The rise of cryptocurrencies has been nothing short of remarkable. Since Bitcoin was launched in 2009, more than 4,000 other cryptocurrencies have been created. The current total market cap is presently over $1.5 trillion and as of February of this year it’s estimated more than 100 million people are using cryptocurrencies around the world.
While there are many doubters that view cryptocurrencies as nothing more than a scam, others see blockchain technology, the technology that enables the existence of cryptocurrencies, as revolutionary. Their belief is that this technology will disrupt and disintermediate money, banking, and finance in the same way that the Internet has done to information. At the moment, most cryptocurrencies have few applications beyond speculation. As a result, most of its massive gains are due to a combination of people getting excited about the technology’s future potential, while others are simply chasing returns. However, some interesting developments are happening on the margins with more practical applications for cryptocurrencies such as NFTs, decentralized finance (Defi), social tokens, and decentralized autonomous organizations (DAO).
In this report, we will provide a broad overview of cryptocurrencies, examine various use cases, and provide more analysis on companies and ETFs that provide exposure to this new asset class such as the GreyScale Bitcoin Trust (GBTC), GreyScale Ethereum Trust (ETHE), Amplify Transformational Data Sharing ETF (BLOK), Coinbase (COIN), Paypal (PYPL), Square (SQ), and Riot Blockchain (RIOT).
Before diving into these topics, let’s take a quick detour into the origins of cryptocurrencies. Since the beginning of the Internet, there have been many experiments to create a sort of digital money. However, these efforts all failed because of a technical challenge that was solved by bitcoin and blockchain technology.
Money is a unit of value that is rare and fungible. Before the invention of the blockchain, these properties couldn’t be replicated digitally. If money was simply stored like a digital file, then it could be replicated, which would diminish its ability to be a store of value, and thus never gain traction as a serious currency. If developers went the other way and focused on maintaining its store of value, then the nascent currency’s fungibility would be diminished which meant that it could never have a use case beyond collecting or speculation.
However, this conundrum was brilliantly solved by Satoshi Nakamoto, in 2008 when he/she/they designed the blockchain protocol and then launched bitcoin in 2009. Satoshi Nakomoto is the name used by the presumed pseudonymous person or persons who developed bitcoin.
The genesis of bitcoin was many becoming disenchanted with the modern financial system and fractional-reserve banking which many blamed for the financial crisis and bank bailouts. So, it’s not a coincidence that bitcoin was developed and launched in the depths of the financial crisis and Great Recession. The intention was to create a more decentralized, rules-based system that would deliver better outcomes than fiat-based currencies. Therefore, many investors view bitcoin as sort of a “digital gold” given that it has a fixed supply and could serve as a hedge against inflation.
While there has been considerable speculation about the true identity of Satoshi Nakomoto, no one knows who he/she/they actually are. Nakomoto remains the largest holder of bitcoins with 1 million bitcoins which comes out to a value of about $33 billion, based on the price as of July 13, 2021.
Nakomoto’s breakthrough was the creation of the blockchain which is essentially a distributed, public ledger. This solved the challenges of earlier digital currencies as all transactions would be recorded on the distributed ledger, ensuring that bitcoin is not replicable while remaining fungible.
This ledger is kept on multiple computers across the world which are known as nodes that record every transaction. Once, the majority of nodes agree on a transaction, then it’s recorded on the blockchain.
While bitcoin is the original cryptocurrency, many others have sprung up such as Ethereum, Ripple, Cardano, and Litecoin. Each has unique features and attributes but in general, the newer cryptocurrencies are more designed for commercial applications and transaction speed, while bitcoin is optimized as a store of value.
(While there’s a lot of interesting differences in the design and intent of each cryptocurrency, this report will focus on the potential commercial applications.)
Over the past year, there’s been an explosion in the buying and selling of non-fungible tokens (NFTs). These are essentially unique versions of digital files with ownership verified on the blockchain. Some of the most well-known examples include NBA Topshots or digital art.
NFTs can be designed in ways that are more friendly to artists in terms of helping them capture the appreciation in value. For example, NFTs can be created so artists get a cut when the NFT is resold in the future. Of course, many see this as a temporary fad, while others believe that NFTs are a new path of monetization for artists and creators.
