How to Gain Exposure to Bitcoin and Other Cryptocurrencies Without Actually Having to Invest in Them
The case for investing in Coinbase Global Inc stock as a proxy to the crypto universe
In this article, I set out to briefly cover the key attributes of the dominant cryptocurrency in existence — Bitcoin. I then provide an overview of the key facts on, probably, the leading platform for trading cryptocurrencies — Coinbase Global Inc (ticker: COIN). By using citations from the company’s recent earnings report, while also looking into the correlation between the stock’s price history as compared to that of Bitcoin’s, I show evidence suggesting that investing in Coinbase Global Inc can be a good proxy for gaining exposure to cryptos.
Bitcoin key attributes
- Launched in 2009 as a decentralized digital currency following a white paper release by a person or group called Satoshi Nakamoto.
- Advocated as a truly democratic and transparent currency, free from any central bank or other control, where
“Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain” (Source: Wikepedia).
- Criticized for being used in certain illicit transactions related to money laundering and terrorist financing, and also for its significant carbon footprint on the environment during the so-called mining process.
- Although it started off primarily as a speculative play by individual investors, it has received a lot of institutional interest after Bitcoin Futures contracts were introduced on the Chicago Mercantile Exchange (Source:CME) and ETFs such as the ProShares Bitcoin Strategy ETF (ticker: BITO) came into existence (Source:ProShares).
- Several investors even compare Bitcoin to Gold, citing its property as an inflation hedge against fiat currencies like the US dollar and the Euro, amid recent inflationary pressures spiking globally.
- Bitcoin is the dominant crypto asset by total market capitalization, currently at around $750 billion, representing more than 40% of a nearly $2 trillion crypto market. (Source: coinmarketcap.com)
Key facts on Coinbase
- On its website, Coinbase mentions that:
“We are building the cryptoeconomy — a more fair, accessible, efficient, and transparent financial system enabled by crypto. We started in 2012 with the radical idea that anyone, anywhere, should be able to easily and securely send and receive Bitcoin. Today, we offer a trusted and easy-to-use platform for accessing the broader cryptoeconomy.”
- Coinbase Global Inc (ticker: COIN) has been trading on the Nasdaq since April 2021, and as of the time of this article has a market capitalization of approximately $38 billion.
- It accommodates trading on more than 100 crypto assets on its platform, including the most popular ones like Bitcoin and Ethereum.
Based on its Q3:2021 earnings, “Crypto assets on Coinbase represented 12.2% of the total crypto market capitalization as of September30, 2021.”
- Looking at the breakdown in the table below — Assets on Platform, the company has seen increases in inflows from both the Retail and the Institutional space in recent quarters which reached a total of $255 billion for Q3:2021. Notice also how the allocation of the various crypto assets on its platform resembles to a great extent the global market allocation described earlier — a declining percentage for bitcoin, down to 42% from 57% a year ago, although still dominant.
- Checking out the key metrics, it seems that the company has had significant growth across the board, albeit with some volatility. According to comments in the Shareholders Letter:
“While we entered Q3 with softer crypto market conditions, driven by low volatility and declining crypto asset prices, market conditions improved meaningfully later in the quarter which we have continued to see into early Q4. This backdrop led to global crypto spot trading volumes declining 37% in Q3 as compared to Q2, however, Coinbase outperformed the market with total trading volumes of $327 billion, a 29% decline in the same period. We have consistently indicated that volatility is a key factor influencing our transaction revenue. Q3 illustrates this point. ”
This last point seems critical in understanding their main driver for revenues — volatility. They are essentially saying that their revenues are largely correlated to rising and volatile crypto markets.
Does correlation imply causality? Probably yes, to some extent at least.
In the chart above I compare the price histories of the Bitcoin/$ pair (blue line) on the left and that of Coinbase Global Inc (candlesticks) on the right. Notice that since the IPO back in April 2021the two markets have exhibited significant correlation, almost moving in tandem.
Putting aside any surprises in the upcoming earnings report of COIN for Q4:2022, due to be released on February 24, 2022, it looks like Bitcoin might be leading the march higher.
Necessary disclosure: The author is holding a long position on COIN at the time of this writing. No benefit or payment has been received by anyone for producing this analysis.
Legal Disclaimer: All views are strictly personal and intended for education purposes only. Under no circumstances can information in this article be considered as advice, investment or otherwise, nor can it be considered as a solicitation to trade in any securities. You should consult your personal adviser for any financial matters. The author cannot be held liable for any adverse impact due to any action or inaction by anyone as a result of consuming this information. All rights reserved.