With talk of “safe havens” creeping into conversations from Wall Street boardrooms to Main Street barber shops, attention turns to a pair of timely assets – gold and cryptocurrencies.
Which one is a better option for safety-minded investors? Real Money Columnist Maleeha Bengali weighs in with her choice this week.
“As Bitcoin surged from March 2020 through 2021, the market was convinced that Bitcoin was the “new” digital Gold, the new store of value assets,” Bengali said. “As Bitcoin surged to new highs with each passing day, this became a self-fulfilling prophecy. Gold was seen as the step child, given no attention whatsoever as traders chased greed and FOMO 100%+ returns in crypto assets.”
On a year-to-date basis, gold is now up 6% vs. Bitcoin down 25%. Has the narrative changed?
“People often mistake correlation and causation,” Bengali noted. “As the direction reinforces the initial thesis, the case for it grows even more.”
According to Bengali, the fundamental case for Bitcoin has been its halving cycle that takes place every four years.
“As supply shrinks and demand rises, prices naturally have to go higher,” she said. “In addition to that, cryptocurrencies, specifically Bitcoin, were seen as the new digital currency that would in theory take over the dollar once the Fiat system fails completely due to endless money printing by its central bank every time there is an economic hiccup.”
While that scenario is largely true, the recent Bitcoin rally had been on the back of that same endless money printing that exacerbated its underlying direction.
“The Fed’s balance sheet had expanded by over $4 trillion during the Covid crisis, which made its way into all risky assets,” Bengali said. “Bitcoin was also one of them.”
While it’s not easy to split the fundamental flow from the bigger picture macro flow, macro does play a part as top-down rotation provides tailwinds. “As much as it was hailed to be a truly diversified asset, if one were to plot the chart of Bitcoin vs. that of the central bank balance sheet or Nasdaq for that matter, the correlation is uncanny,” Bengali added.
But in this particular case, given the Fed’s excess liquidity, it also led to causation because now that the market is considering the end of the Fed QE, Technology stocks and Bitcoin have fallen over the past few months despite their “fundamental valuation.”
“In that context, one can argue that Bitcoin really is nothing other than a pure risk “on” and “off” asset,” she noted.
So what about gold?
Given its 50%-100% moves, Bitcoin is far from being a store of value.
“If it truly was one, then during this period of geopolitical uncertainty and/or recession fears, Bitcoin would be rallying like Gold has all of this year. But instead it has fallen just like one of the Cathy Wood’s (ARKK) names,” Bengali said.
On the other hand, gold is finally outperforming the way one would imagine.
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“It’s not always about the absolute performance as it is about the relative performance,” Bengali noted. “Gold may just be up 6% but it has severely outperformed most equities and broader indexes by 25%-80%.”
“Sometimes capital preservation is as important as making returns, and that is exactly what gold has achieved this year, preserving one’s profits and capital if they had monetized their gains into gold,” she added.
The safe haven discussion comes at a time when cryptocurrency exchanges are making their mark around the globe, with two big stops in the Mideast.
Up first, FTX has announced it has earned a virtual-asset license in Dubai in the United Arab Emirates.
FTX Europe, a recently-established division operating in Europe and the Middle East, is among the anchors in the Dubai World Trade Centre, TheStreet’s Rob Lenihan reported on March 15th.
The firm will offer “complex crypto-derivatives products with centralized counterparty clearing to institutional markets,” CEO Sam Bankman-Fried said.
Additionally, Binance, the world’s largest crypto exchange, also got a crypto license in Dubai under the same program, Bloomberg reported, citing a person familiar with the matter.
In addition, Binance received a license to be crypto service provider in Bahrain, Chief Executive Officer Changpeng “CZ” Zhao tweeted.
“The pair of licenses marked the exchange’s first regulatory approvals in the Middle East region,” Lenihan reported.
Back in the U.S., TheStreet’s investment experts are eyeballing some cybersecurity assets, with these names at the top of the list.
Grayscale ETF $24.95. 5-day performance up 12%.
Could Grayscale Future of Finance ETF GFOF fill the bill as an asset management missing link?
“In the investment world, everyone wants to be first,” said TheStreet’s Mark Abssy. “That’s probably why we’re seeing lots of new exchange-traded funds that offer investors exposure to new technologies in electronic payments and the digital economy, decentralized finance and other blockchain technology, and even cryptocurrency futures – but still no $BTC spot product.”
From a thematic purity perspective, the first-mover advantage is still a strong force in the ETF industry, and there have been plenty of “better” follow-on products that just don’t get anywhere near the traction of the first-to market.
That’s where Grayscale is worth a look. The fund sports a 70-basis point expense ratio, meaning that shareholders with $1,000 invested in GFOF would see fees of $7 over a one-year holding period.
