Betting Big on Bitcoin

You must have diamond hands. To be a successful investor, you need to have a long-term vision. Look out fifty years from now and identify the gaps. Then invest in those missing parts.

Bitcoin is one of those missing parts.

Everyone’s favorite cryptocurrency has been on a recent tear. I mean the crypto asset has gone to the moon and back in less than twelve months [all-time time lows sub $5,000 in March and breaking $50,000 this month if you weren’t keep track]. So what’s the catalyst?

Let’s dive into the key drivers.

The Retail Uprising 

The People have been vocal about the Government during the pandemic. Very vocal. Every activist group raised concerns in 2020. But the biggest group moves slowly in America.

You see, wealth has been concentrating in America for several decades. The rich are getting richer. We can’t hide the fact with the inequality gap rising. This problem is not unique to America. In fact, it is more apparent in third world countries with weak economic systems.

So what does this have to do with Bitcoin? Everything. First, Americans have been experiencing a combination of two things: a fight to flight and momentum trading. 

With trillions of dollars injected into the economy, investors are concerned inflation will erase purchasing power. There is some truth behind this but Fed Chair Jay Powell dismissed these concerns midweek.

The Federal Reserve has stated inflation is not a primary concern at the moment. Powell isn’t rushing to raise rates and will continue his bond buying program. Inflation may only occur if we see supply chain constraints.

As for momentum trading, retail investors have been driving demand for a year. Today you can buy cryptocurrency in most stock trading apps. So after the GameStop/Reddit phenomenon, which resurfaced this week, traders have been rotating between crypto and cannabis.

New institutional Bitcoin investors

Now for the real players. 

Two weeks ago we spoke about the Crypto Chasers. Michael Saylor from MicroStrategy made a big bet on Bitcoin last summer. That trade paid big dividends to him. MicroStrategy has more than 7x’d in the past eight months. Now he’s purchased another $1 billion in Bitcoin, bringing his total holdings to ~$4.5 billion. Like before, he issued zero-interest debt to finance this purchase…

Now take Square, for example. The popular merchant processor, bought $170 million worth of bitcoin this month. More than 3x its Bitcoin position from October 2020. Their CashApp saw +1 million new Bitcoin users in January, on top of their 3 million current Bitcoin users. This is rapid growth, even for a fintech company.

It’s worth mentioning that several high-profile hedge fund managers like Stanley Druckenmiller and Paul Tudor Jones have also been building a position here.

But wait, there’s more...

Cathie’s Ark finds Bitcoin

Cathie Wood is the superstar founder and chief investment officer of ARK investment management.

Two years ago I had the chance to hear her speak at a private event. Cathie spoke in a concise and intelligent manner but had a crazy price target for Tesla. +$2,000. Two years ago. I thought she was nuts but no other attendees had much of an opinion of her. 

Her bet clearly paid off so I began paying attention to her. In fact, ARK made several disruptive investment genomics to robotics at the time. It was hard for me to grasp how she could manage a massive multi-strategy portfolio. 

But today she is crushing it. ARK’s flagship fund has increased 140% in the past year. One of her big bets was in crypto to hedge against inflation. 

And on top of that...

Her bet on Elon and Tesla was a double hitter. Ever since Elon’s first dogecoin tweet last month, our favorite meme lord made another billion dollars this month. In cash. Or shall I say Bitcoin. Tesla made more money buying Bitcoin than selling cars. How’s that for a trade?

Coinbase IPO

If you don’t want to invest in bitcoin directly, you may be in luck. Coinbase, the leading cryptocurrency exchange, plans to go public through a Direct Listing. This is a cost effective method to raise capital instead of IPO'ing.

Today the company is worth $77 billion, which is valued greater than the New York Stock Exchange. Makes sense since crypto is universal in many ways.

It's funny how the best non-bitcoin investment may be an exchange-traded business. Quite ironic since Bitcoin and blockchain pride themselves on being decentralized. You see, the ideal Bitcoin transaction is for buyers and sellers to transact with each other, no middle man. 

Speaking of middlemen, Square, PayPal and Robinhood have all made Bitcoin trading accessible on their platforms as well.

But unlike Robinhood, Coinbase makes money through several revenue streams: trading fees, storage fees and custody services. The company launched a new visa debit card in October to allow users to buy goods with cryptocurrencies. The debit cards can convert into cash at ATMs too.

Now let’s breakdown the numbers

In 2020, Coinbase generated $1.28 billion in revenue from 2.8 million “monthly transacting users” [you can view the company’s S-1 filing here]. This translates into $457 of revenue per user.

But I suspect the users and revenue base will continue to be very volatile. The revenue number per user actually declined from 2019 to 2020.

This public offering doesn’t interest me given the instability of the marketplace. But it is nice to see Coinbase use the Direct Listing route instead of an IPO. Given its strong consumer base, Coinbase will be able to offer securities directly to the public to raise capital. 

Here’s why that’s important. Cutting out middlemen like investment bankers will save on fees. It’s not a blockchain transaction but is a good first step to reduce friction. Plus retail investors may get an allocation at the offering price. 

P.S. If you want to learn more about crypto, check out Hackernoon.com. We’re a small investor in this company. It is one of the leading websites for crypto content.

P.P.S. Subscribe to my YouTube channel if you want to watch or listen to this newsletter. I’ll be providing more regular market updates here.