Cryptocurrencies
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SI $6
03 Mar 2023 |
Once the go-to banker for the crypto industry, Silvergate Capital nears collapse
Silvergate (SI $6) is a California state-chartered bank which provides financial services such as commercial banking, business lending, and cash management to its customers. Sounds pretty plain vanilla until one considers the bank’s niche clientele: cryptocurrency firms. Shares of Silvergate plunged 58% in one session after the bank announced it would not be able to submit its annual 10-K—the SEC-required report of a company’s financial activities for the prior year—on time. In the filing requesting the delay, Silvergate mentioned the need for its accounting firm to “analyze the sale of additional investment securities beyond what was previously anticipated.” In other words, a fire sale is going on in an attempt to shore up the assets needed for it to remain a going concern. The bank, which had been a solid $6 billion mid-cap financials firm, now sits at $160 million in size. A perennial moneymaker prior to 2022, Silvergate lost $938 million last year and $1 billion in its latest quarter. In business since 1988, the company markets itself as the go-to bank for forward-thinking innovators and startups. Unfortunately (in hindsight), it embraced cryptocurrencies prior to its 2019 IPO, and had planned to be a key issuer of Meta’s (META $183) Diem token prior to the tech giant jettisoning its crypto plans. In January of last year, Silvergate bought the Diem technology from Meta for $200 million, and retained plans to launch its own stablecoin—a digital asset linked to a fiat currency such as the US dollar. Now, all plans are on hold as the company focuses on one strategic goal: survival. We have always said that no portfolio, irrespective of the owner’s risk tolerance, should have more than 10% of its value invested in any one specific company or industry. The latest crypto winter is proving the soundness of that advice, but we imagine it won’t be long until it is forgotten yet again. |
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FTX
11 Nov 22 |
Once called the JP Morgan of crypto, Sam Bankman-Fried’s wealth evaporates
Sam Bankman-Fried, the wonder boy of the crypto world who built the world’s second-largest crypto exchange, is finished. Were his FTX publicly traded, it would have probably garnered a market cap in the $20 billion ballpark a few weeks ago; now, the company has announced bankruptcy plans and Fried has resigned as CEO. The FTX token, which was selling for $80.50 in September of last year, is now going for $2.77 (down 60% in one day) and is probably worth a lot less than that. The wunderkind who went in front of Congress earlier in the year to explain the 2008 financial crisis—and how his exchange is completely different—was apparently using customer assets to fund ultra-high-risk bets by Alameda Research, a now-defunct quant trading firm majority-owned by Fried. High profile investment entities, from Softbank to Sequoia Capital to the Ontario Teachers’ Pension Plan, will lose virtually all the money they entrusted to FTX. Of course, their investment losses pale in comparison to Bankman-Fried’s personal erosion of wealth, which has dissolved from a high of around $16 billion to well under $1 billion today. But if a loss of wealth is all he suffers in the end, the JP Morgan of crypto should thank his lucky stars. Highly sophisticated investors—and millions of everyday Joes—were wantonly pumping money into speculative vehicles which weren’t quite as transparent as the likes of Fried led them to believe. This was gambling, not investing. Ironically, Fried was seen as crypto’s white knight, riding to the rescue of “weaker” players. It appears he was doing so with money that didn’t belong to him. If this had to happen (and it did), it is a good thing that it came to light now—crypto had already been so pummeled that the contagion effect is relatively muted. Except, that is, for the investment houses like Softbank, which reportedly will lose some $100 million on the liquidation. |
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COIN $347
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Come watch the Lakers play at the...Crypto.com Arena?
