Author: Anthony Pompliano

Translation: Baihua Blockchain

In this episode of the podcast, Anthony Pompliano talks with Matthew Sigel, Head of Digital Asset Research at VanEck, 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 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 investments, and discussed the impact of the SEC's decision on non-securitized staking on Ethereum, Solana, and others.

He believes that the four-year cycle of Bitcoin may continue but in a milder form, sharing market top indicators such as funding rates and unrealized profits, and commenting on the current regulatory dynamics in the crypto market.

The following are excerpts from the conversation, translated by Baihua Blockchain.

Q1: The NODE ETF has been launched for over three months, achieving a return of 28-30%, which is double that of Bitcoin and far exceeds indices like the S&P 500. How do you construct a portfolio of crypto-related stocks?

Matthew Sigel: Thank you for the invitation. We have been running a cryptocurrency stock strategy for nearly five years and have observed that they are extremely volatile. At market tops, high-leverage stocks perform best and have the largest gains, but leverage is toxic to cryptocurrencies, as proven in past cycles.

At market tops, cryptocurrency stock indices are filled with high-leverage assets, which experience significant declines during corrections. Many cryptocurrency stock products perform poorly, and from an investor's perspective, investing heavily in Bitcoin-related products yields unsatisfactory 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 about 65%, and large infrastructure companies are involved in power, electrical equipment, and industrial infrastructure, which is meaningful for earnings growth and valuation multiples. Additionally, fintech e-commerce companies, similar to the Magnificent 7 but focused on Latin America or Asia, are beginning to adopt stablecoins on a large 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, and low-volatility sectors such as utilities, energy, and infrastructure, providing stability.

By avoiding large drawdowns through high diversification, diversification is particularly important when Bitcoin is near historical highs. A rising tide lifts all boats, but you may miss out on ten-bagger stocks, which was the strategy a year ago. During market corrections, we sell off the low-volatility portion and increase volatility. Since inception, we have outperformed with lower volatility, achieving returns that are double that of Bitcoin, which is our sweet spot. We cannot guarantee repeating this performance, but that 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 Sigel: Some utility companies operate in regions with growing Bitcoin mining, such as Arkansas and Oklahoma.

This is similar to how public equity investors think, studying the entire system's vertical integration. The growth of Bitcoin mining implies a demand for hardware, energy, and geographical locations. We trace the supply chain to find growth areas and power suppliers, assessing their businesses. The cryptocurrency component is overlayed, helping to identify opportunities, followed by fundamental analysis of the companies to determine if they are expensive or align with our strategy.

Unless a company explicitly mentions Bitcoin, blockchain, or cryptocurrency as a business driver, it will not enter our 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 example, Solaris SEI produces generators suitable for co-location with data centers, used for Bitcoin mining and AI mixed-use. Bitcoin miners are shifting from single mining to allocating part of their capacity to AI, requiring equipment upgrades, and we are also monitoring this area.

Q3: What other companies in the industrial and energy sectors are included in your investment scope? What are the screening criteria for cryptocurrency companies?

Matthew Sigel: We tend to hold companies we are optimistic about, as our diversified approach provides investors with a milder volatility experience. Screening criteria include the leverage of a company's relative 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. At market tops, indices are over-allocated to high-leverage companies, posing the greatest risk. In the last cycle, many tech companies that became Bitcoin banks went bankrupt. This cycle's leverage is more specialized, but the volatility of bare assets like Bitcoin is still higher than stocks. We pursue compound growth while reducing drawdowns by seeking companies with strong balance sheets, which is our fundamental investment philosophy.

Q4: TEPCO's stock recently rose 50%, driven by Bitcoin and cryptocurrencies, or is it due to increased demand for AI in Japan? How do you view its potential?

Matthew Sigel: TEPCO has invested in the Bitcoin mining company Agile X, but information is limited, and media coverage is sparse. EDF in France has also started Bitcoin mining, and Marathon has acquired three-quarters of its data center business. The French parliament has proposed formalizing Bitcoin mining to repay debts, as France's surplus electricity was previously exported to Germany. Japanese lawmakers are also discussing increasing mining efforts, and the story of nuclear power resumption is gaining traction.

