Which US stocks have the potential to become winners in the cryptocurrency boom?

Identifying Potential Winners Among US Stocks in the Cryptocurrency Boom

Source: RockFlow

Key Points

① Coinbase has carved out a unique niche market in the complex world of cryptocurrencies. Whether it can dominate the cryptocurrency infrastructure in the United States and whether the crypto economy will become an important part of the real economy will determine how far Coinbase can go.

② As one of the largest holders of Bitcoin among global public companies, MicroStrategy’s core SaaS business limits downside risk, while using low-cost funds to continuously buy Bitcoin gives it significant upside potential.

③ Marathon, as a leading Bitcoin mining company, is essentially engaged in energy arbitrage. Differentiated operational capabilities, hardware upgrades, and energy utilization strategies will be the core competitive advantages for mining companies to surpass Bitcoin returns and successfully navigate market cycles.

• HSBC utilizes blockchain to build a system for tokenizing physical gold, changing the rules of the gold trading game.
• SBF’s Seven Deadly Sins Wire fraud, securities fraud, commodities fraud, money laundering conspiracy
• Breaking News Aragon Association Calls it Quits! Brace Yourself for a Massive $155 Million ETH Giveaway to Token Holders

All innovation cycles start with speculation. Speculation often precedes reality, and fundamentals take time to catch up.

The internet of the past few decades is a prime example. Despite experiencing the pain of the late 1990s bubble burst, today it has incubated a group of companies with the largest global market capitalization and highest profits.

The cryptocurrency market may face similar challenges. It is a lie to say that the rapid expansion of this market over the past decade was driven purely by fundamentals rather than speculation. The question now is, if this market gradually moves away from the late-stage bubble, what real value can it leave behind? Which companies in this industry will emerge as representatives?

Starting from the present, the RockFlow research and investment team will introduce to you the current US companies that are likely to survive as long-term participants in the cryptocurrency market and grow into true giants.

1. COIN: A crucial player leading infrastructure development and attracting institutional investors

Coinbase has carved out a unique niche market for itself in the complex world of cryptocurrencies. Its history can be traced back to 2012, starting as an early platform centered around Bitcoin and incubated by Y Combinator. Over a decade later, Coinbase has become a leading exchange for buying and selling crypto assets and has been consistently pursuing compliance.

In the past two years, Coinbase has been striving to diversify its business scope, no longer limited to just being an exchange, but expanding into the entire blockchain technology field, from wallet infrastructure to staking services and on-chain scalability solutions. The previous L2 rollup Base is a typical example.

At the same time, its revenue sources have significantly diversified: trading revenue from individual users has continued to decline (mainly due to the sharp decline in BTC and ETH prices in recent quarters), while other types of revenue have surged. Especially interest income, which increased rapidly from $32.5 million in the second quarter of 2023 to $201.4 million compared to the previous year. The following graph shows Coinbase’s important financial data for the past five quarters:

In this turbulent emerging industry, Coinbase is building a trustworthy reputation, which is a product of unwavering commitment, transparent operations, and user-centric approach. This trust is reflected not only in its trading platform but also in its diverse range of products – from savings, rewards, and other multifunctional financial products to Coinbase debit cards, and even venturing into Web3. Coinbase’s strategic ecosystem is slowly unfolding.

Objectively speaking, the future valuation of Coinbase depends on four propositions:

First, can Coinbase dominate the infrastructure development of the cryptocurrency market in the United States?

Second, is Coinbase more than just an exchange?

Third, will the “cryptoeconomy” become a significant component of the real economy?

Fourth, will the prices of Bitcoin and Ethereum continue to rise?

These four propositions encompass almost the entire narrative of Coinbase.