(17 Nov 2021) The meteoric rise of the nascent cryptocurrency market, already $2 trillion in size, has been remarkable. With each passing day, fewer experts seem willing to write the movement off as some sort of fad which will eventually implode. The latest evidence of which comes from California, where the crypto world is about to get some serious signage: Effective Christmas Day, the Staples Center will be renamed Crypto.com Arena. The marketing coup comes at a steep price for the privately-held company. We recall naming rights for stadiums in the $3 million per year price range, which always seemed a bit steep to us. Crypto.com will reportedly pay $700 million for a 20-year contract, which equates to $35 million per year. If those numbers are correct, this would be the second-largest naming rights deal in history, behind 2017's Scotiabank Arena deal in Toronto, which was valued at $800 million for 20 years. Keeping it closer to home, Staples paid $116 million for the previous 20-year deal with The Anschutz Entertainment Group, owner of the arena which has carried its name since 1999. Crypto.com is a low-cost cryptocurrency exchange, much like publicly-traded Coinbase Global (COIN $347), a member of the Penn Intrepid Trading Platform. Yes, cryptocurrencies are here to stay, but it can be very difficult to separate the long-term winners from the inevitable multitude of losers. We purchased shares in the Coinbase exchange in June at $230 per share—well off of their $429.54 near-IPO price and 50% below their current price. We can see why the Coinbase wallet is so attractive to crypto traders, and believe in the company's fundamental story. Our biggest concern about privately-held Crypto.com, despite the pretty cool Matt Damon advertisements, is country risk: it is headquartered in Hong Kong, which is now under the full control of the Communist Party of China. |
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BITO $43
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You may love bitcoin, but that doesn't mean you should buy into BITO, the first bitcoin-focused ETF
(20 Oct 2021) Crypto enthusiasts may be thrilled that a bitcoin-centric exchange traded fund has finally arrived, but there are a few things to consider about the ProShares Bitcoin Strategy ETF (BITO $43) before taking a bite. First and foremost, this is not an investment in the crypto itself; rather, it is a derivative which makes a bet on bitcoin futures. Each month, the futures contracts held by the ETF will expire, forcing them to roll into the following month's contracts. This gets into a potentially disastrous situation known as contango—a condition in which the future price of a commodity is higher than the spot (current) price. That is exactly where we sit right now with respect to bitcoin. Of course, the opposite condition, known as backwardation, could also come into play; this is where the spot price of the asset is higher than the its futures price. Another reason crypto investors may want to steer clear is the fact that crypto bears will be able to short BITO, dragging down its price despite the current value of the underlying asset. For sure, the ETF's successful first day (it rose 5% from its $40 initial NAV) helped bitcoin prices rise to new highs, but don't expect the crypto to return the favor for investors in this volatile new vehicle. The cleanest way to buy bitcoin is to open a digital wallet via an app such as Coinbase. Or, better yet in our opinion, buy some Coinbase (COIN $314) itself, and take advantage of the moves in other cryptos. While the Grayscale Bitcoin Trust (GBTC $52) may seem like a common sense solution, this is also a derivative tracking vehicle for the coin, not a direct investment. That being said, Grayscale has filed to turn the biggest bitcoin fund into an ETF, but that is dependent upon the good graces of one of the biggest crypto critics out there: Gary Gensler's SEC. Once again, we would steer would-be crypto bugs to Coinbase. |
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COIN $248
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In a refreshing turn of events, Coinbase's CEO fires back at SEC
(10 Sep 2021) We are ambivalent with respect to cryptos: their future as a means of exchange feels certain, but the industry is going through its Wild West phase right now, with plenty of risks and opportunities for investors. We are equally ambivalent about the SEC (and most other government agencies as well): they enforce needed guardrails, yet they too often create more problems than they resolve. Which leads to the brouhaha going on right now between the SEC and Coinbase (COIN $248), the leading crypto exchange platform in the United States and a current member of the Penn Intrepid Trading Platform. Shares of the exchange fell sharply this week as the SEC warned that it planned to sue if the company forged ahead with plans to allow its users—of which it currently boasts some 68 million—to earn interest by lending crypto assets. Apparently the SEC believes that privilege should rest solely in the hands of the banks. It is crystal clear that current SEC Chairman Gary Gensler plans on doing battle with a host of financial services companies during his reign, with cryptos, perhaps, being his number one target. When a company receives a Wells Notice, a formal notice from the SEC informing the recipient that