For the funds management division of the business (DigitalX), there are a few different valuation approaches one can take. One (somewhat arbitrary) method is to value the operation at a percentage of FUM (which approximates the future stream of cashflows of the operation from funds management fees and performance fees). For example, Harley Grosser from Capital H, considers a reputable, growing boutique fund to be worth circa 10% of FUM.

DigitalX currently has around $33.6m AUD in FUM, as of the end of Dec 2021, representing a period-on-period increase of ~73%. So, the value of this business (stream of future profits) would be around $3.4m at this early stage. If FUM could grow to $500m over the next 5-10 years with increased adoption of crypto funds, the DigitalX funds management business would be worth around $50m AUD, as an example.

One can also use a DCF model to estimate the future fund revenues (management fees of 1.75% and performance fees of 15%, from memory), but that assumption relies on being able to work out growth in FUM and performance fees, which are almost impossible to predict because that component is based on the movement of bitcoin (and other crypto) prices. Thus, the p/FUM multiple is probably an easier approach.

Following that, one also must take into account the value of DCC’s own digital asset holdings (because DCC provided meaningful initial seed capital into Digital X) and cash on hand of circa $7m. DCC reported net tangible assets of 7.2c per share (up from 3.7c per share YoY) at the end of Dec 2021, and the majority of that NTA is DCC’s own cryptocurrency holdings (involving ~216 Bitcoin + 12.5m Human Protocol tokens). But, since the 31st Dec 2021, the value of DCC’s digital assets has decreased by 22% through to 24th February 2022 due to the volatile nature of bitcoin and other crypto-currencies. So, we are looking at an updated (adjusted NTA) of around 5.6c per share now (which includes their cash). If the bitcoin price drops further that NTA figure will also drop and vice-versa.

The DigitalX fund itself invests in the top 20 cryptocurrencies by market cap, which includes Polkadot, Cardano and Binance, but that selection continues to vary over time, the idea being that they want to capture the growth of the entire sector (long-only), not pick individual winners from among the long tail of contenders.

On balance, I personally think it is a buy, with a view to the long term adoption of blockchain-based technology and the growth of the fund's management business (DigitalX) but only if done with some form of dollar-cost averaging and with a long term view. I also think that crypto exposure (and DCC falls in this category, indirectly) should not exceed more than 10% of an investor's portfolio, except for those with a moderate-high risk appetite. DYOR & not financial advice.

I was chatting with Arrow Investor about this one recently and realised that I didn't have a straw up: here's my overview and investment thesis on DigitalX Limited (DCC): Firstly, let me start by saying that I don't have any extreme views on bitcoin (as either a bull or a bear) but I think that it is wise to have a small amount of exposure to the sector (<5% of NAV). So far, bitcoin is not serving as a very good inflation hedge but that, alongside growing mainstream adoption is part of my rationale as to why I want a (small) bit of skin in the game. 

Rather than have direct exposure to BTC, my preferred way to play the theme is indirect exposure through DCC. The reason behind this is that DCC as a multi-pronged entity is somewhat shielded from erratic broader crypto movements (although the share price still primarily hinges on bitcoin fluctuations at this stage) and instead provides exposure to the broader theme of digital assets and distributed ledger technologies.

DCC has 3 arms to their business; digital funds management, regtech (via their Drawbridge product for eliminating corporate and regulatory risks for public companies listed on global securities exchanges through in-built compliance) and product development (design and development of blockchain technology applications for meaningful business improvement). 

Any of these 3 pillars could become a company-maker that supports the current valuation in its own right, although I believe the market is currently ascribing most of the $60m MC value to the digital funds management piece. The reason I like the funds management angle of DCC is that as mainstream adoption grows, DCC can benefit from interest in the sector (management fees), rather than the actual performance of the cryptocurrencies they hold. I also trust them to time their entries and exit in digital assets etc, better than I could. The DigitalX fund holds various digital assets including Cardano, Binance and Polkadot.

There is significant market commentary on individual digital asset startups that many claim will change the world. While DigitalX believes undoubtedly that over time digital assets and distributed ledger technologies will refashion old, less efficient business models into digital 24/7, peer to peer modern-day versions and that this change will bring with it enormous investment potential; they also believe that there is no need to expose investors to tail risk (low probability events) to capture this upside. Many of the latest concepts, while admittedly very inspiring, are still extremely complex from a user perspective and several years away from institutional adoption, if at all. The DigitalX Fund is designed to capture the growth of the sector, rather than picking individual winners.

My goal is to accumulate DCC further if the share price was to continue to fall - essentially I am averaging out my position here, but without taking a massive stake. I would never average out a position in something like BTC directly (it could be a massive falling knife at this point) but for DCC, I am comfortable doing that for the above reasons. 

In terms of bitcoin itself, my thesis was that we were moving into a third wave that would take the price up to the $80K USD level. However, that thesis is now on very thin ice. It may bounce off support at $30K USD and push higher. However, if support at $30K USD falls, my thesis around a 3rd wave push obviously breaks down and there could be a big drop incoming. If I was holding BTC directly and that ice broke, I would cut losses, leave and return when the tide changed.