Analyst of the Month
November 30, 2023

Patrick Bush: Analyst of the Month

Meet Patrick Bush: Senior Digital Assets Research Analyst at VanEck

Jon Ma
Co-Founder / CEO

Welcome to the fifth edition of the Analyst of the Month.

This month we highlight Patrick Bush, Senior Digital Assets Research Analyst at VanEck

We're excited to share Patrick's story as we're big fans of his clear thinking and writing on Solana, DePin, dYdx, and other topics for an institutional investor audience.

Read on to learn more about his journey from trading US treasury bonds to crypto fundamental investing, what he thinks most institutional investors get wrong with Solana, and applications in crypto that he's excited about.

Without further ado, please meet Patrick Bush!

VanEck Disclosures

What is your story? What was your journey into investing and into crypto?
I come into crypto from a proprietary trading and equity research background. I traded the US treasury bond yield curve for more than 10 years and left my role as a desk head, who also started a crypto desk, to go into business school and then fundamental investing. I earned my role at VanEck as a research analyst by cold-emailing the Head of Research after hearing him on a podcast and then writing an investment thesis on the crypto project Osmosis. Currently, I work as a research analyst split between two liquid token funds at VanEck where I try to figure out which tokens are going to go up.

I became intrigued by crypto after reading the Bitcoin white paper in 2015. To me, it was absolutely fascinating to see computer science, cryptography and economics merged together to build internet sovereign money. As someone who used to read economics blogs for fun, I found the novel economic system that Satoshi built to be brilliant. However, while intrigued, I saw BTC and ETH as nothing more than really volatile, fun assets to trade. My views changed in the summer of 2020 when DeFi introduced novel financial functionality in a big way on Ethereum.

At that point in time, I decided to consider crypto as an asset class worth understanding fundamentally. I began exploring the various white papers and settled on Polkadot and Chainlink as the projects offering the most interesting visions and potential for return. So, I took all the money I had and invested it in DOT and LINK. While those were not the best investment choices at the time, the experience motivated me to dig deeper to figure out how to allocate capital to crypto and why. I like to say that crypto investing became a hobby, others, like my wife, would contend it became an obsession.
You and Matt Sigel put out a really interesting piece on Ethereum Price Target: $11.8k by 2030. What was the reception like from other institutional investors and where do you think we are in terms of the broader institutional market understanding crypto fundamentals?
After we wrote that piece, I got very popular on LinkedIn. Mostly from people trying to sell VanEck services, but also from a few institutional players interested in learning more about Ethereum. Most of the positive feedback centered on how we simplify the functionality and business model of Ethereum. They also appreciate how we harnessed the business usage of Ethereum to a valuation using familiar methodologies like discounted cash flow models. Others like the logic of applying take rates, similar to Web2 platforms, to end market revenues to give a sense of Ethereum’s financial potential. These models are not meant to be deterministic, but instead to approximate fundamental guidelines for valuing crypto.

I like writing these pieces because we are at the beginning of people trying to fundamentally assess crypto - we are advancing beyond “Chain X as a % of Gold” narratives. I think a lot of institutions are starting to think deeply about how to value blockchains. Many of them are starting to look at first order metrics like usership, fees, TVL, etc. But the issue they are running into, to an extent, is that those statistics are manipulatable. Also, many of those statistics do not have strong correlations to prices - there is no crypto “Fama French 3 Factor Model” yet. Finally, many fundamentals have not exhibited a leading indicator relationship as many metrics seem to follow price rather than lead it.

As a result, many sophisticated people are spending time trying to peel away the manipulation of fundamentals or infer mathematical relationships between fundamentals and price. We have tried those and the signals have proven fleeting or unreliable. Realistically, at this stage for many crypto assets, I believe allocation should be made based a relative understanding of outcomes. By this I mean looking at which sectors of crypto you believe will capture the most value, and pick the winners amongst the projects in each of those sectors.

