How Markets Reacted and Jefferson Sees an Opportunity

The cryptocurrency market sold off aggressively last night on news from Tesla CEO, Elon Musk, the electric vehicle manufacturer would put their BTC acceptances for purchases on hold.

After several months of excitement in the cryptocurrency space with major corporations adopting Bitcoin (recently Palantir and Sotheby’s joined that list) as a form of payment, the excitement came to a screeching halt Wednesday night after Tesla CEO, Elon Musk, broke the news the company would be suspending their BTC payment option for their vehicles and sending the market into correction territory. 

Musk, who has been viewed by many as a crypto enthusiast, leaned on BTC’s excessive energy usage as the main reason for pausing the initiative. While it is completely accurate that BTC’s mining process, which uses a consensus algorithm known as “Proof of Work”, consumes an exacerbating amount of energy, this is nothing new.  Computer scientists and developers have been understanding the scalability issues behind BTC’s consensus algorithm for several years. In fact, several protocols were developed to address this issue directly. 

During our Q2 2021 portfolio review in April, Robert and I started to discuss a few central thoughts around Bitcoin. Has Bitcoin become too synonymous with the term Cryptocurrency? Do people understand that Bitcoin does nothing except keeping track of transactions? Does Bitcoin’s technology possess key characteristics that were essential to make it the first major adopter, but lacks the characteristics to allow it to scale in the future? And of course, if Bitcoin is going to be replaced, both as a market leader and in our portfolio, who steals the show? 

We agreed that yes, BTC is used almost interchangeably with the term cryptocurrency for no fair reason. This signals a sense of “crowding” in our eyes and in turn, the asset price is a bit frothy. Furthermore, we believe that while the initial technology was revolutionary and the digital economy will be forever grateful, the technology is massively misunderstood and could one day be considered obsolete. This will largely depend on the acceptance as a Medium of Exchange which is largely tied to the success of the Lightning Network (a layer-2 protocol intended to speed up the transaction time). Our thesis as a Store of Value remains intact. 

This is a very long-term outlook, however, we believe the underpinnings are starting to take form. In turn, we trimmed our position in BTC by the most we ever have this quarter and will look to increase our position on a future pullback between $30,000-$40,000.

The two protocols we believe best positioned to replace BTC in the top of the marketplace are Cardano and Ethereum. These two protocols are at very different stages of their development and market integration. Cardano remains still in a bit of early-stage development (the project started in 2016) hoping to finalize the rollout of their smart contracts by the end of 2021. Led by Ethereum Co-Founder Charles Hockinson, Cardano’s blockchain is 10.3 million times more energy-efficient than Bitcoin. Moreover, the transaction speed is lightning fast compared to BTC (257 Transactions per second vs. 5 Transactions per second). We believe Cardano will reach a $1 trillion market cap by the end of 2024. Ethereum is currently the most well-positioned blockchain technology on Earth. Their smart contract platform has created an entire ecosystem of decentralized app developers, NFT creators, Digital Asset collectors, and a Decentralized Finance system. It should not be understated the importance of technology making its way into popular culture through things like art, music, and sports. This is an integral step in the overall adoption of blockchain technology and cryptocurrencies. We believe ETH will have over a 50% market cap share dominance by the end of 2022, putting our price target at $10,000.

We kept our position steady in ETH and increased our position in Caradano substantially.

We did not envision Elon changing his tune on BTC so quickly, but we also make note that he has not announced any liquidation of BTC on Tesla’s balance sheet. Perhaps he is shining a light on a problem that he believes can be solved. 

What if his team at Tesla and SpaceX work with global engineers and developers to make a more efficient mining process increasing the viability for wind & solar power for the next generation? Sounds cool to us.

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