Apex News

September 24, 2021

Today there are over 1160 cryptocurrencies (crypto) to choose from that are collectively worth $2 trillion. Bitcoin was launched in 2009 and is currently the largest cryptocurrency by market capitalization. Ethereum, Cardano, Tether, and Dogecoin are a few others that have risen into popularity more recently. At Apex Financial Advisors, we frequently get asked about cryptocurrency as an investment or in general, so we thought it wise to explain our approach in this blog.

What is Cryptocurrency?

A cryptocurrency is a digital or virtual currency secured by cryptography, making it nearly impossible to counterfeit or double-spend. You may recall earlier this year when the Feds recovered millions from the pipeline ransom hack, thus proving the concept that the underlying technology is a highly effective crime-fighting and intelligence gathering tool. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government control, interference, and/or manipulation. 

How to Invest?

Bitcoin, Ethereum, Dogecoin, and other cryptocurrencies (crypto) have become a hot topic for investors in recent years. And with a total market capitalization of about $ 2 trillion, there’s much to discuss. Many investors purchase and trade cryptocurrencies on various exchanges like Coinbase and Robinhood.  These markets are open 24/7/365 and are easy to access via smartphone apps. If you are just getting started the best onramp is a well-recognized brand of which there are a handful, like Coinbase, a robust company and has a nice user interface. There are some Funds that trade on more traditional platforms, like Grayscale Bitcoin Trust (Ticker: GBTC); however, the fees are relatively high, and liquidity is only available during regular market hours. 

For the average investor, it’s incredibly confusing. Should I invest in crypto? How can I invest in a straightforward manner? What are the tax or regulatory issues associated with these investments? Clearly, there is a lot of uncertainty in the marketplace and with it comes extreme volatility. If we had a clearer path on regulation, investor uncertainty would smooth out and until then it’s fair to say volatility will continue. Perhaps the easiest way to invest is to buy shares in a company heavily involved in crypto and below we will take a look at a few.

Equity Alternatives to Direct Cryptocurrency Investments

Square, Inc. (Ticker: SQ) was one of the first financial technology (fintech) companies to enable their customers to transact Bitcoin. In 2018, SQ allowed its customers to trade and transact Bitcoin. In just three years, Bitcoin revenue has become a significant contributor to the total revenue of SQ, a $120 billion market cap company. In the first two quarters of 2021, Bitcoin-related revenue was over 60% of total revenues. Three million SQ customers transacted Bitcoin in 2020 and added one million new customers in January 2021 alone. In addition, SQ purchased $220 million of Bitcoin for its account in the past 12 months. All this has helped propel the stock to over a 300% gain in the last three years.

SQ has not been the only major company to purchase Bitcoin for its account. In February of this year, Tesla, Inc. (Ticker: TSLA) announced it bought $1.5 billion of Bitcoin. At different times, it has said that it would accept Bitcoin as payment for its products. Currently, TSLA will accept bitcoin if it’s been mined in an environmentally responsible manner. Naturally, because of the prominence of TSLA and its mercurial founder, Elon Musk, these announcements have generated significant interest in crypto investing in 2021. Musk and fellow billionaire Mark Cuban of Shark Tank have also been vocal supporters of Dogecoin. TSLA has a market cap of $753 billion.

A lesser-known corporation has been the largest investor in Bitcoin to date. MicroStrategy Incorporated (Ticker: MSTR), a data analytics company, has bought a total of over 114,000 Bitcoins, with a current value of almost $5 billion. Since the total market cap of MSTR is less than $ 6 billion, one can see that MSTR has made a significant investment in Bitcoin. In the past two years, MSTR has repeatedly sold stock and bonds to the public and invested the proceeds in Bitcoin.