Can Coinbase dominate the infrastructure development of the cryptocurrency market in the United States? From the current landscape, exchanges like Binance still pose a strong competition in terms of trading volume and scale. However, trust is a crucial differentiating factor in the crypto space – users need to have confidence in the security of their assets and regulatory compliance of the exchange. Binance faces difficulties in expanding in the United States, and there are unresolved issues and conflicts with regulators like the SEC. On the other hand, Coinbase is subject to strict supervision by the CFTC, SEC, UK, and European financial regulatory authorities. In comparison, Coinbase should be the preferred destination for individuals and institutions seeking a secure investment in Bitcoin.

Second, Coinbase is more than just an exchange. In the traditional financial system of the United States, institutions often play different roles in various aspects. For example, Robinhood, TD Ameritrade, and Schwab have retail brokerage businesses, State Street and BNY Mellon have asset custody businesses, LianGuaiyLianGuail, Visa, and Mastercard have payment businesses, while NYSE and Nasdaq have stock trading businesses.

The current crypto financial system is not the same. Coinbase already has retail brokerage business, custody solutions, exchange business, and is a leading player in the crypto payment field. It can be said that calling Coinbase the “crypto NYSE + Robinhood + State Street + LianGuaiyLianGuail” is not an exaggeration.

Third, will the “cryptoeconomy” become an important part of the real economy? There is a significant divergence of opinions on this matter in the market. All mature real economy markets that have stood the test of time – such as agricultural products, oil, and natural gas – thrive because the entire industry profits by selling basic commodities to consumers. The oil market is not just about speculating on oil prices – it involves the physical business of upstream and downstream producers in the energy industry; the corn market is not just about speculating on corn prices – farmers and large institutions also engage in trading and hedging risks to provide consumers with price-stable food. But what about the crypto market? How many real business participants are there?

Currently, very few people actually use Bitcoin as a form of payment, and mainstream cryptocurrencies are almost impossible to use as a daily payment method. The wider use and circulation still require the final approval of Bitcoin spot ETF in the United States, which will expand the effective “business use” of the cryptocurrency market, such as allowing individuals and institutions to hold Bitcoin. The cryptocurrency economy is expected to continue to exist as a speculative method and emerging asset class, but the difficulty of having commercial viability is still high.

Fourth, will Bitcoin and Ethereum prices continue to rise? Coinbase charges fees based on the value of assets traded or held by customers on its platform, and it also holds a large amount of Bitcoin on its balance sheet. Therefore, the rise in cryptocurrency prices indeed has a direct boosting effect on its market value. Looking at past events, inflation always exists, fiscal and monetary stimulus never stops, and the two main choices for safe-haven assets – gold and Bitcoin – are becoming more widely accepted.

Although the cryptocurrency industry is full of challenges, this also means that the remaining players can benefit more. Coinbase is one of the few exchanges that can truly attract institutional investors into the field, and in the long run, it is expected to outperform the performance of cryptocurrencies themselves.

2. MSTR: A Better Choice than BTC

The lengthy delay of the US SEC in making a formal decision on multiple Bitcoin spot ETF proposals is disappointing news for the majority of investors. However, for those familiar with MicroStrategy and Bitcoin investors, this only enhances the attractiveness of MSTR as it is currently the most convenient way to obtain Bitcoin through a US stock account.

MSTR is one of the largest holders of publicly-traded Bitcoin companies globally, thanks to its strategic move in August 2020 – using excess cash as well as debt and equity financing to continuously buy Bitcoin over the long term.

According to its 2023Q2 financial report, as of July 31, MSTR held 152,800 Bitcoins with a total cost of $4.53 billion, which is approximately $29,672 per Bitcoin. Among them, 15,731 Bitcoins were pledged as collateral for the company’s 2028 secured notes, while the remaining 137,069 Bitcoins (which accounts for approximately 90% of the total holdings) were not pledged.