Another application for cryptocurrencies is smart contracts. Smart contracts are self-executing contracts with agreements between the buyers and sellers inscribed in code and hosted on the blockchain. Just like bitcoin and blockchain make centralized authorities irrelevant, smart contracts replace the middle-men who draw up and enforce legal agreements. In theory, smart contracts will allow people to transact and make binding agreements in a decentralized manner.
Most smart contracts are currently hosted on Ethereum which allows for more programmability than bitcoin. Currently, smart contracts are only being used on an experimental basis, however, many believe that they could be applied in the following areas: insurance; supply chain; logistics; and tokenization.
This latter application of smart contracts might be the most interesting as it would allow anyone to create tokens that can be freely bought and traded. Social tokens are similar to cryptocurrencies in terms of fluctuating in price depending on supply and demand, but they are based around a brand, community, or influencer.
An example of social tokens is Rally which lets creators issue their tokens that can be bought and sold to fans. Then, creators can offer special privileges to people who own their tokens. For example, they may post exclusive content that would be available only to token holders, and they can offer even more exclusive content to people who are their largest token holders.
In a sense, this creates an interesting situation in which creators and artists can monetize their audience differently than through advertising or selling merchandise. In turn, this allows someone to profit from their good taste if they are a fan of an up-and-coming artist or creator.
Defi is short for decentralized finance. It encompasses a wide variety of financial applications that are built on top of blockchains and various cryptocurrencies. Currently, the majority are built on top of ethereum.
In the same way that the blockchain replaces traditional government and financial institutions, Defi looks to replace intermediary financial institutions with code. Already, the total value of all Defi tokens has exceeded $100 billion. Some of the most popular Defi apps are decentralized exchanges, where users can exchange various assets including cryptocurrencies, NFTs, or tokens with no centralized authority.
Other examples of Defi include stablecoins which are cryptocurrencies that are tied to an outside asset such as the US dollar. There are also Defi lending platforms, where users can earn a return on their coins or take out a loan. During times of rising crypto prices, many traders use these platforms to borrow money on their holdings and use the proceeds to buy even more coins.
Another interesting, crypto-based innovation is decentralized autonomous organizations (DAO). These are tokens for a specific organization or group that gives holders a vote on how the DAO is run or operated. Often, DAOs are on the blockchain and governed by a set of rules that automatically execute.
Most DAOs today operate similarly to a democracy. Examples of current DAOs are investing syndicates or buyers of art. Stakeholders in the DAO will vote on how the DAO’s funds will be used based on their ownership. Of course, each DAO can be structured in different ways and assign voting rights in unique and transparent ways. DAOs that work well will be rewarded with their tokens climbing in value, while those that fail to function well will see people selling their tokens.
Just like cryptocurrency disrupts traditional aspects of finance and social contracts could disrupt aspects of the legal system, DAOs present a new model for how organizations could be run more transparently and effectively which aligns stakeholders’ interests.
All of these developments are in the early stages. If we look back at previous technology shifts, the ultimate applications are quite different than what even seemed possible at the inception. When Steve Jobs combined email, the iPod, and a cell phone into the iPhone, it would be impossible to anticipate all the changes it brought to the world in multiple spheres of life.
I believe that cryptocurrency is similar in that it’s in the early stages and we have little idea of its ultimate shape or impact. In terms of public markets, there are stocks and ETFs that offer exposure to this new asset class.
Below, we will highlight some of the most interesting names:
GreyScale Bitcoin Trust (GBTC)
GBTC is the largest bitcoin ETF and one of the largest owners of bitcoin in the world as inflows into the ETF are used to purchase bitcoin.
For anyone bullish on bitcoin, buying GBTC might be the most simple and straightforward way to get exposure especially since many of the crypto stocks are priced at high multiples.
Like bitcoin, GBTC has certainly been volatile but has been a strong performer overall with a 172% gain over the past year. However, it’s performed poorly in recent months as it’s down by 51% since its peak in mid-February.
