In this article, we will take a look at the top 10 investments of Balaji Srinivasan and see his thoughts on China’s ability to undermine crypto.
Crypto stocks have taken a hammering over the past week as environmental concerns related to crypto mining and governmental scrutiny on crypto transactions hit the big names in the crypto world. Bitcoin, the most popular cryptocurrency, has fallen in value by more than 20% since the beginning of the month. Ethereum, the second most popular crypto coin, has also seen value plummet. Coinbase Global, Inc. (NASDAQ: COIN), the largest crypto exchange in the world, which primarily trades in these two currencies, has witnessed its stock value fall as well. User reports on Coinbase Global, Inc. (NASDAQ: COIN) outages have increased too.
The freefall started late last week when Tesla, Inc. (NASDAQ: TSLA) owner Elon Musk took to social networking platform Twitter, Inc. (NYSE: TWTR) to question the energy usage of cryptocurrency mining and their impact on the environment. Tesla, Inc. (NASDAQ: TSLA), which had earlier been responsible for a record Bitcoin rally after buying more than $1 billion in Bitcoin and announcing it would start accepting it as payment for vehicle sales, also suspended Bitcoin payments at the firm following the tweets.
This was followed by reports in the international media that the Chinese government had placed restrictions on crypto transactions, further hitting the firms that had bet big on crypto, like Square, Inc. (NYSE: SQ), the financial services company founded by Twitter, Inc. owner Jack Dorsey. Square, Inc. (NYSE: SQ) facilitates crypto transactions on its network and has hundreds of millions invested in the blockchain technology. The firm has seen share price drop by more than 3% following the developments this week.
The stock of other firms with crypto bets, like PayPal Holdings, Inc. (NASDAQ: PYPL), also fell. PayPal Holdings, Inc. (NASDAQ: PYPL), which facilitates electronic money transfers across borders and has hundreds of millions of users, saw share price fall close to 2% this week. Despite the setbacks, all is not doom and gloom in the crypto world. In fact, market experts had warned of this slide in advance. Balaji Srinivasan, a crypto guru and angel investor who has gained a fan following for his investment exploits, in an interview in March, had said that a Chinese crackdown on blockchain was inevitable.
In his interview with Tim Ferriss, Srinivasan said that the internet firewall which operates in China, filtering out material not approved by Beijing, would be the pretext for an operation against blockchain mining in China because of the global nature of the blockchain technology. On May 18, the People’s Bank of China issued a warning to Chinese finance institutions facilitating transactions in virtual currencies. Coin mining operations, which were huge in China as crypto was taking off in the latter part of the last decade, have been banned in the country since 2017.
Here’s what Srinivasan said about this matter in the interview when asked about the worst-case scenario for Bitcoin and other cryptocurrencies.
“So I think that for BTC, because like a 10-year-old protocol, the attack on BTC that I think would be the most likely is that the Chinese put up the great firewall against it. So it’s a network level attack as opposed to a mining attack, because the thing is that Bitcoin assumes that every node can reach every other node or every mining node can reach every other mining node. And so it assumes a global intranet.”
“If you put up the firewall, you can work out the kind of predator/prey on this, but they block port A333 and the Bitcoin devs do port randomization. And then they do deep packet inspection, and these guys do tunneling to try to put it over a stage, through GPS, there’s a back and forth that can happen there.
I think at the end of the day, the firewall is pretty sophisticated. That plus domestic penalties may make it challenging for people to maintain a blockchain indefinitely in China, or what happens is they mine, the China chain and the rest of the world chain is also being mined. And there’s like a peekaboo problem where they sync up every once in a while. And because the China chain would have more mining, the rest of the world chain would have less mining. All the blocks mine, the rest of the world would get thrown away with a chain reorganization, the China chain would basically periodically throw away every transaction that’s happening in the rest of the world. That would be like the worst case scenario where, remember, two things would have to happen there. First, they’d have to put up the firewall. And second, they would have to allow Chinese mining to continue.” [Source: The Tim Ferriss Show podcast transcript]
However, Srinivasan is still bullish on crypto in general. In fact, he is one of the few famous investors with great exposure to crypto assets and regularly advocates for the wider adoption of the new technology. This has given him handsome returns on his smart crypto investments. However, the same cannot be said of the finance world, which is going in the opposite direction. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Balaji Srinivasan
With this context in mind, here is our list of the top 10 investments of Balaji Srinivasan.
