- Mike Alfred is a value investor who took a bet on bitcoin.
- He lays out the ultimate investing strategy that melds value investing and crypto.
- And he shares 3 crypto stocks he thinks are undervalued.
- See more stories on Insider’s business page.
Mike Alfred started trading stocks from his bedroom before it was cool when he was an undergraduate at Stanford University in the late 1990s, during the dot-com boom-and-bust cycle.
The experience taught him about losing and making money. It also gave him good reason to dismiss bitcoin due to its similarities with the speculation of that era.
Only later, after hundreds of hours of research, did Alfred truly start to appreciate bitcoin’s beauty as an investment opportunity. His thesis comes down to the asset’s ability to be a superior form of money with its digital native- and harder-than-gold qualities.
Most of the risk within investing stem from execution, Alfred said, such as the management team and how well the strategy is deployed. Bitcoin completely removes this, he added.
“[With bitcoin] you were just betting on it continuing to be adopted over time,” Alfred said. “And that was a bet that made more sense to me than almost anything else on the planet.”
Execution is Alfred’s forte as a successful entrepreneur. In 2008, he co-founded BrightScope, a company that provided ratings for 401(K) plans. By 2016, he’d sold the company for around $30 million. He also co-founded Digital Assets Data, which was acquired by NYDIG this year.
Now he plans to launch an investment fund within the next year that will be a reflection of his own personal investing philosophy, melding value and crypto investing. He intends to start out with his own capital before taking on limited partners, according to an interview with The Investor’s Podcast Network.
“Because I’m a long-term value investor, I’m really concerned with long term returns, returns that actually stick,” Alfred said. “… If you can triple your money in one year, but lose 70% or 80% the next year, I’m not really that interested in that type of investment strategy.”
He views the optimum strategy as a split between 40% bitcoin and 60% value stocks.
“I think marrying a traditional value discipline type of approach with bitcoin in a single portfolio is going to yield one of the best risk adjusted returns that you’ve ever seen in a fund structure over the next 20 years,” Alfred said.
This is because investors will have exposure to an asset that could surge 100 times within the next 10 to 15 years, while also securing cash flows from conservative equities, which means they shouldn’t need to sell their core bitcoin holding, Alfred said.
“If you are able to generate all your cash flow passively from value investing in traditional equities, then you don’t need to violate your bitcoin at any time, for any reason,” Alfred said. “That’s the biggest risk for most people, it’s not that bitcoin’s gonna go to zero … the biggest risk is they sell bitcoin too soon.”
Despite moving further down the risk curve, Alfred believes value stocks are less risky than bonds, which could lose value if interest rates rise. However, investors won’t find riskier crypto assets in the fund, such as alt-coins, as Alfred views them as speculative.
“I need to fundamentally understand why it’s both going to outperform over a longer period and why it will sustain that outperformance without risk of catastrophic loss,” Alfred said. “And with bitcoin, I’m very confident the left tail is gone, there’s no outcome where bitcoin goes back to zero.”
On the equities side, however, Alfred sees value in three crypto stocks.
Coinbase (COIN) is a widely misunderstood opportunity, Alfred said.
“Cathie Wood buys a lot of stocks I don’t agree with, she buys a lot of things that I think are expensive, that a value investor really can’t own,” Alfred said. “But I do agree with her on Coinbase. I think Coinbase is a crossover between a value-style investment and a growth investment.”
Coinbase is cheaper by some dimensions than other large US equity exchanges, but with a much more interesting and explosive growth trajectory ahead, Alfred said.
“Coinbase is a great example of a company that could grow 20x, 30x, 40x from here over the next five to 10 years,” Alfred said. “But also today represents something slightly under fair value.”
Marathon Digital Holdings & Hut 8
Based on Alfred’s bull case on bitcoin, he expects “pretty astronomical numbers” for how much bitcoin miners could grow over the next five to 10 years.
He feels confident that Marathon (MARA) and Hut 8 (HUT) could be 50 to a 100 times more valuable in the next eight to 12 years. This is based on the continuing strategy of mining more bitcoin, putting it on the balance sheet and then continuing to issue both equity and debt to buy more machines.
It’s much cheaper to borrow against bitcoin than against the machines. This should mean the company’s cost of borrowing will plummet, Alfred said.
“There’s a tremendous amount of alpha in finding those handful of miners that are a top five or 10% operator over the next 10 years,” Alfred said. “I’m not sure there’s a tremendous amount of alpha just owning the whole space as an index.”
He expects they will have an uninterrupted path to far more scale and higher market capitalization, which will be difficult to challenge beyond a certain point.