Comparing BTC’s Performance to Firms with Crypto-Heavy Business Models
Managing financial risk comes in many forms. One of them is buying company shares that are driven by digital assets. Bitcoin is the primary driver behind them, ousting physical gold in the process. When the performance of such companies is compared to that of BTC, is it really fair to consider such investments ‘exposure’ to digital assets?
Bitcoin is Overtaking Gold as a Reserve Asset
For corporations, governments and individuals alike, gold has been an historical staple as a reserve asset resistant to inflation. While its reputation remains firm, its recent price performance leaves a lot to be desired. On April 17th, 2017, Bitcoin firmly left gold behind, outperforming it by over 4,600% during a 5-year period.
As you can see, gold’s key feature is price stability, while Bitcoin’s high performance is necessarily accompanied by volatility. This is understandable given that Bitcoin’s current market cap is 8% of that of gold. Nonetheless, both have their advantages and downsides. Investors love to have peace of mind, but Bitcoin’s 25X performance compared to gold is proving to be too enticing to not take advantage of.
Eventually, even BlackRock, a global financier staking almost every financial pie on the planet, had to admit Bitcoin’s merit. At the end of 2020, Rick Rieder, BlackRock’s CIO for fixed income, told CNBC’s Squawk Box that Bitcoin is likely to supplant gold because it is both deflationary and easier to use.
Half a year later, a Bloomberg Intelligence report stated the following:
“The process of Bitcoin replacing gold in portfolios is accelerating and we see risks tilted toward more of the same. In 2020, the benchmark crypto gained legitimacy with declining volatility vs. the opposite in most assets. In 2021, we see little to stop the process of old-guard gold allocators simply focusing on prudent diversification.”
Fast forward to August 23rd, when a Wells Fargo’s report confirmed the trend further. The Investment Strategy Report noted that it is unusual for gold to stagnate for the past year, despite its strong fundamentals.
“Gold has had a rough 12 months. At this time last year, gold traded near $2,000 per ounce. Today, it sits closer to $1,800 per ounce. Probably the most quizzical thing about gold’s lagging performance is that its fundamental backdrop has been quite strong.”
John LaForge, Head of Wells Fargo Real Asset Strategy, then answered his own question.
“So, what has influenced gold, if not the normal macro factors? The rise of cryptocurrencies, specifically bitcoin, comes to mind.”
While this is all good news for Bitcoin maximalists, it bears keeping in mind that Bitcoin remains untested and psychologically novel compared to gold. Alongside Bitcoin’s volatility, this presents the last barrier for financial institutions to directly expose themselves to cryptocurrencies. The question then is, how do they mitigate crypto exposure?
Managing Financial Exposure to Digital Assets
In finance, any investment poses a risk, lying on the spectrum between negligible and high. For example, certificates of deposit (CDs) pose effectively zero risk because the principal investment is protected from loss. However, such an investment vehicle also yields negligible performance.
This is where crypto exposure comes in, after it had so soundly beaten gold and most stocks. Many investors would prefer not to own Bitcoin directly, but rather through financial instruments tied to cryptocurrencies. The most direct way to accomplish this would be through a Bitcoin Exchange Traded Fund. ETFs are securities listed on exchanges that track certain assets, essentially ‘stockifying’ them.
Therefore, the performance of Bitcoin would then be followed by the performance of Bitcoin ETFs on the stock market. While Canada has approved of the world’s seven Bitcoin ETFs, not a single crypto ETF exists in the world’s largest economy—in the US.
By the end of this year, that could change, according to Bloomberg senior ETF analyst Eric Balchunas.
In the meantime, here is an overview of top publicly traded companies that can give investors crypto exposure.
While many companies patiently wait for the US SEC to approve a Bitcoin ETF, they continue to seek ‘exposure’ to Bitcoin and other digital assets through other means. A common method here is investing in a public company—traded on a regulated stock exchange—with a business model which is heavily tied to digital assets.
A few common examples include cryptocurrency exchanges, bitcoin mining firms, and publicly traded companies that have a high amounts of BTC on their balance sheets.