“If the name Grayscale sounds familiar, it is because you have most likely heard about the Grayscale Bitcoin Trust (GBTC) or any of the other 12-cryptocurrency focused trusts,” Abssy said. “Some of these trusts issued shares that have been trading on the over-the-counter (OTC) market and have been providing a relatively easy way for investors to get access to bitcoin, ether, litecoin, and other cryptocurrencies.”
A fund named “The Future of Finance” sounds like it might be another broad stroke attempt to “capture the future”, and Abssy’s not on board with that.
“Frankly, if it weren’t for Grayscale’s involvement, I probably would have let the fund launch go by without comment,” he said. “But given the innovation that the Grayscale already brought to market and its knowledge of innovation in finance, I’m interested.”
Structurally, the fund tracks the Bloomberg Grayscale Future of Finance Index (summary found here). According to Abssy, the segments within the broad theme read similar to a number of other indexes, highlighting the following areas:
Financial Foundations – includes asset managers, exchanges, brokers, and wealth managers involved in the enablement of the digital economy.
Technology Solutions – companies providing the technology to facilitate the digital economy through data and transaction processing.
Digital Asset Infrastructure – companies involved in mining, energy management, and activities that power the digital asset ecosystem.
Once names are selected, they’re scored and screened on revenue; fit to theme; and, interestingly, regulatory risk with reference to current regulations as well as what is described as “any potential changes in regulation.”
In addition, “Quantitative filters include a fairly standard minimum $100 million market capitalization and minimum average daily value traded of $1 million,” Abssy noted. “Once the index’s final 20 names have been selected, they are market-cap weighted with an 8% cap on the top five names and a 4% cap on remaining names. Reconstitution and rebalancing become effective on the last business day of each calendar quarter. This differs a little from industry practice of coordinating effective dates with options expiration but should not be an issue.”
Is Grayscale for you? Abbsy thinks so.
“First, there is an absolute fire sale going on in this space right now with many names 20% to over 60% down since September 30 of last year,” he said. “Second, the Fed’s recently released white paper on “The U.S. Dollar in the Age of Digital Transformation” outlines a potential approach to a U.S. Central Bank Digital Currency (CBDC) and asks for public comment. This sends a clear message that the Fed recognizes digital currencies represent an undeniable shift in the global economy.”
While Abbsy doesn’t see an immediate (weeks, months) catalyst for this strategy, he thinks this fund is a solid take on an emerging trend that is in the early innings.
“Considering current valuations as well as the potential effects of an increasingly hawkish Fed I would say taking your time stepping into a position should provide a good opportunity to participate in the evolution of money and payments in the future,” he said.
Block $136.73. 5-day performance 34.14%.
Real Money Columnist Kevin Curran is examining digital-first payment platforms and the impact Western sanctions on Russia for its invasion of Ukraine. The impact in payment companies and on crypto players is “more than symbolic,” he says.
“While Russia lays siege to Ukrainian cities that include Mariupol, Odessa and Kyiv, Moscow’s economy is arguably under the greatest unified economic blockade in modern history,” Curran said.
Alongside partners in Europe and Asia that encompass a nearly unprecedented coalition of nations, the US is leading a ban on major Russian banking institutions from the SWIFT bank messaging system while also imposing hugely restrictive measures on the Russian Central Bank and seizing Kremlin-linked offshore assets held by institutions outside of Russia.
“Adding to the pain for Russian citizens, popular mobile payment platforms such Apple (AAPL) – Get Apple Inc. Report Pay and Google Pay are no longer functioning in the nation,” Curran noted.
What’s more, credit card giants such as Mastercard (MA) – Get Mastercard Incorporated Class A Report, Visa (V) – Get Visa Inc. Class A Report and American Express (AXP) – Get American Express Company Report have blocked transactions in the aggressor country, sending Russia’s citizenry back to reliance upon either cash or faltering domestic solutions from banks such as Sberbank ( (SBRCY) ) and Alfa-Bank that now find themselves on the brink of insolvency. The pressure is only amplified as a rush to ATMs puts the possibility of runs on banks on the table.
“As a result of sanction orders, we have blocked multiple financial institutions from the Mastercard payment network,” Mastercard CEO Michael Miebach said in a statement. “We will continue to work with regulators in the days ahead to abide fully by our compliance obligations as they evolve.”
The sanctions are having an impact on Russia, for sure, but for investors, as well. That’s especially the case in the fintech and crypto sectors.
“Sanctions programs (are) applicable to (the payment processing) business that works closely with banks to fulfill payments into the impacted regions that similarly apply such sanctions. These same requirements apply to businesses like PayPal and Block,” Marwan Forzley, CEO of online global payments platform Veem, told Real Money. “I would not expect to see this sector becoming a path to sidestepping sanctions, at least for mainstream players.”
Meanwhile, the Jack Dorsey-led Block (SQ) – Get Block Inc Class A Report has no exposure to Eastern Europe with little exposure to international markets outside of the major economies of Western Europe, Oceania and North America. In addition, cross-border transactions are unsupported by the service.
As a result, Curran said, the Block platform looks lightly exposed.