Since the strategy of buying and holding Bitcoin was launched three years ago, the correlation between MSTR’s stock price and the price of Bitcoin has been extremely strong. As shown in the graph below:

MSTR is not the only choice for investors who want to profit from the rising price of Bitcoin. Stock prices of Bitcoin mining companies like Marathon Digital and Riot Platforms, as well as cryptocurrency exchanges like Coinbase, also fluctuate in sync with the price of Bitcoin. However, unlike these stocks, MSTR has a strong competitive advantage with its core business.

Stable Core Business Limits Downside Risk

MSTR is also a SaaS company that has been providing enterprise analytics software and services for decades. It has a solid customer base, including Hilton Hotels and Sony, with predictable annual revenue – $499 million in 2022, $511 million in 2021, $481 million in 2020, and $486 million in 2019. Analysts predict revenue of $501 million in 2023.

MSTR is migrating its enterprise analytics software customers to the cloud, shifting from revenue generated through product licenses to revenue generated through subscriptions. So far, the subscription model has proven successful with a high renewal rate. The customer renewal rate in Q2 2023 was 93%, maintaining above 90% for the sixth consecutive quarter.

To adapt to technological trends, MSTR’s core enterprise analytics platform is also exploring integration with AI. MSTR is expanding its partnership with Microsoft, integrating its analytics capabilities with Azure OpenAI services and Microsoft 365. MSTR is also seeking greater innovation through MicroStrategy Lightning, aiming to leverage the Bitcoin network for new e-commerce use cases and address cybersecurity challenges.

While these initiatives are unlikely to bring explosive revenue growth, they are reliable signs of the healthy development of MSTR’s core business, indicating its ability to generate sufficient cash flow to cover operating costs. This limits the downside risk to its stock price.

From a valuation perspective, MSTR’s current stock price is reasonable compared to other software companies. However, the difference lies in the fact that MSTR is not just an ordinary software company; it also holds over 137,000 unencumbered Bitcoins. This gives its stock price a greater potential to outperform many tech giants and SaaS peers.

Key Advantage of Accessing Low-Cost Capital

Another major reason for investors bullish on BTC to choose MSTR is its ability to raise funds on attractive terms. The company’s outstanding debt and convertible notes reportedly amount to $2.2 billion, with a weighted average interest rate of approximately 1.6%. Annual interest expenses have decreased by over $15 million compared to the average interest rate of 2.1% at the end of 2022.

Being able to continuously purchase BTC using low-interest debt is a wise move, as the capital appreciation of Bitcoin is expected to exceed the debt and interest costs with the improvement of the crypto market over the coming quarters (catalytic events including SEC approval of a Bitcoin spot ETF, Bitcoin halving in Q2 2024, and the possibility of interest rate decrease during periods of lower inflation).

Issuing new shares to raise funds is another financing option for MSTR. Since Q3 2021, MSTR has raised a total of $1.7 billion through its ATM program, with an average stock issuance price of approximately $424 per share. Naturally, the main purpose of raising funds is to purchase more Bitcoin.

The uniqueness of MSTR’s ATM plan lies in its extremely low increase in circulating shares compared to other participants in the Bitcoin field, such as MARA and RIOT, who regularly issue new stocks for financing.

The total number of circulating shares of MSTR increased from 11.3 million shares in 2021 to 14.1 million shares in the most recent quarter. In comparison, MARA’s circulating shares increased from 102.7 million shares in 2021 to 174.2 million shares in the most recent quarter, and RIOT’s circulating shares increased from 117.3 million shares in 2021 to 185.3 million shares in the most recent quarter.

The slow increase in the number of shares implies that MSTR has more room in the future to issue more new stocks for financing. In addition, MSTR sold a total of 403,362 shares on September 24th, with a net profit of $147.3 million, which was used to purchase Bitcoin.

Risk factors

It is necessary to point out that MSTR has two potential risks. Firstly, disposing of a portion or all of its Bitcoin in the future for any reason may lead to excessive negative reactions from investors. Therefore, the company must continue to assume debt and issue stocks to maintain its Bitcoin strategy. However, it is also difficult to guarantee its ability to raise funds on attractive terms for the long term, especially if the Bitcoin price continues to consolidate (or even worse, experiences a significant decline). It should be noted that during the previous crypto bear market in 2022, many crypto companies went bankrupt due to excessive leverage.