GreyScale Ethereum Trust (ETHE)
ETHE operates much like GBTC with inflows into the ETF used to buy ethereum. Ethereum is the second-largest cryptocurrency, and many believe it is more suited for building commercial applications as compared to bitcoin.
Many of the new applications, discussed above like NFTs, smart contracts, and DAOs, are most commonly built on top of ethereum. Many analysts say that ethereum is more like a global, distributed computing engine rather than a “store of value” like bitcoin.
Many companies like Visa (V) and JPMorgan (JPM) are building products on top of ethereum which lends it a certain credibility. Further, one critique of crypto and specifically, bitcoin, is its heavy use of energy. Ethereum is addressing these concerns with the release of Ethereum 2.0 late this year, which is intended to use 99.5% less energy per transaction.
Amplify Transformational Data Sharing ETF (BLOK)
BLOK is an ETF that invests in companies that are building and utilizing the blockchain. The ETF is up 151% since its inception in January 2018. The fund has net assets of $1.1 billion and an expense ratio of 0.7%. Since mid-February, BLOK is down by about 25%.
About 72% of the companies that it’s invested in are based in North America, and 55% are software companies. Some of BLOK’s top holdings include Microstrategy (MSTR), Paypal (PYPL), Square (SQ), Coinbase (COIN), and Nvidia (NVDA).
BLOK is a good option for investors who are bullish on the blockchain on a long-term basis. It provides a mix of high-quality companies in the space and removes much of the risk that comes with investing in crypto assets.
The POWR Ratings rate BLOK a C which equates to a Neutral rating. BLOK does have an A for its category grade as it’s part of the Technology Equities ETF group which is one of the highest-ranked ETF categories. To see more of BLOK’s POWR Ratings, click here.
COIN is the largest and most liquid stock for investors who want to bet on the growth of the crypto industry. Currently, it’s the third largest cryptocurrency exchange with an average of $2.3 billion traded on the platform every day. Of course, this figure is growing at a double-digit rate as are other important metrics like total assets on the platform, transaction revenues, and net income.
COIN went public in April through a direct listing and was one of the biggest IPOs of the year. The stock opened at $381 but has trended lower since then along with other cryptocurrencies. However, the stock is still viewed as one of the highest-quality, pure plays in the crypto space as many other crypto stocks are smaller, more speculative, and less liquid. Further, its business model is easy for any investor to grasp.
PYPL is a fintech stock and one of the backbones of the Internet economy. The company has grown into more than a $300 billion valuation, and it is one of the largest payment processors in the world.
Last year, PYPL started letting users trade cryptocurrencies. Early results show that people trading crypto are using the service more and checking their accounts more often. It also juiced the company’s user growth. It’s a savvy move for PYPL as it’s a way to get more users into the PYPL ecosystem at a much lower cost than other means of user acquisition.
The company is also working on offering more higher-margin products and services to its users to create a ‘digital wallet’ experience. Eventually, users will be able to manage all their finances through PYPL and buy insurance and other financial products through it. For PYPL, crypto is more of a user acquisition strategy than something that is accretive to earnings.
SQ develops and provides payment and point-of-sale solutions. It’s also one of the largest digital wallet companies in the US as it offers various financial services including banking, credit, and selling financial products. It was one of the first, mainstream platforms to offer users the ability to buy and sell cryptocurrencies.
SQ’s crypto strategy has many similarities to PYPL, but the company, including founder and CEO Jack Dorsey, is even more bullish on it. Dorsey has likened bitcoin to the Internet’s currency. It’s been remarkable in terms of juicing user growth and last quarter, it led to strong revenue growth. Crypto trading revenue increased by 1,045% on a year over year basis and accounted for $3.5 billion in revenue, 69% of the company’s total.
However, it only contributed $75 million in gross profit as SQ only takes a 1% commission on crypto trades. However, the company is one of the most forward-thinking when it comes to crypto. The company is working on integrating crypto more seamlessly into its services and building new applications on top of the blockchain. Therefore, interested investors should certainly keep the stock on their radar.
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COIN shares were trading at $244.81 per share on Tuesday afternoon, down $2.86 (-1.15%). Year-to-date, COIN has declined -25.43%, versus a 17.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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