the agency is preparing enforcement actions, it is traditional to stay relatively mum; certainly not to stir the pot. Apparently, Coinbase CEO Brian Armstrong is taking a page from Elon Musk's playbook, as he remained anything but mum following the announcement. In what Bloomberg described as "a rant" and "a fit" (it was neither, Bloomberg), Armstrong unloaded on the commission. In one tweet, the dynamic CEO noted "Some really sketchy behavior coming out of the SEC recently. Story time...." Ironically, it was Coinbase's willingness to share its plans for the new lending platform with the SEC—instead of pushing ahead and implementing the plan—which instigated the threats from the government body. Instead of a few polite questions to delve further into how the process would work, the SEC, i.e. Gensler, took the very public action of issuing the Wells Notice. Not cool, SEC. Jesse Powell, co-founder of the crypto exchange Kraken, came to Armstrong's defense in his own series of tweets: "We won't tell you why we think your product is illegal but we will tell you that there is no path to making it legal. Disagree? Go ahead and see what happens." CEOs daring to fight back against government regulators? Brilliant! While the zeitgeist seems to consist of corporate heads cowardly genuflecting to any and all social movements looking their way, it is refreshing to see a little gutsy pushback against the tactics of bullies. That used to be called The American Spirit. Despite the SEC-caused downturn in the stock, our COIN position is still up 10% since purchase. We fully expect the firm to weather this storm. For their part, we doubt the SEC fully understands how the crypto exchanges even work, so it will buy some time while the government attorneys attempt to get up to speed. After that, let the lengthy court battles begin. |
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Bitcoin $29,000
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The real reason China is cracking down on cryptos
(22 Jun 2021) Oh, the naive press. If only they would give esteemed American establishments the same deference they show to the Chinese Communist Party. The big price drop in cryptos at the start of the week came on the heels of a major Chinese crackdown; the press got that part of the story right, but what they missed was the real catalyst behind the move. Absurdly, one major business publication said, "Concerns about the environmental impact (of the computers that mine Bitcoin) continue to swirl." Yep, they nailed it. The greatest polluter in the world is suddenly concerned that Bitcoin mining might make the air over Xinjiang a little bit browner. The real reason the CCP ordered the People's Bank of China to warn lenders to cease using cryptocurrencies, and for the major provinces where mining takes place to crack down on production, is two-fold. First, by their very nature, digital coins are hard to control, and the CCP is all about control. Once the coins have been mined they can travel freely through the ether, generally untouchable by a central power. The second reason has to do with China's own ambitions in the arena. As we have mentioned before, the country wants to create a digital yuan that will ultimately (in the eyes of the party) become the world's leading currency, supplanting the dollar. The incredible amount of hydropower used for mining should be reserved for the state's own coinage, not the free market's. Don't believe anything you hear about the government's sudden concern over the environment, or the need to preserve electricity for the Chinese people—only journalists are gullible enough to fall for that straw man. When Bitcoin rose above $64,000, the experts were pointing to $100,000 as the next major stop. On Tuesday, the coins broke below $29,000 and there isn't much clarity on where prices are headed from here. The China-induced drop is interesting; if Chinese mining goes offline, shouldn't that bode well for the price of the commodity? For those with FOMO, we recommend opening a Coinbase account and buying a few of the fifty or so cryptos available on the platform. |
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Tether $1
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Finally, a crypto that acts like a currency: Tether now the third-largest digital coin in the world
(18 Jun 2021) We have laughed off any comparison of cryptocurrencies such as Bitcoin to actual currencies; they are actually commodities with wild volatility. Well, that is true for most of them. All of a sudden, a digital currency known as a stablecoin has roared into third place—behind Bitcoin and Ether—on the list of the world's largest cryptocurrencies. Tether, which was originally known as Realcoin, is—as the name implies—tethered to an actual currency. Tether USDT is tied to the price of a US dollar, EURT to the euro, CHNT to the Chinese yuan, and XAUT to the price of an ounce of gold. So, at least in theory, one Tether USDT will always be worth one US dollar. As one could imagine, that makes it a lot easier for owners to buy goods with their USDTs, as they won't be worried that they could buy the same goods for a lot less in the future (due to fluctuation). The cryptocurrency got a big boost in May when the largest US digital exchange, Coinbase (COIN $232), announced that Tether USDT would be available on its platform. Tether is not