Top Investments of Balaji Srinivasan
10. Soylent
Soylent is a California-based company that offers meat replacement products. It was founded in 2013 as a crowdfunding project and is placed tenth on our list of top 10 investments of Balaji Srinivasan. Over a period of four years, the company managed to raise more than $133 million in funding through seven rounds. These rounds were led by Andreessen Horowitz, where Srinivasan worked as a partner, and Initialized Capital. The company has grown over the years and is now valued at over $500 million.
In March, Soylent announced that it was expanding a partnership with Walgreens Boots Alliance, Inc. (NASDAQ: WBA), an Illinois-based pharmacy-led retail firm, for the distribution of products at Walgreens across the United States. Walgreens Boots Alliance, Inc. (NASDAQ: WBA) is one of the largest retail chains in the US.
At the end of the fourth quarter of 2020, 36 hedge funds in the database of Insider Monkey held stakes worth $609 million in Walgreens Boots Alliance, Inc., up from 33 the preceding quarter worth $285 million.
In its Q4 2020 investor letter, Ariel Investments, an asset management firm, highlighted a few stocks and Walgreens Boots Alliance, Inc. (NASDAQ: WBA) was one of them. Here is what the fund said:
“Walgreens Boots Alliance, Inc. has been essentially flat during our brief holding period. We have successfully owned Walgreens in the past. Recently, its share price has been pressured on concerns that Amazon may enter the prescription drug distribution business. As recently as 2015, Walgreens was a market favorite, trading at more than 20 times forward earnings. The company was expected to grow in good times and bad. Walgreens Boots Alliance, Inc.’s new clinics, designed to treat day-to-day healthcare needs such as flu shots and children’s ear infections, could be part of the solution for expensive emergency room overcrowding. Finally, trends toward generic pharmaceutics that began in 2015 are still considered a positive, as pharmacies have more influence in directing customers toward particular generics than with a patient seeking a patented drug prescribed by a doctor. Walgreens will face new competition going forward, but with its current depressed valuation, we believe the threats are more than discounted in an attractive stock price.”
9. Counsyl
Counsyl is a California-based health technology company founded in 2008. It is placed ninth on our list of top 10 investments of Balaji Srinivasan. Srinivasan was one of the founding members of the firm that primarily uses cutting-edge technology to inform people about disease risks through DNA profiling. The company managed to raise more than $237 million in nine funding rounds by 2017, with Pilot Growth Equity, Felicis Ventures, and SharesPost Investment Management leading these investments.
Counsyl was acquired by Utah-based molecular diagnostics company Myriad Genetics, Inc. (NASDAQ: MYGN) for $375 million in 2018. Myriad Genetics, Inc. (NASDAQ: MYGN) has a market cap of over $2 billion. Like Tesla, Inc., Twitter, Inc., Square, Inc. and PayPal Holdings, Inc., Myriad is one of the best long-term tech stocks to buy.
Out of the hedge funds being tracked by Insider Monkey, Boston-based investment firm Camber Capital Management is a leading shareholder in Myriad Genetics, Inc. with 3 million shares worth more than $91 million.
8. Nakamoto
Nakamoto is a community-driven news network that focuses on developments related to cryptocurrencies and blockchain technology. Srinivasan is a founding member of the organization. Nakamoto operates through a hub of social media, community engagement and internet-based content platforms to gather crypto-related updates. The news network was named after Satoshi Nakamoto, the creator of Bitcoin, the most popular and valuable cryptocurrency in the world.
Another popular news network for crypto and finance news is CNBC, a news channel owned by Comcast Corporation (NASDAQ: CMCSA) in the United States. Comcast Corporation (NASDAQ: CMCSA) has a market cap of $250 billion and posted more than $103 billion in annual revenue in 2020.
