One of the big news stories over the last few weeks has been the much-anticipated debut of Coinbase, a cryptocurrency exchange website that allows investors to research, track and invest in crypto currencies like Bitcoin, Ethereum, Litecoin, Dogecoin, etc. The stock is going public today as a result of a SPAC merger. The initial reference price was indicated this morning at $250 per share. As of now (12:24 PM on April 14) the indicative opening price is $374.50. Who knows what it will end up at when it finally opens, but the company may be initially valued at somewhere in the range of $100 billion, which implies that its revenue will be 1.5 times the combined revenues of the Nasdaq and ICE stock exchanges.1
This comes at a time when crypto currencies are reaching all-time highs. Bitcoin, for example has appreciated in value roughly 823% over the last 12 months.
Combine this with the recent news that a few major corporations like Microstrategy, Tesla and several funds have purchased significant amounts of the digital asset and that Morgan Stanley, Goldman Sachs and other brokerage firms are planning to open up cryptocurrency investing to their clients, and it makes one pause to wonder just what's going on here.
It's easy for the traditional investment community to write all of this off as a fad and the latest bubble waiting to be popped. Without getting into a debate of crypto as an "asset," I have a few thoughts on the matter.
- Blockchain technology (the technology behind digital currencies) is here to stay, and we are probably at the initial stage of this revolution. Many innovations will be developed around this technology in the financial and payment sectors in the years to come.
- Cryptocurrencies may be overvalued at present. or they may not be. With a limited supply of digital "coins," and potentially increased demand as the asset enters the mainstream, we may see higher values in the future.
- We'll continue to see an industry develop around crypto. From miners to exchanges and investment vehicles, the trend shows no sign of stopping.
- A general distrust of traditional Wall Street and regulators is apparent among proponents of digital currencies. This is a global phenomenon.
- Regulators will attempt to exert their control over digital currencies. It remains to be seen whether or not they will be successful.
- The IRS has noticed and will expect accurate reporting of gains in taxable investment accounts.
- These types of "assets" will remain one of the most volatile holdings for an individual or corporation. It will be interesting to see whether they remain closely correlated to the stock markets.
- Although I strongly discourage anyone from viewing crypto currency as anything but speculation, the industry being built around it may become a valid sector for investment.
As a wealth manager, Artifex Financial Group does not have direct access to cryptocurrency investments for our clients, other than through publicly-available funds like the Grayscale Bitcoin Trust (GBTC). Any position we may take in an investment like this would fall under the "alternative asset" category and constitute a small portion of a portfolio, and only where appropriate. We can, however, assist clients who hold currency directly in an outside account to diversify and to incorporate their holdings into an overall wealth management strategy.
In conclusion, although what we are witnessing appears to be unwarranted valuations in this sector, we are not going to hide our heads in the sand and hope it goes away. We'll be watching and evaluating where all of this goes in the future and provide suitable advice to our clients along the way. It would be irresponsible to dismiss it out of hand and potentially ignore a disruptive technology at its birth.
--Doug Kinsey, CFP®, CIMA®
Chief Investment Officer
1MarketWatch, April 14, 2021 https://www.marketwatch.com/story/should-you-buy-coinbase-the-valuation-is-ridiculous-11618254467
Disclaimer: This article represents the opinion of Artifex Financial Group and should in no way be construed as an investment recommendation on any of the subjects discussed.