But—is this really ‘exposure’ to Bitcoin? And how does the performance of these firms compare to the price action of BTC and other digital assets? Let’s take a closer look.
San Francisco-based crypto exchange, Coinbase, was valued at over $100 billion after its listing on Nasdaq in April 2021. Its net income was $322 million in 2020, increasing to $2.36 billion for H1 2021. Covering 56 million users, Coinbase works closely with Visa and Circle (USDC stablecoin) to erase the borders between traditional finance and digital assets.
Interestingly, in its Q2 2021 earnings report, Coinbase reported that Ethereum surpassed Bitcoin in trading volume. However, both Bitcoin and Ethereum outperformed COIN stock, which could be attributed to the company’s personnel and regulatory expenditures. For instance, decentralized exchange Uniswap had at one point 33x fewer employees than Coinbase, while having 77% of Coinbase’s trading volume.
Now holding 108,992 bitcoins worth about $5.3 billion, MSTR is as close as one could get to Bitcoin exposure. As a business intelligence company, it has a leaner business model which shows in its Q2 2021 earnings report. Its total revenue increased by 13.4%, at $125.4 million. The company’s CEO, Michael Saylor, is the key figure behind the wave of institutional investments in Bitcoin this year.
After the “Bitcoin for Corporations” conference led by Saylor in February of 2021, among 1400 investors, Elon Musk onboarded the crypto train buying $1.5 billion worth of BTC. Saylor further pushed the envelope of modern finance by selling senior convertible debt to buy more BTC, counting on its upward performance.
Much like Saylor, Jack Dorsey, the CEO of Twitter and Square, is a big Bitcoin proponent. Square’s bread and butter – Cash App – was responsible for tripled revenue in Q2 2021, at $4.68 billion, of which Bitcoin’s revenue was at $2.72 billion. Moreover, Dorsey suggested that Twitter accounts should be connected to Bitcoin Lightning Wallets in the future.
For environmentalists concerned with Bitcoin’s carbon footprint, Square commissioned a study in cooperation with Cathie Wood’s ARK Invest. To alleviate Proof-of-Work worries, the study outlines how Bitcoin’s mining network could incentivize renewable energy development.
Silvergate Capital (SI)
Silvergate Capital is the parent company of the San Diego-based Silvergate Bank, focused on providing a ramp from fiat to digital assets. The crypto bank has its own platform for trading – Silvergate Exchange Network (SEN), available 24/7. If one were to envision how banking should be conducted, Silvergate would certainly fit the bill.
All crypto trades are seamlessly converted into USD customer accounts, making it a one-stop financial platform. One of the most interesting aspects of this crypto bank is that it doesn’t pay an interest rate to its trading account holders. This means that if interest rates eventually go up, the bank will be able to charge interest rates for loans, while using digital assets as collateral.
In Q2 2021 alone, Silvergate received $4.3 billion worth of digital asset deposits, topping $11.1 billion in total, mostly in Bitcoin. Over the last four quarters, Silvergate exceeded consensus revenue estimates three times.
Galaxy Digital Holdings (BRPHF)
Founded by Michael Novogratz, Galaxy Digital is a merchant bank that aims to bridge crypto with institutional investors, similar to Silvergate Bank. It handles custody, principal investment, and trading. In its Q2 2021 earnings call, Galaxy managed $1.6 billion worth of digital assets.
Unfortunately, the company suffered from May’s 41% decline in BTC, which resulted in a net loss of $175.8 million. Interestingly, Galaxy is now doubling down on the resurgent NFT wave, having invested $52 million into 14 NFT-driven firms. This is not that surprising given that Novogratz bought 500,000 ETH from Vitalik Buterin in 2015, then priced at $0.99.
Lastly, companies that are directly tied to Bitcoin’s performance are mining operations. Of particular note are Marathon Digital Holdings and Riot Blockchain. Circling back to BlackRock, the world’s asset manager bought $382.9 million worth of stocks in these two mining firms, 6.71% and 6.61% respectively.
Would you like your local bank to offer the same services as Silvergate? Do you think more will follow or be completely ousted by FinTech and DeFi platforms? Let us know in the comments below.