At the end of the fourth quarter of 2020, 84 hedge funds in the database of Insider Monkey held stakes worth $8.8 billion in Comcast Corporation, up from 82 the preceding quarter worth $8.1 billion.
In its Q1 2021 investor letter, Nelson Capital Management, an asset management firm, highlighted a few stocks and Comcast Corporation (NASDAQ: CMCSA) was one of them. Here is what the fund said:
“Comcast Corporation (NASDAQ: CMCSA) is the Largest cable provider in t he U.S. and is the dominant internet access provider in the markets it serves. Though Comcast will likely see further declines in cable subscriptions due to ongoing cord-cutting, it should be able to off set that lost revenue by growing internet access customers and instituting higher pricing. The pandemic has increased the importance of a fast internet connection, with more content streaming to homes at increasingly higher quality. Comcast Corporation (NASDAQ: CMCSA) made significant upgrades early on, allowing it to quickly deploy new technology and increase speeds to meet t he evolving needs of its customers.”
7. Teleport
Teleport is a California-based company that primarily operates as a platform offering users the ability to suggest the best places to live or to work by running their preferences through an online database. The company was founded in 2015 and is placed seventh on our list of top 10 investments of Balaji Srinivasan. Srinivasan was a founding member of the company that raised close to $2.5 million in funding over the seed round before being acquired by MOVE Guides for an undisclosed sum. Teleport had been a success story when it was purchased, boasting a catalog of more than a quarter of a million users.
Another company that runs a digital travel advisory is Seattle-based Expedia Group, Inc. (NASDAQ: EXPE) which has a market cap of over $25 billion. Expedia Group, Inc. stock was given an Equal Weight rating by investment bank Morgan Stanley in March.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm D1 Capital Partners is a leading shareholder in Expedia Group, Inc. with 5.1 million shares worth more than $891 million.
6. ZeroTier
ZeroTier is a California-based software firm founded in 2011. It is ranked seventh on our list of top 10 investments of Balaji Srinivasan. Srinivasan has worked as an adviser with the firm that primarily connects electronic devices with universal software defined networking. It operates on a freemium model. Some of the products offered by the firm include ZeroTier One, Central, and LF. The company has raised more than $2 million in funding through three rounds. Anorak Ventures and Bonfire Ventures are the lead investors in the firm.
Another good option in the software industry is California-based development firm Unity Software Inc. (NYSE: U). On March 15, Unity Software Inc. (NYSE: U) was given a Buy rating by investment bank Goldman Sachs with a price target of $126. Like Tesla, Inc., Twitter, Inc., Square, Inc. and PayPal Holdings, Inc., Unity is one of the best long-term tech stocks to buy.
At the end of the fourth quarter of 2020, 32 hedge funds in the database of Insider Monkey held stakes worth $11 billion in Unity Software Inc., down from 35 in the preceding quarter worth $6.7 billion.
5. Earn.com
Earn.com is a California-based company that hands out digital currencies in exchange for certain internet-based tasks. It was founded in 2013 and is ranked fifth on our list of top 10 investments of Balaji Srinivasan. Srinivasan was a founding member of the firm which asked users to reply to emails or do other tasks in exchange for payments in cryptocurrencies. The firm raised more than $121 million in funding over two rounds by 2015, with Andreessen Horowitz, where Srinivasan worked as a partner, as well as Yuan Capital in China leading the investments into the startup. In 2018, Coinbase bought Earn.com for $100 million.
Another company to watch out for in the same space is Amazon Mechanical Turk, a website owned by Amazon.com, Inc. (NASDAQ: AMZN) that gives businesses the opportunity to hire remote workers for discrete on-demand tasks. Amazon.com, Inc. (NASDAQ: AMZN) is one of the largest technology firms in the world.
Out of the hedge funds being tracked by Insider Monkey, London-based investment firm Crake Asset Management is a leading shareholder in Amazon.com, Inc. with 146,000 shares worth more than $452 billion.