without its share of controversy, however. It got in some hot water a few years back by implying that it was fully backed by the dollar. In actuality, a breakdown of the coin's reserves shows that it is 75%-backed by cash and cash equivalents; 13%-backed by secured loans; and 12%-backed by corporate bonds, precious metals, and other digital tokens. Nonetheless, it has traded at or near $1 throughout its seven year history. Another thing we like about this coin: For foreign nationals who don't have access to US bank accounts but want the stability of the US dollar, Tether has proved to be a popular solution. Tether's market cap surpassed $60 billion last month, and we expect it to maintain its steep growth trajectory. Considering the Communist Party of China is hell-bent on creating a digital currency to supplant the US dollar as the world's reserve currency, perhaps the United States Treasury should study Tether as it slowly prepares to roll out its own fiat digital currency. In the meantime, Tether is one of the only digital coins whose future value we can confidently predict. |
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Bitcoin $33,452
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Bitcoin drops following FBI's successful clawback of ransom
(08 Jun 2021) It always struck us as odd that so many cryptophiles—the unabashed cheerleaders of all digital "currencies"—consider these creatures completely secure from outside forces. Granted, we have heard stories of Bitcoin owners forgetting their digital wallet passcodes, thus losing their coins forever, but we are talking about something which exists purely in the digital realm. Perhaps that realization hit home for some this week following the FBI's successful recovery of $2.3 million worth of bitcoins paid to the Russian-backed hacker group DarkSide by Colonial Pipeline. The ransom was apparently retrieved after investigators either uncovered the complex key code for the hackers' digital wallet, or somehow took control of the server which held the coins. However it was done, the specter of a third party being able to reach in and take bitcoins out lacking the permission of the wallet's owner sent the price of Bitcoin down around 8%. The FBI recently launched its Ransomware and Digital Extortion Task Force, which was responsible for the recovery. The price of Bitcoin has been reeling as of late, falling from its high of $64,000 in the middle of April to $32,800 following news of the ransom recovery. As we've mentioned before, anyone wishing to get in on the crypto craze would be better off buying into the underlying blockchain technology rather than amassing the actual coins. Coinbase (COIN $227), the platform on which a number of major cryptos trade, might be a good place to start. |
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COIN $328
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As expected, Coinbase shot out of the gate in its debut trading day; then something interesting happened
(15 Apr 2021) Despite an initial pricing range of around $250 per share, cryptocurrency exchange Coinbase (COIN $328) opened on the Nasdaq at $381 then quickly rocketed to nearly $430 per share. That mark put a sky-high valuation on the firm at $112 billion, but woe to the investors who wantonly bought in within the first few minutes of trading. Unlike many other recent IPOs with similar levels of rabid interest, shares of COIN began faltering almost immediately, falling all the way back to $311 within two hours of the company's first trade. Shares closed the day at $335.90, or 22% off of their high. While the closing price gave the exchange a more reasonable market cap, we believe it is still overvalued. We do like the fact that Coinbase is a play not on one particular cyrpto, but on a number of reasonably solid players. In fact, it acts as something of a gatekeeper, keeping more questionable digital currencies from being traded on the platform. Bitcoin and Ethereum trading generated nearly 60% of the firm's revenue in 2020. One clear winner on the day was the Nasdaq exchange, with Coinbase representing its first direct listing. At its size, in fact, COIN became the largest company to ever take the direct listing route. There was a heated competition between the NYSE and the Nasdaq to land the deal, but Coinbase's CFO said the fact that the latter had the symbol "COIN" played a part in the company's decision to go with that exchange. Here's what worries us most about Coinbase: there are few barriers to entry for would-be competitors. In fact, the fat fees the exchange charges almost begs the competition to come flooding in with the promise of lower costs to the customer. Nonetheless, the company has grand strategic plans of building out a complete suite of financial services over the coming years. They will, more than likely, succeed with those plans. So, we are relatively bullish on Coinbase, but believe COIN shares are overvalued and that the industry has few barriers to entry. With all of that in the mix, what's an intriguing price point for a buying opportunity? We would say anywhere around $250 per share, which is where we set our own price alert. |
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Coinbase
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There is an enormous crypto opportunity coming Wednesday via direct listing; should you buy?
