Nick Hotz: Analyst of the Month

What is your story? What was your journey into investing and crypto?

I caught the markets bug early on after taking a personal finance class in high school and quickly getting hooked. I soon started frequenting the local library to scan pages and pages of Value Line stock investment reports and investing whatever lawn mowing and birthday money I had into my ideas.

A college friend in computer science encouraged me to look into crypto in summer 2017. Being the prudent financial professional I am, I showed him a chart of the Nasdaq in 1999 and explained that this was an obvious bubble, though I did buy a little Bitcoin anyways just in case. I round-tripped that trade, but began following the embryonic onchain analytics community closely in 2018, who were working on the earliest form of “fundamental metrics” in crypto. I later called my college friend back to thank him and tell him he had been right, which was probably little condolence as he said he had gotten absolutely rekt buying ICOs.

During grad school, I was looking for an opportunity to get into the crypto space and consuming a ton of crypto content. Arca was consistently getting my attention from the That’s Our Two Satoshis blog and their (at the time slightly more cavalier) Twitter content. Arca’s fundamentals-first approach to investing in liquid tokens was pretty unheard of in the space at the time and resonated with my CFA brain.

What is your role at Arca as VP of Research?

I’ve always gravitated towards the infrastructure sectors in the space including Layer 1’s, Layer 2’s, and middleware/deep infrastructure. Those represent my primary areas of coverage at Arca. As they’ve emerged in the last few years, I’ve also done deep dives and headed up coverage on the DePIN and AI sectors. My day-to-day is primarily keeping up with positions I cover that are in the portfolio as well as researching new potential positions and investment themes that could be added in the future.

As an aside - researching deeply technical sectors has underlined the importance of the need for strong understanding and good communication. If you can’t teach a complex topic with a couple of bullets and a meme, you don’t actually understand it. When starting to learn about a new topic I have no shame in asking ChatGPT to explain it to me like I’m in kindergarten.

How has your time at US Bank shaped your view as a liquid token investor?

My position at US Bank was heavily focused on asset allocation and global macro analysis. My biggest learning was to respect the importance of global macro’s influence on the crypto markets. While correlations wax and wane, the underlying pull of global financial liquidity remains one of the key drivers of crypto markets and are the primary reason for crypto’s cyclical behavior.

On the other hand, working on portfolios for ultra high net worth clients and studying for the CFA program unduly influenced me to diversify across the space like I was some kind of pension fund. It took time studying past successful traders and investors to internalize that concentration, not diversification, is the only way to truly achieve great performance.

What did your banking colleagues and girlfriend think when you told them you were going to work in crypto while getting your MBA?

I got a lot of flak initially from former colleagues as I spent more time studying crypto, especially as Bitcoin continued to plumb the late 2018/2019 lows. I got quite a few eyebrows when I posted a chart of Bitcoin’s MVRV (one of the first onchain valuation techniques) on my cubicle wall to reaffirm my conviction in my early 2019 BTC purchases. It was my first time experiencing the feeling of being deeply convicted in an investment and very out of consensus.

Fortunately my girlfriend has been nothing but supportive (read: doesn’t understand any of this).

What’s your favorite NFT project?

Why don’t you ask one of my two Pudgy Penguin plushes? I’m happy to provide a hot beverage in my adorable Pudgy Penguin mug while you converse.

You’ve been at Arca for >3 years. How has your view towards liquid token investing changed? How much do fundamentals matter, and how much has that evolved?

All major moves in financial markets are driven by stories that people either interpret themselves or tell each other to make them buy or sell. Stories wax and wane in strength as conditions change, investors reposition, and prices adjust. Stories about the future potential of AI, tokenization, and of Solana as a platform drove token outperformance during the recent bull period and stories about big players selling (rarely the selling itself) contributed to the recent down leg. Unless you’re going activist, even value itself is just a story that investors tell to justify why other investors will come in and bid later on.

Realizing this was key to my understanding that different fundamentals matter at different times and for different tokens. In a bearish market, supply unlocks and high FDVs are seen as death knells, while investors give no credit to projects with increasing growth potential. When the market turns higher, FDV becomes a meme, many supply events become “bullish unlocks”, and high TAM is key to drive a narrative. Active addresses used to be incredibly correlated with the price of Bitcoin, but no longer are. It isn’t because active addresses aren’t a good metric, but because Bitcoin’s investment story has shifted from being one about payments and retail usage to one about institutional adoption and global settlement, in which active addresses aren’t as relevant.

Fundamentals always matter, but which fundamentals you’re looking at is going to be a big determinant of success. Looking for a story about cash flows and value probably wouldn’t have helped you catch STX or TON, but it might have gotten you into MKR and COIN.

What is your thesis on Bittensor?

Peer to peer electronic money was tried before Bitcoin, but wasn’t successful until Satoshi’s core innovation - using a token to pay miners to do work in order to reach consensus about the state of the ledger, aka proof of work. Even Ethereum, while extending Bitcoin’s capabilities by adding smart contracts, still clung to the general principle of using token incentives for generating consensus to secure itself. The reason I’m so excited about Bittensor is because it is the first attempt to generalize this innovation.

In Bittensor, miners can do literally anything as work. They inference AI models, figure out how proteins get folded, trade quant strategies, provide cloud computing services, act as a sports bookie, index scraped web data, and even predict the flight path of asteroids. Bittensor’s Yuma Consensus makes this possible by allowing validators to come to agreement even when there isn’t an obvious correct answer, like there is with the state of a blockchain. A new stakeholder called subnet owners design reward frameworks - a similar mechanic to how AI models are trained - to incentivize miners to do the best work possible. Finally, the TAO token is staked by validators to get access to the services miners provide.

Bittensor’s two main advantages are its permissionless access to a global network of miners and rapid funding of participants using the TAO token, which I believe can combine to create an environment where markets for nearly any service can be created 100x faster than in the traditional venture model.

What are your favorite real-world applications enabled by blockchains and why?

The DePIN project Hivemapper is my go-to application to explain to normies why blockchains are useful. Contributors to Hivemapper buy a dashcam to mount on their car and act as a mini Google Maps car, taking pictures of the road as they drive to earn HONEY token incentives. Other contributors can help train the Hivemapper AI’s synthesis of the map data, providing a higher quality and more accessible dataset to customers.

The key unlock from Hivemapper is the frequency of data capture. Whereas Google may only map a city street once a year, Hivemapper can have the same street mapped dozens of times a day, and can adjust HONEY incentives to attract drivers to valuable areas. This rapidly refreshing data has applications in autonomous driving, property management and insurance, real estate valuation, government infrastructure maintenance, and more. The tangibility of the physical infrastructure, magnitude of the improvement over the existing system, and obviousness of the value provided combine to make this a potent example.

How have you been able to use Artemis in your fundamental research?

Artemis has been a critical tool in our research toolbox over the years. Artemis was the first analytics provider to offer easily interpretable Excel integration, which shaved hours per week off our manual data gathering process and dramatically expanded our analytical capabilities. In my coverage of L1s and L2s, Artemis was again the first to put out comparison dashboards, and more recently sector dashboards, which have been a lifesaver in keeping on top of trends in the different projects.

You can find or reach out to Nick on LinkedIn or X.com