The second potential risk lies in the company’s valuation. Although investors can use the price-to-earnings ratio to understand its value as a software company, according to GAAP accounting requirements, MSTR’s held Bitcoin needs to be impairment tested and recognized at fair value changes every quarter, resulting in frequent impairment charges in the company’s financial reports. The significant short-term volatility of Bitcoin prices (e.g., impairment charges of $24 million in 2023Q2 compared to $918 million in 2022Q2) adds complexity to an already challenging company valuation.

3. MARA: Is mining a good business?

Marathon is a Bitcoin mining company that offers indirect Bitcoin investment solutions to investors. There is a strong positive correlation between mining company stock prices and Bitcoin prices, and in general, mining companies are essentially a leverage game for cryptocurrencies.

Looking at historical data, when the price of Bitcoin rises, mining company stocks tend to rise even more, as investors are exceptionally excited and believe in the existence of a multiplier effect. On the other hand, when the price of Bitcoin falls, mining companies are hit harder.

The essence of the mining business is arbitrage. Rather than needing to research the technical details of Bitcoin, mining companies need to learn from “mining farm” experiences to operate energy arbitrage businesses as efficiently as possible. The top mining companies are often excited about new cooling methods, new architectural approaches, new transformers, or new energy arbitrage strategies.

Arbitrage is key, it’s one of the differentiating factors that sets mining companies apart from their competitors. The best mining companies need to have the best equipment assets and the lowest production costs. More importantly, they need someone who understands energy arbitrage, an excellent CFO.

Sometimes they shut down machines because they can make bigger profits through energy recovery programs. The importance of an experienced CFO is that they can guide mining companies through the cyclical bear market of bitcoin and the “crypto winter”.

The 2023Q2 financial report released by Marathon on August 8 reveals the current state of its business development: a 228.5% year-on-year increase in revenue for the quarter, with a net loss of $21.3 million (nearly 200% increase compared to Q1’s $7.2 million). This means that the production costs of Bitcoin are high, market prices are not ideal, and there are excessive operating expenses such as energy costs.

Despite falling short of expectations, MARA’s performance still shows significant growth compared to the previous year. Bitcoin production increased by 314% year-on-year, averaging 32 per day, but the average price of Bitcoin decreased by 14%, affecting revenue.

The reason for the increase in production is that MARA’s operational hash rate increased by 54% in the second quarter compared to the first quarter, reaching a record high of 17.7 EH/s. After the second quarter, the operational hash rate continued to climb, reaching approximately 19 EH/s in July.

The path to profitability for mining companies is more challenging than that of exchanges and asset management companies. In addition to the common regulatory obstacles in the crypto field, the volatility of Bitcoin prices often severely affects the profitability and cash flow of mining companies, as Bitcoin is their primary source of income.

Furthermore, the next Bitcoin halving is expected to occur in April 2024. As Bitcoin block rewards are halved, mining company revenue may decrease. The Bitcoin halving will also lead to increased mining difficulty, forcing mining companies to purchase more powerful hardware. More powerful hardware, in turn, results in higher energy costs and more operational expenses, which are difficult challenges for mining companies to avoid.

Therefore, compared to exchanges and asset management businesses, mining is a higher risk crypto investment.

4. Conclusion

The crypto industry itself has experienced multiple speculative cycles, each driven by people’s speculation about innovative trigger factors. These cycles have brought more attention, users, and capital to the crypto ecosystem, and have expanded the possibilities of crypto technology on top of the progress made by predecessors.

Now, this industry may have reached a point where there are enough puzzle pieces – they can be reassembled in different ways to meet a broader range of needs and real use cases – thereby taking the industry to a new level.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!