In its Q1 2021 investor letter, Hayden Capital, an asset management firm, highlighted a few stocks and Amazon.com, Inc. (NASDAQ: AMZN) was one of them. Here is what the fund said:
“Amazon (AMZN): We sold our last remaining stake in Amazon this quarter. Amazon was our longest-running investment holding, after having originally purchasing it at the inception of Hayden in 2014, at a price of ~$317.
I gave some details of how Amazon has progressed over these past 6.5 years in last year’s Q2 2020 letter, which partners can find here (LINK). The company has executed amazingly well over this tenure, with revenues up ~3.3x and since our initial purchase, and reported operating income up ~30x over that period.
Generally, I believe there are three reasons to sell an investment: 1) we recognize our initial thesis is wrong (sell out as quick as possible), 2) we have a significantly higher returning opportunity to redeploy the capital into (sell-down to fund the new investment), or 3) the company is maturing and hitting the top part of it’s S-curve / business lifecycle, so the business has fewer places to reinvest its capital internally. As such, the future returns will likely be lower than the past. This investment thus becomes a “source of capital” in the future, as we fund earlier-stage investment opportunities.
In the case of Amazon, we decided to sell due to the third scenario. I’m sure Amazon will continue to generate value for shareholders and continue to keep pace with the broader technology sector. However, I’m just not confident it’s as attractive an investment as when we first invested.
With ~51% of US households having an Amazon Prime account (and with very low churn), each of these households continuing to increase their annual spend with Amazon, and few / no real competitors in sight, Amazon is a dominant force that will only continue to accrue value as consumers continue to move from offline to online purchases for their everyday needs. Likewise, the “cash-flow machine” of Amazon Web Services is in a similar position of strength, with AWS now having ~32% market share and continuing to grow at +30% y/y. Because of this, I think Amazon is probably one of the safest investments in the technology sector today.
So why did we decide to sell the investment then? Simply put, Amazon is in a much different place than when we initially invested. Back in 2014, investors were starting to question whether Amazon’s promise of future earnings potential would actually come to fruition.
Operating income had declined from ~$1.4BN in 2010, to ~$676M in 2012, to just ~$178M by the end of 2014. Expenses were outpacing revenue growth, and investors were questioning whether Amazon’s expenses were truly “investments” as they claimed, or whether it was a structural necessity of the business and thus would never flow to investor’s bottom line.
The critical question was ‘what portion of expenses are truly growth investments vs. structural expenses, and as a result, will Amazon ever be capable of generating significant profits?’
Our analysis indicated that these expenditures truly were the former, and led to the belief that the business’ structural margins would inevitably increase over time. This was our differentiated insight / investment edge.
Fast-forward to today, and our thesis proved correct with operating margins having increased from ~0.2% to ~6%. However due to this success and proving this facet out to investors, Amazon investors have much higher confidence and a better understanding of the company today. I’m not sure we have the same level of differentiated insights, as we did back then.
In addition, I believe the departure of Jeff Bezos and his long-time lieutenants signal a regime change. Perhaps it’s now “Day 1.5” instead of the Day 1 mentality that made Amazon so successful (LINK)… The departures within the past couple years include:
• Jeff Bezos – Founder, CEO, Visionary. Started Amazon in 1994.
• Jeff Blackburn – Joined Amazon in 1998. Oversaw Amazon Marketplace, Advertising,
Amazon Studios, Prime Video, Prime Music, M&A.• Jeff Wilke – Joined Amazon in 1999. Oversaw Amazon Consumer (ecommerce)
business.• Steve Kessel – Joined Amazon in 1999. Oversaw Physical Stores, Kindle, and Whole
Foods.Blackburn, Wilke, and Kessel have each arguably created hundreds of billions of shareholder value. On top of this, Bezos is the visionary and culture-setter behind Amazon. When he and his long-time lieutenants take their hands off the wheel, it is probably time for us to as well.