“That’s not to say that Block is not impacted by the geopolitical events that now permeate almost every inch of the market,” he noted. “Due to its founder’s focus on Bitcoin and cryptocurrencies, it could be a major beneficiary.”
Cryptos are, by default, emerging right now in Eastern Europe.
“Cryptocurrencies have already seen increases in value as a safe harbor for rapidly fluctuating currencies in Ukraine and Russia,” Forzley told Real Money. “Cryptocurrency is continuing to see an uptick in usage amongst Russians as it’s currently the only type of foreign currencies available to them.”
Indicative of this dynamic, Block’s stock has soared about 50% since the start of the invasion and subsequent news that Russian assets would be frozen. According to Curran, that’s largely tied to the company’s audacious push into cryptocurrencies, outpacing its peers in adapting to digital currencies.
“During the year ended December 31, 2021, we saw a significant increase in total Cash App revenue, primarily from bitcoin revenue which contributed 57% of total consolidated net revenue in 2021 and 48% of the total increase in consolidated net revenues in 2021,” a Block SEC filing released late last week reads. “The primary drivers of bitcoin revenue are customer demand and the current market price of bitcoin.”
In addition to customer transactions, Block holds about $350 million in Bitcoin on its balance sheet, the fourth most of any publicly traded firm in the world. “The surge in Block’s stock is understandable in the context of Bitcoin’s recent run amid the invasion, jumping more than 10% per coin,” Curran said.
According to Citi, about 11% of Russians currently own cryptocurrencies, with a possibility that buying will only increase as alternative allocations for currency transactions close off and the ruble crashes.
“Interest in bitcoin is rising,” the firm’s analysts wrote earlier this week. “But Russian volumes have been relatively small so far, suggesting that the price action is more due to investors positioning for an expected uptick in demand from Russia rather than Russian demand itself.”
Meanwhile, Russian policy makers aren’t allowing big outflows from its core currency, thus putting Russian oligarchs and others who might try to put capital outside the country for safekeeping in a bind.
“The price for patriotism, in this case, is quite high indeed,” Curran said. “For investors outside of Russia eyeing opportunities both in Bitcoin and in correlated companies such as Block, it is important to temper expectations given this impasse.”
Coinbase Global $184.43. 5-day performance 15.22%.
Coinbase (COIN) , the cryptocurrency exchange, might be hitting a sweet spot at an optimal time for investors. But those same investors should tread cautiously.
“Investors are often seduced into buying hot IPOs of companies with new business models that show signs of hyper-growth,” said Real Money Columnist Paul Ginesin. “However, when they come public, it’s often hard to discern if the IPO coincides with the exact moment when growth is at its peak or if growth is enduring. Wall Street usually chooses the latter and extrapolates growth well into the future.”
Take Coinbase, for example.
“When COIN shares came public last April, earnings and revenue were growing so rapidly that analysts had price targets equivalent to the value of Goldman Sachs (GS),” Ginesin said. “Revenues soared from $190 million in 2020 to $1.8 billion in 2021. Yet, it’s become clear that Coinbase had been over-earning last year, with 2022 revenue expected to be down and earnings far lower than 2021.”
Before COIN’s latest earnings report, EPS were already expected to decline in 2022 to $7.20.
“But with new ramped-up expenses and lower trading volumes, Wall Street now expects 2022 EPS below $4 per share — down from $14.50 reported in 2021,” Ginesin said.
In 2021, Coinbase was able to take advantage of market inefficiencies and enthusiasm for cryptocurrencies.
“The company earned a high take rate on crypto transactions along with other fees and services,” Ginesin noted. “But Coinbase’s take per transaction has declined significantly from the peak due to more competition and market efficiencies.”
After the quarterly numbers came out, Investment firm Needham & Co. wasn’t exactly supportive of cryptos – or COIN.
“Given Coinbase transactional revenue is highly sensitive to retail sentiment, we are especially concerned that retail interest in crypto assets may be lower in 2022 than 2021 on the back of lower price momentum in underlying crypto assets. We are lowering our 2022FY revenue estimates from $8.38Bn to $6.77Bn given increased headwinds around crypto asset price activity, increasing competition from crypto native exchanges in US markets, and increasing uncertainty related to rising interest rates, and growing geopolitical and economic concerns which could dampen crypto activity.”
Shares of Coinbase are highly correlated with the price of Bitcoin, as well. That likely will curb COIN’s market performance this year.
“I expect COIN to underperform the cryptocurrency this year due to much higher expenses,” Ginesin said. “Stock-based compensation alone is expected to hit $1.5 billion, almost 4% of Coinbase’s market cap.”
Additionally, Coinbase is diversifying its revenue base with new products and it will benefit from a growing subscription and services revenue.
“However, with Coinbase’s EPS expected to plummet this year to under $4, down from $14.50 in 2021, the company looks to have come public at an optimal time for sellers,” Ginesin said.