TEPCO's market value has dropped from $30 billion to $6 billion, presenting high risk but low price. If acceptance increases in France and Japan follows suit, TEPCO could benefit. Even without this trend, the risk-reward is attractive.

We tweeted to encourage TEPCO to discuss its mining business more, believing this would enhance its valuation multiples. The fundamental story combined with Bitcoin integration suggests that if the business expands, the stock price could soar. We leverage our internal expertise in utilities and energy, collaborating with analysts from our natural resources strategy, which has proven effective.

Q5: You mentioned that leverage is one of the investment risks, especially in Digital Asset Treasury companies (DATs). If entering a bear market, what traps should be wary of?

Matthew Sigel: Leverage is a primary risk. Our exposure to digital assets shows that position size is crucial, 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, as valuation is critical for DATs, especially small-cap companies, where management can influence market signals through buyback authorizations and other actions.

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 taking millions in salaries. If trading at 0.8 times NAV, it is difficult for shareholders to make the right decisions. We may explore corporate governance topics further in the future.

Q6: The SEC has clarified that staking does not constitute securities; what impact does this have on staking strategies for individuals, private equity funds, and public companies?

Matthew Sigel: The Solana ETF is set to launch this fall, and we are working to support staking and on-site creation of redemptions, with market makers creating shares using Solana to reduce friction and specialize in staking. The due diligence threshold for staking coins in ETFs is high, requiring organizational recognition, and regulators focus on partners, making SOC certification important, which 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 staking to maintain network shares, with returns only offsetting inflation. The dollar has depreciated by 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 at a loss, with actual returns close to zero. Ethereum and Solana have positive yields in active blockchains, with reasonable positions. This field is early, with most blockchain fees being low, and the token holder mechanisms are not mature, 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 in Washington are you paying attention to?

Matthew Sigel: 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 purchasing Bitcoin; Bessant's comments may reveal the truth—they will not sell. Large-scale budget-neutral purchases of Bitcoin would require legislative support, and significant financial issues would still need legislation, even if neutral.

Q8: There are speculations that the government may nationalize companies like MicroStrategy that hold large amounts of Bitcoin. How do you view this possibility?

Matthew Sigel: There are people on Twitter suggesting 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 or selling companies or Bitcoin is not based on this.

If the government deems Bitcoin important, there are publicly traded companies and ETFs holding large amounts of Bitcoin in the U.S. A century ago, the government required the surrender of assets, but today, the internet and the relationship between government and citizens make this difficult. The Treasury Secretary mentioned confiscation in the context of criminal procedures, which can easily lead to misunderstandings in the internet age. If Bitcoin supports 20% of new national debt issuance, it is reasonable to consider moral hazards, such as a 99% drop. In the present and 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 Sigel: Opportunities lie in stablecoin trading and clearing. The federal government will not issue stablecoins, and legal issues may make CBDCs impossible; individual states may attempt this, with Wyoming leading the way.

Merchant acceptance is a problem, such as whether Wyoming stablecoins can be used 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 the next generation of stablecoin clearinghouses.

Q10: Will the four-year cycle of Bitcoin continue, or has it changed due to ETFs and corporate purchases?

Matthew Sigel: I believe it will continue, but in a milder form. The cycle has existed 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 is still early, but I am watching the down years; the cycle will recover, and ETFs and corporate purchases provide balance.

Q11: What data points do you use to determine if the market is nearing a top? Do you have any unique indicators?

Matthew Sigel: We use funding rates to gauge short-term tops; if the cost of leveraged positions reaches double digits for several weeks, it indicates the end is near, supported by historical data. Currently, there is no such situation; occasionally, rates spike and then wash out, but it has not persisted. The ratio of unrealized profits in the 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 signals risk; I received one and felt slightly concerned.

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