(13 Apr 2021) If we ever had any doubts about the long-term viability of cryptos, that ended when it became clear that China has plans to create its own global reserve currency (dollar envy). It has decided to do that in the form of a government-backed digital currency, a sovereign Bitcoin if you will. Technically called the Digital Currency Electronic Payment, or DCEP, the currency will allow the Communist Party of China to further control the entire banking system in China and, in the hopes and dreams of the master planners, create a tool to overtake the dollar as the world's reserve currency. Will it work? Probably not—at least not to the extent China hopes. However, it points to the critical importance of the American government both understanding and embracing cryptos. On that note, Something big will happen in the crypto world on Wednesday: Coinbase will go public via a direct listing. As the largest cryptocurrency exchange, the San Fran-based company (though it has no official physical headquarters) acts as a secure online platform for buying, selling, transferring, and storing digital currency. The fact that it is part of the support structure, rather than an entity tied to the success of any one single crypto such as Bitcoin, makes the company extremely interesting. Not only that, it is (get ready) already profitable! The firm had a blowout Q1, with earning of around $800 million on revenues of $7.2 billion. And that revenue base represented an 850% spike from the same quarter a year earlier. There is only one problem with this intriguing investment. With the rabid interest circulating around cryptos and the millions of new myopic retail investors now in the game, Coinbase will probably come out of the chute with a market cap in excess of $100 billion, and some will be willing to jump in at any price ("diamond hands, baby"). We will be watching the action closely, and if the price is too expensive on its first day of trading we recommend investors wait for the shares to come down and settle within a reasonable range. Cryptos, despite what we said about their inevitable future, still operate in a normal market cycle of peaks, contractions, troughs, and expansions. Don't get too caught up in the hype: when everyone is jumping into the water with their eyes closed, it is always wise advice to wait until the sharks send them fleeing for safety. |
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Tesla
Bitcoin |
Tesla shifts $1.5 billion of its cash reserve to Bitcoin, will accept the crypto as a payment source soon
(09 Feb 2021) Going into the new year, $800 billion EV juggernaut Tesla (TSLA $854) had about $19 billion sitting in cash reserves. In a move that GM or Ford would never consider making, the firm revealed—via an SEC filing—that it has placed about $1.5 billion of that amount, or roughly 8%, in the cryptocurrency Bitcoin. Let there be no doubt, Bitcoin is not a currency; rather, it is a commodity. Forget the comparisons to the US dollar, compare it to gold or silver instead. The dollar is worth a dollar today, yesterday, and (hopefully) tomorrow. Certainly, its value will fluctuate, but it will not go up 60% in one month like Bitcoin has. Governments can print currencies 24/7, effectively reducing their value, but only 21 million bitcoins can be mined—and 18.6 million digital coins already exist. So, is there anything wrong with Tesla's cash management experts shifting 8% of the company's reserves into the commodity? We don't believe so. After all, they could also buy (based on their SEC filings) gold or silver as a store of cash. Given Elon Musk's belief in the future of cryptos, the move shouldn't be surprising. Furthermore, investors applauded the move: both Bitcoin and TSLA were trading higher following the announcement. The company also announced plans to accept Bitcoin as a means of payment in the near future. We were true Bitcoin skeptics at first, but as soon as big payment processors like PayPal and Venmo got in the game, and as soon as we started looking a the non-physical product as a commodity rather than a currency, we warmed up to the crypto. Our biggest concern is this: Although only 21 million bitcoins will be mined, nothing will stop new, competing cryptocurrencies from being "discovered" in the digital world. |