Early investors in digital currencies like Bitcoin (CRYPTO: BTC) experience near-constant volatility. In 2010, a single bitcoin’s value went from $0.0008 to $.08. Investment experts who dislike Bitcoin as an investment compare it to 17th century Dutch Tulip Mania.
With multiple bubbles, major problems with the ecosystem, and negative reviews from high-profile investment experts Charlie Munger, many institutional investors haven’t given crypto a second look.
However, recent regulatory changes and a more mature crypto market make it a sector worth watching. Understanding this digital currency and investing in the technology that helps it function is of interest to a growing number of institutional investors.
Cryptocurrency is a variation of Bitcoin; an electronic cash system that runs without a third-party verification entity like a bank or government. Crypto is a decentralized currency that works internationally.
Cryptocurrencies are impossible to break, duplicate, or counterfeit. Developers use complex computer engineering principles that not only protect the currency but also hide the identities of users.
Cryptocurrency owners have a unique private key that can be up to 78 digits long. Without the key, it’s impossible to convert or spend cryptocurrency. Losing the key is like losing a pile of cash. It’s irretrievable.
Bitcoin is the most well-known cryptocurrency in the world. Combined with significant cryptocurrencies like Litecoin, Ethereum, and Monero, there’s about $1.5 trillion in value invested in these cryptocurrencies. This amounts to just 1.8% of the value of all narrow money. Narrow money is currency. It also includes liquid assets and deposit accounts that owners may make a withdrawal from at any time.
Satoshi Nakamoto first used blockchain technology in 2009 to secure Bitcoin. Blockchain uses a shared public ledger to record transactions. Each block is filled with data and chained to the previous section of the chain. Users can access the entire blockchain with a blockchain explorer or by downloading a node. Since each node contains a copy of the entire blockchain history with timestamps and hash codes, blockchain is nearly impossible to hack.
This decentralized method of verifying data is irreversible and permanent. Bitcoin (and other types of cryptocurrency) transactions are on display for anyone to see because of blockchain technology.
While the price volatility of cryptocurrency is enough to make many investors shy away from this type of investment, there are additional concerns.
The cryptocurrency market is worth more than $2 trillion, which is about the same amount of money held in gold investments. While it’s easier to carry a cryptocurrency key than a bar of gold, many investors see major problems with cryptocurrency.
Cryptocurrency is a work in progress. Stocks have value, and they can yield dividends. Fiat currency is backed by banks. Cryptocurrencies are inherently volatile, making them a risky investment. A big trade sends ripples resulting in price shocks.
The price of Bitcoin rose by 125% in 2016. In 2017, it rose more than 2,000%. Bitcoin set record highs in 2021, tripling the 2017 peak price.
Crypto markets have less liquidity than mainstream markets, so speculation and news developments can cause serious price swings. As trading firms and institutional investors enter the cryptocurrency sector, market fluctuations may calm down. It remains to be seen whether crypto assets will begin to mimic the volatility of mainstream assets.
While blockchain remains impossible to hack, exchanges are vulnerable. An exchange provides a means by which to buy and sell cryptocurrency. If a hacker breaches the exchange, they can take ownership of cryptocurrency with a fraudulent order. Mt. Gox, a cryptocurrency exchange in business between 2010 and 2014, was hacked by someone pretending to be a site auditor. More than $8 million in Bitcoin was affected and the exchange shut down.
Another area of serious concern with cryptocurrency ownership is that a lost key can lock even the most connected and wealthy bitcoin investors out of their fortunes. Sefan Thomas, a programmer living in San Francisco, lost the password to his IronKey, which holds the keys to a digital wallet containing 7,002 Bitcoin worth $220 million. Chainalysis, a cryptocurrency data firm, estimates that about 20% of Bitcoin is locked in wallets that their owners can’t access because they lost the key.
QuadrigaCX was once Canada’s largest digital asset exchange platform, but the founder died suddenly in 2018. He was the only person with access to crypto assets. QuadrigaCX clients and staff lost a collective $150 million when he died.
