Crypto/Bticoin
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Introduction
Housekeeping
In some respects, this article has been in the works for a while. I originally submitted it to Seeking Alpha in early January. In some respects, you cannot avoid politics when it comes to Bitcoin (BTC-USD). The Bitcoin project itself emerged as a response to the bailouts, money printing and U.S. government abuse of the reserve currency following the Great Financial Crisis (2007-2009). Thus, one cannot easily deny that HODL’ing Bitcoin is a form of voting with your hard earned savings, as well as a bet against the Federal Reserve, central banking and bureaucrats.
Since early January 2022, the politics of Bitcoin have come to the forefront across the world in many respects, whether in Canada with the trucker protest and Trudeau’s heavy-handed response, in Turkey and Argentina as a response to high rates of inflation, in El Salvador as that country looks to issue Bitcoin bonds, and now in Ukraine and Russia in response to the war between those two nations. Regardless of what you think of that war or politics in general, the power of Western central banks to freeze the bank accounts of individuals, companies and even Russia is eerie and on full display, and the advent of central bank digital currencies will only accelerate this power. Bitcoin, however, stands tall as a contra, dare I say, political force against the powers of centralization, the intrusive power of the State and corrupt central bankers.
Portfolio Matters
In that Original Draft, I had tried to give readers an update on my portfolio, with the key point being that I was reducing my crypto holdings materially. Indeed, I did reduce my crypto holding from roughly 12% of my overall portfolio down to 8%, which proved to be a good move. Had my Original Draft of this article been published soon after I submitted it, the timing would have been excellent. The the crypto market started to tank in earnest, before I could incorporate updates. Thereafter, I got busy with work and, next thing you know, it is almost May.
In any event, what I can do here in this article is 1) provide an update on my portfolio holdings, 2) note that I remain bearish on crypto for at least the next couple of months for reasons noted in the next paragraph, and 3) highlight a new crypto related investment I have been accumulating.
With respect to my current short-term bearishness on crypto, what I had written back in January in the Original Draft (not published) still applies:
A bear market is always coming in crypto and likely a mathematical certainty given the volatility of the asset class. The Fed’s desire to tighten policy is already causing some large declines in the space, and a well- planned regulatory attack could shake out weak hands, including those who did not realize they had weak hands — diamond hands can only develop under the extreme pressure of monster drawdowns.
As 2022 progresses, know what you own and avoid leverage. Have ammo ready, be sure to take profits from time to time, and recognize that the path to an $100 trillion asset class value for the space (50x from here) will not be smooth. Amazon (AMZN) fell 90% during the tech bubble in the early 2000s and very few, including yours truly, had diamond hands. It is not easy to HODL, but if it is a good project with real value, that will likely be the best course.
I have chosen to take material profits in Bitcoin and Ethereum and otherwise reduced my overall crypto exposure, while reinvesting some proceeds in a number of alternative layer 1 protocols. If my cautiousness is ill timed, I would expect these alternative layer 1s to exceed the returns on Bitcoin and Ethereum, somewhat mitigating the fact that I have substantially reduced my overall crypto holdings.”
Blockchain Portfolio
Below is my updated portfolio, as of December 31, 2021 and as of the time of writing.
Asset Exposure Percentages
| Investment | Category | Allocation December 31, 2021 |
Allocation April 25, 2021 |
| GBTC | Bitcoin | 22% | 0% |
| ETH-USD | Ethereum | 39.2% |
30% |
| ETHE | Ethereum | 0.2% | 0% |
| BTC-USD | Bitcoin | 1.5% | 20% |
| Algorand | Layer 1/Smart Contract Platform | 7.1% | 2% |
| Solana | Layer 1/Smart Contract Platform | 2.7% | 6% |
| Avalanche | Layer 1/Smart Contract Platform | 1.6% | 6% |
| Cosmos | Interoperability | 2.8% | 6% |
| Other Alt Coins | Alt Coins | 3.4% | 7% |
| MicroStrategy | Software/Bitcoin | 0% | 2% |
| HIVE | Crypto Miner | 5.0% | 5% |
| Defi Technologies | Diversified Crypto Services | 3.6% | 7% |
| Argo Blockchain Notes |
Blockchain Miner Bonds |
0% | 6% |
| Other Equities | Blockchain Equities | 1.0% | 3% |
The “Other Alt-Coins” category above includes positions in, among others, Chainlink (LINK-USD) The Graph (GRT-USD), Polygon (MATIC-USD), Decentraland (MANA-USD), Luna (LUNA-USD); and Polkadot (DOT-USD).