We sold our remaining shares at an average price of ~$3,240. Based on our initial investment, we made a ~10x return in a little over six years, for a ~45% IRR7. We reinvested the proceeds into our existing portfolio, taking advantage of the prices offered by this latest market draw-down.”
4. Bitcoin
Bitcoin is a blockchain-based cryptocurrency founded in 2008 by Satoshi Nakamoto. It is placed fourth on our list of top 10 investments of Balaji Srinivasan. In simple words, Bitcoin is a digit file stored on an electronic device or in a cloud. Bitcoin can be sent or received on these devices. The transactions are recorded in a public list called the blockchain. Bitcoin is the most popular and the most expensive cryptocurrency on the market, although its value has dropped in recent weeks as other crypto stocks register losses as well.
Bitcoin has been steadily gaining mainstream recognition and registered one of its biggest coups earlier this year when Elon Musk, the billionaire owner of electric vehicle maker Tesla, Inc. (NASDAQ: TSLA), announced that the company would start accepting Bitcoin as payment for vehicle sales. Tesla, Inc. bought more than $1 billion in Bitcoin after the announcement.
At the end of the fourth quarter of 2020, 68 hedge funds in the database of Insider Monkey held stakes worth $12.3 billion in Tesla, Inc., up from 67 in the preceding quarter worth $8.1 billion.
3. Coin Centre
Coin Centre is a Washington-based non-profit research and advocacy center that concentrates on the public policy issues facing cryptocurrency and decentralized computing technologies. It was founded in 2014 and is placed third on our list of top 10 investments of Balaji Srinivasan. Srinivasan sits on the board of directors for the firm and was also an angel investor for it. The non-profit managed to raise more than $1 million in funding in a seed round held back in 2017 through ShapeShift and Bitso.
The non-profit is supported by dozens of big companies, including fintech giant Square, Inc. (NYSE: SQ). The fintech firm, which is based in California, has more than $400 million in investments related to crypto assets. Square, Inc. stock has also offered investors returns of more than 162% in the last twelve months.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm ARK Investment Management is a leading shareholder in Square, Inc. with 10.9 million shares worth more than $2 billion.
2. Ethereum
Ethereum is the second most popular cryptocurrency in the world that uses blockchain technology to offer financial services. It is placed second on our list of top 10 investments of Balaji Srinivasan. Srinivasan was one of the angel investors in the cryptocurrency that has climbed to record highs this year, although its value has fallen in recent days amid a broader crypto-related lull in the market on the back of social media speculation and reports of governmental regulations on crypto transactions.
Many big firms have backed crypto like Ethereum to succeed, including financial services company PayPal Holdings, Inc. (NASDAQ: PYPL). The firm, which is based in Palo Alto, recently allowed users on its platform to checkout with cryptocurrency. PayPal Holdings, Inc. has a market cap of over $280 billion.
At the end of the fourth quarter of 2020, 147 hedge funds in the database of Insider Monkey held stakes worth $15.9 billion in PayPal Holdings, Inc., down from 150 in the preceding quarter worth $11.5 billion.
1. Coinbase Global, Inc. (NASDAQ: COIN)
Coinbase Global, Inc. is a Wilmington-based cryptocurrency exchange platform founded in 2012. It is ranked first on our list of top 10 investments of Balaji Srinivasan. Srinivasan has served as the Chief Technology Officer of Coinbase, a position he left in May 2019, more than a year before the company went public and was valued at over $86 billion on the first day of trading. Coinbase is the biggest global crypto exchange platform and operates in more than 100 countries.
On May 19, investment advisory Wedbush picked up coverage on Coinbase Global, Inc. stock with an Outperform rating and a price target of $275. Wedbush analyst Moshe Katri said the rising mix of institutional trading volumes was reducing volatility in overall trading revenue for the firm.
Several hedge funds have been revealed to have holdings in crypto assets like Coinbase Global, Inc. in recent months, including New York-based investment firm ARK Investment Management, which on May 19 picked up 133,848 shares of the firm for the ARK Innovation ETF and 35,382 shares for the ARK Next Generation Internet ETF.
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