CoinFund’s investment thesis for Compass

Links: Compass; CoinFund Portfolio

Thesis Summary

• Active Demand Drivers: There remains a large gap between the low quality and low margin retail-focused ‘cloud-mining’ businesses of the past and the growing demand for value-added, relationship-driven, Proof-of-Work (PoW) marketplace which Compass enables, similar to how Expedia and other OTAs have connected previously-fragmented pockets of travel demand and supply. In addition, our research reveals multi-year secular drivers including but not limited to the continued migration of hashrate out of China, opportunity to monetize “stranded” sources of power across the globe, and investor appetite for crypto mining infrastructure investment opportunities with more manageable risk profiles than just holding bitcoin.
• Speed to Market Advantage: Given the asset-light business model and scalable architecture of a software-enabled solution, Compass’ offering is leveraging its first mover advantage to quickly aggregate new customers, enabling new market participants to access industrial economies of scale without having the headache of negotiating PPAs (power purchase agreements), sourcing hardware, and dealing with the operational difficulty of managing power, cooling, and uptime.
• Differentiated and Deep Team: CEO Whit Gibbs is host of the Hashr8 mining podcast and one of the top connectors and operators in the mining industry. He’s also gathered an experienced group of executives and advisors including COO Thomas Heller formerly of F2Pool (China’s first mining pool), and Harry Sudock of GRIID (a proprietary mining company), respectively. The market currently lacks a trusted operator interested in building brand equity for the long term, and we think this opportunity sets Compass up well to easily stand out against the backdrop of predatory cloud mining businesses, flaky hardware vendors, and difficult-to-find facilities operators.

Introduction: We’re excited to announce our recently closed investment in the seed round for Compass, the first platform of its kind addressing long-standing market inefficiencies in bitcoin mining. Compass facilitates trusted third-party relationships for institutions and facilities to find hosting facilities that have excess capacity in their data halls. For example, their bundled retail product offering, Powerblocks, enables individual miners to access industrial economies of scale for hardware, space, power, and electricity. The entire Compass mining process is bespoke and attributable, with each customer actually mining for themselves after initial setup. Compass has vetted and verified hosting facilities, and currently has over 700 MW of power available to host, with that number growing quickly as new sites become available. Compass sites all have on average 3–5 years remaining in the respective power purchase agreements, and many use a rate class concept which limits the ability for the local power utilities to renegotiate in the future (similar to how ConEd doesn’t renegotiate with you just because you plug in an ASIC at home). The contracts that Compass has signed with the facilities have all been 5 years or greater in term, and all have the optionality to roll.

From a financial diligence perspective, we believe there is likely incremental upside even versus base-case estimates in terms of strategic partnerships, additional price-taking ability, and volume growth. Since CoinFund’s initial conversations with Compass, the team has already delivered 4th quarter sales volumes in excess of what was budgeted while also expanding new revenue opportunities aggressively, while also maintaining a lower cost base and leveraging social media marketing to maximize ROI of spend while still supporting the Compass product launch and filling their funnel in excess of initial projections. Although Compass isn’t yet at the same stage of growth as large scale publicly-traded infrastructure companies, we are reminded of the similarities in business models (recurring revenues, scalable platform model, meaningful barriers to entry) between Compass and the premium valuation multiples enjoyed by data centers such as EQIX or DLR (25x+ EBITDA) and tower operators like AMT or CCI (also 25x+ EBITDA), which we view as aspirational.

One question is whether the assumption that BTC and its SHA-256 algorithm will remain the market leader versus a POS chain like ETH2, or newer base layers like DOT. At this point, we believe it’s unlikely that BTC will lose its central positioning as a ‘digital gold’ asset within the world of digital assets, a position that has only strengthened despite numerous forks such as LTC, BCH, Bitcoin Gold and more, none of whom have been able to take share from BTC’s monetary premia and have mostly lost ground on a price basis versus Bitcoin. While it’s true that current and future generation POS-based layer-1’s will continue to demonstrate better programmability and scalability, the success of wrapper projects like wBTC suggests that BTC’s moat is actually stronger, not weaker in an era of composability and interoperability due to its core properties that cannot be copied easily (immaculate conception and getting past the POW cold start problem, having now reached mainstream awareness and appeal).

Another potential area of concern is that the majority of ASIC supply chains still rely on fabrication processes that heavily involve China, not to mention the reliance on China-based manufacturers such as Bitmain and MicroBT. Historically, the Chinese government has also periodically cracked down on crypto-related businesses, confiscating miners implicated in illegal mining operations, or raiding the offices of exchanges accused of violating securities law. However, while the country-level risk remains an issue, we believe the trend of geographic diversification of hashpower outside of China will only continue going forward, as there are natural incentives both for proprietary miners and hardware suppliers to seek to minimize their own risk in terms of being levered to one country / government regime. Specifically, we believe that the combination of 1) Chinese miners being incented to diversify geographically as a personal/political hedge, 2) increased diffusion of mining equipment + longer hardware cycles (enabling larger capital investment projects), and 3) greater appetite for mining operations as infrastructure investment plays outside of China will naturally result in diversification of hash in the base case, though I’ve highlighted some of the obstacles and sources of variance that are worth watching. There are already examples of ASIC manufacturers diversifying their operations to both reduce the risk of regional Chinese interference and optimize tax liability for buyers, for example with Bitmain having stood up final assembly operations in Malaysia to save US equipment purchasers from a 20% value-added tax levied on ASICs purchased directly from China.

Conclusion: We’re excited to support Compass’s vision to enable simplified, attributable, and democratized access to the previously confusing world of cryptocurrency mining, especially given the opportunity set for scalable and global value-added services beyond the beachhead marketplace application, such as data, financing and more. While CoinFund had previously shied away from investments in the mining vertical, we believe Compass is uniquely positioned to take advantage of the market backdrop and leverage its team’s history of successful execution to add durable value to the industry in the years to come.

Disclaimer: The content provided on this site is for informational and discussion purposes only and should not be relied upon in connection with a particular investment decision or be construed as an offer, recommendation or solicitation regarding any investment. The author is not endorsing any company, project, or token discussed in this article. All information is presented here “as is,” without warranty of any kind, whether express or implied, and any forward-looking statements may turn out to be wrong. CoinFund Management LLC and its affiliates may have long or short positions in the tokens or projects discussed in this article.

Compass’ Platform is Legitimizing, Democratizing, and Growing the Cryptocurrency Mining Industry was originally published in The CoinFund Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

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Source: https://blog.coinfund.io/compass-platform-is-legitimizing-democratizing-and-growing-the-cryptocurrency-mining-industry-26f66af64db8?source=rss—-f5f136d48fc3—4