As noted earlier in the article, I reduced my crypto exposure relative to my overall investment portfolio, but did take on more risk by investing in other layer 1 protocols such as Solana and Avalanche. (Also, I do hold stable coins which I consider cash equivalents rather than part of my crypto portfolio.)
In addition, as you can see, I have been accumulating the publicly traded “baby bonds” of Argo Blockchain PLC (ARBK) (“Argo Blockchain” or the “Company“), which trade under the symbol (NASDAQ:ARBKL). I highlight this investment in more detail below.
Argo Blockchain Baby Bonds
Per its website, Argo Blockchain is a global data center business providing an efficient platform for sustainable cryptocurrency mining operations. Headquartered in London, UK, the company’s crypto mining operations are located in North America and the company is expanding its operations in Stillwater, Texas.
Per the prospectus, the basic terms of these Argo’s 8.75% Coupon Senior Notes (the “Notes“) are as follows:
Face Amount at Issue: $25.00
Original Coupon: 8.75%
Maturity Date: November 30, 2026
Shares Outstanding: 1.6 million
CUSIP: 040126203
Interest: Interest on the Notes will accrue from November 17, 2021, and will be paid quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on January 31, 2022, and at maturity.
Redemption: Argo Blockchain may redeem the Notes for cash in whole or in part at any time at its option (1) on or after November 30, 2023 and prior to November 30, 2024, at a price equal to 102% of their principal amount, (2) on or after November 30, 2024 and prior to November 30, 2025, at a price equal to 101% of their principal amount, and (3) on or after November 30, 2025, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, Argo Blockchain may redeem the Notes, in whole, but not in part, at any time at its option, at a redemption price equal to (i) 100.5% of the principal amount plus accrued and unpaid interest to, but not including, the date of redemption, upon the occurrence of certain change of control events. See the prospectus for more details, as well as information concerning certain redemption options due to changes in tax laws.
I do like that the Notes pay a premium if they are called early, particularly since I think the current risk/reward is favorable.
Priority of Notes: The Notes are senior unsecured obligations. The Notes rank equally in right of payment with all of Argo Blockchain’s existing and future senior unsecured indebtedness and will be senior to any other indebtedness expressly made subordinate to the Notes. The Notes are effectively subordinated to all of our existing and future secured indebtedness (to the extent of the value of the assets securing such indebtedness) and structurally subordinated to all existing and future liabilities of our subsidiaries, including trade payables.
Financial Covenants: None
In short, these are uncollateralized Notes with no financial covenants. In a default situation, the Notes rank ahead of the common equity shareholders and any debt holders specifically subordinated to the Notes (currently none).
While clearly risky “junk” bonds (see pages 14-62 of the prospectus linked above for a litany of risks), at the current share price of roughly $22.50, however, the Notes offer a yield to maturity of well above 10%.
The Notes are largely a bet on Bitcoin and Argo Blockchain’s balance sheet which, of course, is leveraged to the price of Bitcoin.
At September 30, 2021, per the prospectus, Argo Blockchain’s summary balance sheet showed:
Cash and Cash Equivalents: $ 85,840,094
Total Assets: $ 345,596,346
Total Liabilities: $ 96,247,374
Accumulated Surplus: $ 58,065,505
Total Equity: $ 250,348,972
As one can see, there is CURRENTLY ample liquidity and assets to cover debt service in the near future, and the Notes mature in less than five years. Recent operational updates suggest that the Company is increasing mining production and improving operational efficiencies.
According to the most recent investor presentation, the Company HODL’s 2700 Bitcoin (as of March 31, 2022).
Full year operational results will drop around the time this article posts. Depending on the outcome, I might be inclined to add more to my position, particularly if the high yield bond route continues. As long as management acts rationally and doesn’t over-leverage the Company, these Notes should be a good investment and a good diversifier in my crypto portfolio.
Final Thoughts
The last crypto bull run mostly ended on or about November 10, 2021. While opportunities abound in the long run, it is (still) time to be cautious and selective and to have a plan should a deep crypto winter be in the cards. Of course, there will be oversold rallies along the way. I hope to trade and fade the bear market rallies, while maintaining core positions. For now, I am not fighting the Fed. Liquidity is already drying up and high yield spreads are blowing out. In the investment space, now is not the time to be a hero in my view. That said, at the current price, ARKBL bonds offer an interesting opportunity to earn a yield that keeps up with inflation and which is indirectly supported by Bitcoin.
In short, these Notes are a BUY at or below $22.50. Limit orders are absolutely necessary as these shares are thinly traded and the bid/ask spreads are typically very wide.
Cheers!