such as taxing Bitcoin mining licenses or self-custody transactions, which is simpler to implement.
Q9: The issuance of stablecoins may partially privatize “currency production.” What related opportunities or risks are you paying attention to?
Matthew Sige: Opportunities in stablecoin trading settlement. The federal government will not issue stablecoins, laws may make CBDCs impossible, and individual states may attempt it, with Wyoming leading the way.
Merchant acceptance is an issue, such as whether Wyoming stablecoins are usable in Miami. State-chartered banks can issue USD-backed stablecoins, similar to branded electronic dollars. VanEck Ventures recruited a team from Circle, and Wyatt is investing in the next generation of stablecoin clearinghouses.
Q10: Will the four-year cycle of Bitcoin continue, or will it change due to ETF and corporate purchases?
Matthew Sige: I believe it will continue, but more moderately. The cycle has been around for a long time and is trustworthy. With the midterm elections heating up next year, there has been little progress in Washington, and interest rate cuts may have already been implemented. It’s still 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 approaching its peak? Do you have any unique indicators?
Matthew Sige: We use the funding rate to judge short-term tops. If the cost of leveraged positions reaches double digits for several consecutive weeks, it indicates the end is near, and historical data supports this. Currently, there is no such situation; occasionally, there are spikes in the rate followed by liquidations, but they do not persist. The proportion of unrealized profits in blockchain has slightly increased but has not reached the danger zone. Anecdotal data, such as application download volumes or ex-wives sending Ethereum text messages, also suggests risks; I received one and felt a bit concerned.