However, there is still value in tracking on chain metrics. I particularly like the application of Web2.0 and marketing metrics like customer acquisition cost, customer attrition, and customer life cyle profits to crypto. There is a deep well of comparative metrics where some projects are better able to engage the user and extract value from him than others. Understanding these metrics and cobbling together the reasons for the differences informs future fundamental analysis. I think there is also an emergent trend of tracking quality users and vanguard users to separate bot addresses and identify first adopters. There is quite a bit of tracking that can be squeezed out of on-chain product usership and this is the second inning.
Your piece with Matt Sigel on VanEck’s Base, Bear, Bull Case: Solana Valuation by 2030 also got a lot of attention. What do most institutional investors get wrong on Solana?
For years, there was an entire three-ring circus of Solana bears riding around on unicycles and juggling flaming torches while asserting gripping missives on Solana’s shortcomings and its impending dirt nap. There was a time when I was also held captive by these showmen and even clapped along to beat of their hypnotic bear theses. But I snapped out of it in January 2023 when, despite all the bad things that happened on Solana, it survived. At the end of 2022, Solana seemed to be on its last legs as it has lost its most well-capitalized financial backers, had the majority of its development community leave, and it saw the collapse of its DeFi ecosystem. The fact that it was able to survive these immense setbacks was incredible and caused me to reassess my bearish views.

But many investors continued to focus on things that either used to matter or things that are not relevant to valuing a project like Solana. Some of these include:
●     Low Fee Generation
●     Forced holder selling (FTX & Alameda)
●     Tokenomics
●     Low User Metrics - Daily Active Users, DeFi Activity, TVL, Stablecoin Totals
●     Network Downtime
●     Network Spam

Not to expend too much virtual ink on the topic, I think the investment community misread Solana to be a mature asset that should be generating substantial fees as a result of its economic activity. And they looked beyond its great potential and concentrated more on the palpable and the near-term. However, Solana is not trying to become a fee generating platform at this stage in its development. Nor should it. Solana’s current goal is to create a best-in-class product that is allows near-instant feedback while offering abundant, inexpensive blockspace for projects to experiment. At its core, it is a techno-optimist chain designed to cradle novel use cases for blockchains and handle the massive influx of users if one of those uses cases succeeds.

Over the medium or long term, this gambit is designed to attract as many projects as possible that can create things that are “only possible on Solana” due to Solana’s extraordinary capabilities for throughput (transactions and data) and speed. What this means is that Solana is offering a differentiated platform environment that is outside of the scope of what the Ethereum ecosystem and most others are currently building.

As a result, if applications prove to be able to use Solana’s exceptional environment, they are locked into Solana because it offers unique functionality that cannot be found elsewhere. This means that Solana’s services, its blockchain, is hard to replace for applications. Solana is sticky for the business applications that deploy there. At the same time, Solana’s unique abilities offer a platform whose infrastructure is capable of handling usage by 100M+ users.

In essence, as Solana is a platform, it stands the highest chance of getting a blockbuster application and at the same time keeping it locked into its ecosystem by virtue of Solana’s unique blockchain technology. As such, if and when Solana is able to attract and grow an application that hosts trillions of dollars of economic activity, it can raise its fees to extract more value of the activity it hosts. Also, it must be noted that the founder Anatoly is the raddest bro in crypto and one should never underestimate the personal appeal of a founder
What frameworks do you use from your trading and equity research days do you think carry over into crypto? Which ones don’t?
I used to trade the US Treasury yield curve by buying and selling different bonds and derivatives based on perceived inefficiencies in relative value. Often times, many different spreads and relationships would blow out simultaneously because the principal component causing things to diverge from typical relationships was the same thing – volatility. So, my job was to not only pick the spreads I thought were most likely to come back, but allocate risk amongst the best candidates on a risk/return basis. This is something that has helped inform my analysis for crypto projects. As our funds are always functionally long crypto, we have to pick and choose our risk buckets accordingly. So, I like to do this on a relative basis based upon the north star guidance of our valuations which are further steered by subjective analysis of the projects.