In a gold rush, be like Levi Strauss. In 1849, he sold shovels to prospectors searching for gold. Peter Lynch famously pointed out that, “people who sold them picks, shovels, tents, and blue-jeans made a nice profit.”
Cryptocurrency may not represent a solid investment, but crypto exchanges like Coinbase Global (NASDAQ: COIN), Kraken, and Binance (NASDAQ: BNB) offer exposure to cryptocurrency without the pitfalls of owning the digital currency.
Kraken is pre-IPO, with plans to go public in 2022 with a valuation of $20 billion. Founded by Jesse Powell in 2011, Kraken gained popularity among cryptocurrency enthusiasts as an alternative to the failing Mt. Gox after the company’s platform was hacked.
Kraken raised $5 million in a Series A round of funding in March of 2014. After a Series B round of funding in 2016, Kraken acquired the Dutch company CleverCoin and Glidera, a non-custodial service for buying and selling wallets.
After a direct share offering to customers, Kraken’s valuation shot up to $4 billion in 2019. They raised $100 million with that offering and then brought in another $13.5 million for over 2,000 investors.
Kraken hasn’t finalized its decision to go public via IPO in 2021, but company leaders have been open about the possibility. At one point, reports indicated that the company was considering a special acquisition purpose company (SPAC) at $10 billion, but Kraken considers this option to be a low valuation. Powell noted in a recent interview that Coinbase’s direct listing in April of 2021 made him rethink a direct offering (DPO) in favor of an IPO.
Binance, founded in 2017 and run out of the Cayman Islands, is the world’s largest cryptocurrency exchange. With a market capitalization of more than $1.3 billion, its biggest competitor is Coinbase.
Binance Smart Chain (BSC) launched in 2020, offering users access to smart contracts, decentralized finance (DeFi) services, and decentralized Apps. Stock prices started going up in early 2021 as BSC gained momentum. It’s now the second-largest DeFi platform. BSC is expected to continue to grow throughout and beyond 2021. DeFi applications are up from $20 billion to $50 billion and continue to rise.
The Binance Exchange is the largest and most popular crypto exchange worldwide. It has the highest number of crypto to fiat pairs and the most diverse selection of cryptocurrencies to buy and sell.
Coinbase was the first cryptocurrency exchange with a stable user base in the United States. It has assets held in more than 35 million accounts with more than $21 billion. Since Coinbase works as a bank by accepting funds through bank transfers and stores digital keys in safes, it makes sense to people interested in cryptocurrency.
The company’s main attribute is security, and they regularly reference the security breach of Mt. Gox when talking about how Coinbase handles their customers’ accounts.
Coinbase launched a direct listing on the Nasdaq on April 14, 2021. Its stock price closed at $328.28 with an $87.3 billion valuation.
Coinbase lists 50 cryptocurrencies, including Bitcoin and Ethereum. Ethereum’s value has doubled during 2021. Market analysts called Coinbase a foundational piece of the crypto ecosystem.
Crypto exchanges are in the right position to directly address the demand for access to cryptocurrency. As an investor, you can take advantage of the rise in cryptocurrency and blockchain use without exposing yourself to the risks of this volatile sector.
While early Bitcoin investors have amassed a great deal of wealth, many cryptocurrency investors have famously lost money (or the keys to their money). There are more than 4,000 digital currencies worldwide, which makes the research required to make a wise investment in the crypto market by purchasing cryptocurrency a massive undertaking.
The technology that drives crypto could be a better bet when it comes to getting involved in the sector. The crypto ecosystems are rich with opportunities. While investing in Kraken pre-IPO, Binance, or Coinbase isn’t the same as buying Bitcoin, it does allow you to reap the rewards of the quickly developing sector.
The bottom line is that you don’t have to purchase cryptocurrency to invest in the sector. There are a number of cryptocurrency exchanges that support the development of the technology responsible for digital assets. Investing in companies that benefit from the popularity of crypto assets and blockchain is a smart way to gain exposure to this exciting sector.
Contact The Spaventa Group today to learn more about investing in fintech, cryptocurrency exchanges, and opportunities in the pre-IPO private market.