My Small-Cap Stock for 2025 Is a Picks and Shovels Play in Crypto and Finance
This name, which breaks the mold in the cryptocurrency and finance sector, won’t remain on the OTC much longer.
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Every new trend and meta has a common theme. Whether it was the dot-coms or real estate fueled by the MBS craze or cannabis or artificial intelligence, you’ll hear the words: picks and shovels.
The picks-and-shovels strategy focuses on suppliers rather than speculators. Rather than betting on the high-risk, high-reward companies in a trend, an investor finds the infrastructure or tools the industry needs for growth and stability.
For instance, during the internet craze, the picks-and-shovels approach was buying companies like Cisco Systems CSCO, which produced routers, or Ciena CIEN, which sold fiber optics, rather than flashy dot-com names like Pets.com or theglobe.com.
For artificial intelligence, Nvidia NVDA has been the popular picks-and-shovels play, with Palantir PLTR, Broadcom AVGO, and Marvell Technology MRVL also getting attention. I have MRVL as my top large-cap pick for 2025.
Propelled by the November election results, cryptocurrency emerged from a nasty bear market and is back in the spotlight.
Buying Bitcoin or Ethereum remains a risk too high for many traditional investors. Some have gravitated to the ETFs that hold these top-tier cryptocurrencies, assuming their brokerage offers it. MicroStrategy MSTR remains the most popular Bitcoin stock derivative.
Still, you’ll be hard-pressed to find many Main Street USA wallets taking the plunge directly into cryptocurrency outside of something in an easy-to-buy ETF wrapper. After all, Wall Street has conditioned the average investor to buy ETFs. It’s the picks-and-shovels of the finance industry.
This leads us to my 2025 “Big” Small-Cap opportunity, a picks-and-shovels name in the cryptocurrency and finance sector. And no, it isn’t named Robinhood HOOD or Coinbase COIN.
The company is DeFi Technologies DEFTF.
A 'Big' Small-Cap Opportunity
With a market cap approaching one billion, average daily trading volume of 1.4 million shares, and solid fundamentals, this name won’t remain on the OTC much longer. It appears destined for a Nasdaq listing. In fact, it already filed its Form 40-F back in September.
DeFi allows investors to benefit from roughly five dozen different cryptocurrencies without speculating on even one. The company showcases spectacular growth, strong net cash flow, and a blossoming balance sheet filled with cash and digital investments. All of this without the high risk that makes this sector famous.
I want to pause for a moment and highlight two things: positive cash flow and a strong balance sheet. Those aren’t associated with very many companies in the cryptocurrency industry.
The company operates diverse business segments, including DeFi infrastructure, crypto research, market making, asset management, venture investments, and arbitrage trading desk.
DeFi’s asset management segment, Valour, is the company’s crown jewel. Valour offers a portfolio of over 60 exchange-traded products (ETPs), Europe’s version of an ETF.
Assets under management (AUM) in the ETPs have exploded over the past two years. At the end of 2022, AUM stood at $106 million, rising to over $920 million less than two years later. Over the past two years, there hasn’t been a single month when AUM has not increased from the prior month. Given that DeFi launched 20 new ETPs in December, there’s a high probability the company ended 2024 with over $1 billion in AUM.
The company generates revenue from management fees and staking rewards received from holding and staking the underlying crypto assets. If the term staking is unfamiliar to you, think of it like the interest a bank would pay you on a certificate of deposit or a savings account.
Management indicated they generate revenue of 8-10% on AUM. If AUM did not grow another penny, the company would be on pace for $80 million to $100 million in 2025. This is unlikely, given that DeFi has increased AUM monthly for two years, even during the crypto bear market.
When we factor in the $97.5 million in revenue DeFi’s arbitrage trading desk earned during the first 11 months of 2024, it’s reasonable to estimate that revenues for 2025 could easily eclipse $200 million just from these two business segments. Note that these are low-risk arbitrage trades, not speculated day trades. The company takes advantage of marketplace inefficiencies. The trading desk has zero losses to date.
Management’s revenue projections of $141.5 million and net income of $71.4 million seem reasonable. These projections translate to earnings per share above $0.30 for the year.
These numbers put DEFTF at a trailing P/E below 9 and a price-to-sales ratio of 7. Neither HOOD nor COIN can touch those numbers.
DeFi plans to launch another 40 ETPs in Europe next year and expand its business into Singapore, Africa, and the UAE. The company’s AUM could easily double next year.
Initially, I worried about the costs of launching too many ETPs, but management outlined that the cost to launch an ETP is around $50,000. The company only needs $675,000 in AUM to maintain profitability in a particular ETP, and it only spends $10,000,000 in operating costs annually — a fraction of its revenue.
Based solely on the asset management business and trading desk, DeFi should be trading two to three times higher than its current price, but when you examine the balance sheet, those numbers may even be too small.
DeFi has $6 million of debt on its balance sheet; however, that number doesn’t concern me given the cash and cash equivalent $12 million position it holds. Furthermore, as of November 30, 2024, DeFi held $48.5 million in digital assets. Those holdings include $20 million in Bitcoin (208.8 BTC), $419,000 in Ethereum (121 ETH), and nearly $3 million in Solana (14,375 SOL). I view virtually all their digital assets as readily liquid, so it is fair to say DeFi has net liquid assets (assets minus debt) of $54 million.
Given its strong balance sheet, profitability, and positive cash flow, the dilution risk is minimal at the current price. The company could accelerate growth through acquisition; however, it possesses a strong enough balance sheet to do so with cash or in an accretive manner.
When I examine all these factors, DeFi Technologies enters 2025 with accelerating business momentum and a stock price that hasn’t kept pace. It is a unique blend of strong growth and deep value.
That has created an asymmetric opportunity for small-cap traders in a company that breaks the mold for its industry.
And that’s why it is my small-cap best idea for 2025.
At the time of publication, Byrne is a partner in a venture equity firm that has a business development relationship with Defi Technologies, and Byrne owns shares of DEFTF for his own account.
