Bitcoin: Investment or speculation?
For many investors, Coinbase Global Inc.’s trading debut next week will be an entry into the US$2 trillion cryptocurrency market.
And for those who have already gorged on Bitcoin, the arrival of the largest U.S. cryptocurrency exchange on the Nasdaq Stock Market could be what is needed to settle portfolios roiled by the asset class’s notorious volatility.
There are other stocks already tied to the bits and bytes of the various blockchains. Elon Musk’s Tesla Inc. and Michael Saylor’s MicroStrategy Inc. have both notably added billions worth of Bitcoin to their treasuries. But with Coinbase’s public listing, investors will have the choice of an equity tied to cryptocurrencies that is -- so the hope goes -- less likely to suffer persistent cycles of boom and bust.
“For a crypto investor that also buys stocks, it has the ability to diversify risks as there is a very profitable exchange platform that trades on another venue (stock exchange) whose flows of buyers and sellers can be less correlated than many crypto prices,” wrote Greg Foss, a veteran credit trader, Bitcoin investor and chief financial officer for Validus Power Corp., in an email reply to questions.
Coinbase is planning to go public through a direct listing in which it will not raise any new capital, it said in an S-1 filing. The direct listing allows current shareholders to trade their shares without a lock-up period that is typical in an initial public offering. It was valued at about US$90 billion in its final week of trading on Nasdaq’s private market, Bloomberg News reported.
Still, because volume and price tend to go hand-in-hand, Coinbase’s transaction revenue, its largest segment, could remain susceptible to cryptocurrency market gyrations.
“In a traditional stock portfolio it gives exposure to an exchange platform that generates trading fees on crypto,” wrote Foss. “Those fees increase with volumes and volumes typically increase with prices, so there is a beta trade there.”
Coinbase said Tuesday that it expects to report a first-quarter profit of US$730 million to US$800 million, more than double what it earned in all of 2020. The bumper quarter for the exchange comes amid surging cryptocurrency prices. The Bloomberg Galaxy Crypto Index, tracking Bitcoin, Ether and six other cryptocurrencies advanced by more than 100 per cent in each of the last two quarters.
Coinbase may have further appeal for investors. The exchange could provide an accessible diversified investment into the space, where there’s a proliferation of cryptocurrency tokens and few passive vehicles to spread bets around, according to Gil Luria, head of institutional research at D.A. Davidson & Co.
“Coinbase will win regardless of which crypto asset emerges as a winner, and their revenue is tied more to trading volumes, which are often less volatile than asset values,” Luria wrote in an email.
But investors looking to add some stability to their cryptocurrency portfolios may want to exercise patience.
Kevin Kelly, global head of macro strategy at research firm Delphi Digital, warns that those seeking a lower volatility investment might want to sit out Coinbase’s first week of trading.
“I expect to see a lot of volatility next week once COIN begins trading, but eventually I think we’ll see it trade more in line with the direction of the broader crypto market,” Kelly wrote in an email. “However, I view it as a lower beta play on the continued expansion of crypto with less downside risk to crypto asset prices; in other words, COIN is more agnostic to crypto asset prices and may be an attractive opportunity for investors looking to gain exposure to the continued adoption of crypto without taking on similar levels of price volatility.”