Also, the valuations themselves, things I learned in business school and as an equity research guy, are applicable to crypto as well. They are important particularly in crypto because we are building them from scratch – what are the revenue lines, what are they worth, why are they worth that, what are the token sinks/supply dynamics, etc.  – these are the guard rails that help inform our process. They tell us when it us time to reassess our views and to consider new possibilities we did not foresee. And they can tell us that something is potentially undervalued or overvalued.                                                                                         
What does not work, which I applied while trading fixed income, are mean reversion strategies. In crypto, there is no reversion to the mean!
Do fundamentals matter in crypto markets today?
Fundamentals matter for looking at projects on a relative basis over short time frames to an extent. But mostly they do not because most metrics lag price and most of crypto is traded on emotions, greed, and future expectations. In crypto, prices are highly reflexive on narrative because fundamentals are greatly influenced by price!
What are some theses in crypto that you’re currently researching or excited about?
I am really interested in DePIN at the moment. I think there is a lot of greenfield to use blockchain rails to cut into highly lucrative but stagnating, rent-extraction businesses. I think projects like Hivemapper. Dimo, Teleport, Helium, and ATOR are interesting because they offer reasonable pathways to disrupting the industries they target. They are also aimed at use cases where blockchain fits logically and will enable cost savings to disrupt their respective incumbents. I am also excited because I find that entrenched, oligarchic players do not drive their employees to increase value for users. The result is that these employees tend to focus their time on internal power-dynamics, creating monetization schemes, concocting bizarre moral philosophies, and building anti-humanist neo-religions rather than improving the product for their customers. I think these monopolies are not just bad for consumers, they are bad for civilization.  
What are the most interesting applications that you’re excited about in crypto?
dYdX is going to explore the boundaries of what is possible for building a decentralized clearing house for risk management. Due to its success, dYdX is uniquely positioned to offer more customized derivatives for offsetting risk in ways that have never been possible. Smart contracts enable the holding and enforcement of specialized agreements that can expand the potential for companies to reduce risk. Let’s say you’re a business who strongly believes that an election outcome will cause your product to be regulated out of existence.Why are you not able to hedge away this risk in a transparent and fair market? At the same time, I interested in watching dYdX build the risk engines that can manage the counterparty risk in these new markets. Many will say this a bit away from dYdX’s current roadmap, but I think for permissionless finance to have a true “so-what,” it needs to explore these novel solutions.
How have you been able to use Artemis in your fundamental research?
I use Artemis daily to inform both my alpha-generating (hopefully) research as well as my explanatory research for pieces I write for curious investors. I mainly use Artemis to see how blockchains are performing through comparable metrics. I use both Artemis’s online charts as well as its Excel features to pull time series. I have used Artemis data to build multivariate regression models for blockchain metrics and blockchain prices. Artemis is something I go to because it is fast, relevant and deep. I particularly like the Activity Monitor which helps me understand the chief components of activity on each of the L1 chains.  

The most important thing that Artemis does is take one-on-one feedback and respond in a timely matter. They build things that matter because they work with subject matter experts and Artemis’s team members are constantly learning themselves. Going forward, I am certain that they will have a strong pulse on the crypto metrics that drive price because they care enough to listen to their users. 
How to get in contact with Patrick

You can find or reach out to Patrick on Twitter or LinkedIn

VanEck Social Media Disclosures
Artemis Disclaimer:
The authors, affiliates, or stakeholders of Artemis may hold interests in the tokens or protocols mentioned in this content. This disclosure highlights potential conflicts of interest and is not an endorsement to buy or invest in any specific token or protocol. The content is for educational and informational purposes only and should not be construed as investment advice in any form.

Readers should approach this information cautiously and consider their unique circumstances before making investment decisions. The views and opinions expressed are subject to change without notice, and Artemis bears no liability for any loss or damage arising from the use of this information.

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