Marathon Digital Holdings, Inc. (Ticker: MARA) is focused on mining cryptos. Sophisticated computers are used to “mine” cryptos, using extensive computations and a significant amount of electricity. MARA owns both the computers and a data center to directly mine digital assets. Its machines are located in Montana, adjacent to a low-cost electricity producer. It currently has over 22,000 mining computers, with plans to increase that to over 133,000 by mid-2022. MARA has a market cap of $3.6 billion.

Coinbase Global, Inc. (Ticker: COIN) is a recent public entity (IPO April 2021) that operates mainly as a crypto exchange and marketplace. It works with retail clients, institutions, and companies, to facilitate crypto transactions. It has broad exposure to the crypto marketplace: it offers 83 digital assets for exchange and 142 assets for custody. Despite all these varying assets, trading in Bitcoin is the most significant component to date. COIN has a market cap of $63 billion, and it has been extremely volatile since its IPO. COIN is off 43% from the highest stock price recorded from April.

Riot Blockchain, Inc. (Ticker: RIOT) is another company whose primary business is crypto mining. It currently deploys over 16,000 mining machines, with plans to expand to over 81,000 by mid-year 2022. It has a market cap of almost $3 billion. It is worth explaining the term Blockchain here: it is a technology whereby a record of transactions made in cryptos is maintained across numerous computers networked together. While a term mainly associated with cryptos, it is expected that Blockchain will become a computing standard in many industries and could revolutionize computing soon.

Finally, comes one of the most talked-about names in the past couple of years: Robinhood Markets, Inc. (Ticker: HOOD). HOOD operates mainly as a trading platform for all types of financial assets, including crypto. While it only came public (IPO) two months ago, it has existed for several years. Since the beginning of the pandemic 18 months ago, it seems like HOOD has become the major outlet for younger investors to be involved in financial markets. With zero fees/commissions on trades, HOOD is much cheaper than other platforms, which charge 2% to 3% for crypto transactions. In fact, when HOOD reported its earnings in August, it disclosed that most of its revenue came from crypto trading and options. And recently, they introduced a crypto wallet away from its app which allows customers to transfer assets from elsewhere to this wallet. HOOD currently has a market cap of about $40 billion, and its share price has been extremely volatile in its short history.

Besides the names we discussed above, there are also more direct means, including crypto-themed Mutual Funds and potentially Exchange Traded Funds in the coming years. However, there is increasing scrutiny from government entities, both here and abroad. Gary Gensler, currently head of the SEC, is an outspoken critic of crypto investing. Whatever investment choice you make, be ready for more regulatory scrutiny, daily news updates, exchange hacks, and volatility related to crypto investing in the coming years.

Non-Fungible Tokens

We can’t discuss the digital currency investing environment without briefly touching on the introduction of non-fungible tokens (NFTs). These are simply the first example of digital properties rights existing in the wild. It has existed on the sidelines for more than twenty years but recently exploded with the digital innovation of NFTs. Owners of NFTs are recorded on the blockchain, allowing an NFT to be traded as a stand-in for the digital asset it represents. Sales volumes have remained high after NFTs exploded in popularity early this year.

As a core idea, the ability to own digital property rights is a very big idea. The market is estimated at several billion dollars. It’s purely speculative activity but in art, beauty is in the idea of the beholder. 

Ready, Set, Coin?

The decision on whether to invest in crypto and digital rights reminds me of a concept that one of our investing grandfathers, Benjamin Graham, teaches us. To be an intelligent investor, you must be patient, disciplined, and eager to learn new things. The only way to reach long-term investment goals is to make sustainable and reliable decisions that are not subject to the whims of the often volatile stock market. And thus, our team at Apex Financial Advisors will sit on the sidelines and watch as the innovation unfolds before our volatile eyes.

“Invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price.”

― Benjamin Graham, The Intelligent Investor

Stuart Caplan

Principal, Chief Investment Officer

DISCLOSURE: Past performance is not indicative of future results. This is neither an offer to sell, nor a solicitation to buy securities, nor an invitation to subscribe to specific services. This overview is for informational purposes only and nothing contained herein shall be construed as investment advice.