ETF.com recently spoke with Wes Fulford, CEO of Viridi Funds, which launched the Viridi Cleaner Energy Crypto-Mining & Semiconductor ETF (RIGZ) two weeks ago. Fulford discusses how his ETF tackles the “E” in “ESG” and what makes cryptocurrency miners a potentially better investment than the tokens they mine. The following interview has been lightly edited for clarity.
ETF.com: Some investors have been reluctant to invest in the crypto space because of the massive energy consumption of some blockchain-based networks, particularly Bitcoin. The Viridi Cleaner Energy Crypto-Mining & Semiconductor ETF (RIGZ) aims to assuage some of those concerns by holding stocks of companies in the mining industry that fit certain ESG criteria. How do you respond to those investors’ skepticism about crypto, and what criteria do you use to decide which stocks to hold in the ETF?
Wes Fulford: Our intention with the fund was really to focus on the “E” in “ESG.” The underlying commodity that all of these crypto miners are supporting does a pretty great job of addressing the “S” and “G’” in “ESG”; for instance, by banking the unbanked; providing a sovereign currency not tied to any one government’s printing press; or running on a network that is maintained by an arm’s-length group of miners and participants.
On the “S” and the “G” front, bitcoin does a pretty phenomenal job of addressing those two components. The “E” is where we've been focused, which is the carbon footprint and energy consumption that underpins mining operations. To be quite frank, all of the media coverage is just regurgitating a lot of the same sort of messaging, which we think is quite overdone, and not really relevant.
There are a lot of responsible operators out there—myself included—that have been focused on identifying stranded sources of energy and renewable sources of energy for bitcoin mining. In a former life, I was CEO of Bitfarms, which now trades on the Nasdaq. I could still be credited with building the largest solely renewables-based portfolios of computing power in the public market to date.
Today, our focus at Viridi is on identifying and targeting investments into operations that are primarily powered by renewable sources of energy. With the evolution of the Crypto Climate Accord, the Bitcoin Mining Council, or just pressure from shareholders and media on management teams and boards of directors to provide more transparency on the sources of energy underpinning their operations, the industry is moving toward renewables on its own accord.
We've got an internal scoring system, which is proprietary to our management model and investment policy, that case-ranks the variety of fuel sources powering mining operations. We’re generating an internal score that’s got to pass our thresholds to be the recipient of an allocation of ETF.
ETF.com: What percentage of the ETF’s portfolio is in actual miners versus suppliers, such as chip companies and the like?
Fulford: The vast majority of the allocation is in the miners—somewhere around 80% into operations that generate the majority of their income from either running machines directly or providing infrastructure to support hosting services. Our intention with the fund is to be an infrastructure play within this whole ecosystem.
Miners provide the essential validation and verification service to the blockchain network. You cannot trade bitcoin without a miner incorporating your trade into a block that they’ve created, at which point it becomes verified.
The benefit of investing in the miners is to get leverage to the underlying commodity, much like a senior gold producer would have leverage to a run-up in gold prices. Gold pops 5% and the equities are up 10% or 15%.
We’re providing an infrastructure investment product to the public markets because we believe that through an active management strategy, we can identify some fairly prevalent mispricings, leveraging our financial markets’ background, and our hands-on operational expertise with the team at Viridi.
As the sector evolves, we’ll increase the weightings to the pure-play miners. But in the infancy of this fund, and as this sector continues to evolve, we’ll go down the supply chain and allocate capital to other core infrastructure components of this ecosystem, from the chip foundries to the semiconductor companies to the manufacturers of mining equipment.
ETF.com: I assume that leverage cuts both ways—that miners tend to rise more and fall more than underlying cryptocurrency prices?
Fulford: Actually, it’s the opposite. With prudent capital deployment into mispriced names, there's going to be greater torque to the upside with ongoing upward movements in bitcoin, but there's a lot more downside protection as well, given the cash flow profiles of these operators.
To put it into context, at prevailing bitcoin prices [around $32,000], good operators that are plugged into industrial scale, low-cost power are generating 90% operating margins right now. There's a real high performance computing business that underpins these operators.
As the market matures, and if we do our part to go out and educate the marketplace about the operating nature and the financial profile of some of these equities, there should be less volatility in these stocks in the long run.
ETF.com: The two largest blockchain networks, Bitcoin and Ethereum, currently use proof-of-work consensus algorithms, where miners are at the center of validating transactions. But the expectation is that Ethereum will eventually shift over to using a proof-of-stake mechanism, where miners are no longer required to validate transactions. How will that impact your ETF?
Fulford: Among the publicly traded miners, there really aren’t a lot of them that have a significant non-Bitcoin portfolio of computing power. Most of the public companies are running Bitcoin computing power portfolios.
And I certainly wouldn’t expect, in the medium or long term, that Bitcoin ever evolves to a proof-of-stake protocol. Proof-of-stake has its pros and cons associated with it, but within the landscape of equities available to deploy our capital and our AUM, it’s not really a material consideration at this point.