To investors, I was talking to a friend recently about the various investment opportunities in the crypto industry. He kept explaining how much exposure he had to publicly traded stocks, so I asked my friends at Bitwise to do an analysis on that piece of the market. Below is their write-up. Really fascinating stuff. Crypto assets are the best returning asset class over the past one, three, and five years. And yet, many traditional investors remain on the sidelines. The Crypto Combo: High Growth and High Profitability Crypto equities today combine two characteristics rarely found together: Exceptional top-line growth with very high levels of profitability. Take Coinbase, the premier crypto exchange. It’s not alone. The chart below compares the median top-line growth and net margins for pure-play crypto equities, as captured by the Bitwise Crypto Innovators 30 Index, with other industries in the S&P 500. CRYPTO EQUITIES STAND OUT IN TERMS OF THE PROFITABILITY GENERATED FROM THEIR TOP-LINE GROWTH 2021 median estimates of revenue growth versus profitability levels for crypto equities and S&P 500 industries. (Area of each circle is proportional to the total market capitalization of each industry).
What’s even more interesting about crypto equities is that they are largely flying under the radar. Despite superior fundamentals, they currently trade at a median 2021 P/E ratio of 22.3x, just marginally higher than the S&P’s average of 21.2x. FAVORABLE GROWTH AND PROFITABILITY DYNAMICS ARE NOT REFLECTED IN 2021 P/E MULTIPLES 2021 P/E multiples of crypto equities versus the industries of the S&P 500 Index There are many reasons for this unique combination. There are of course also significant risks. Crypto equities are exposed to crypto asset prices, which can be volatile and have historically demonstrated elements of cyclicality. The exceptional historical returns in crypto have been accompanied by sharp and sometimes prolonged corrections, and those drawdowns could happen again. Additionally, risks related to regulation, market infrastructure, technical developments, and user adoption can also affect these markets. Still, as a fast-growing and often overlooked sector, these companies bear real consideration, both from investors locked out of the traditional crypto market and from investors looking to augment their crypto exposure. Are Cryptoasset Correlated With Crypto Equities? The chart below shows that the answer is yes … mostly. CORRELATIONS BETWEEN CRYPTO EQUITIES AND CRYPTO ASSETS TYPICALLY RANGE BETWEN 0.50 AND 0.75 30-Day rolling correlations of daily returns between the top 10 constituents of the Bitwise Crypto Innovators 30 Index and the Bitwise 10 Large Cap Crypto Index. Data from December 1, 2020 to September 30, 2021 for all companies except for Coinbase, for which data is available from April 14, 2021 to September 30, 2021. The chart looks at the correlation between the 10 largest pure play crypto equities and the broader crypto market. It finds that crypto equities offer material exposure to cryptoassets, with correlations typically ranging between moderate (0.50) and significant (0.75). While not a perfect proxy, this is a robust connection. Another important angle is whether these stocks are leveraged or de-leveraged to cryptoasset price action. Commodity stocks tend to be leveraged plays on the commodity cycle, as their profits tend to go up more than the price of the underlying commodity during bull markets and vice versa in bear markets. CRYPTO EQUITIES ARE LEVERAGED TO CRYPTOASSET PRICES TO DIFFERENT DEGREES Betas of the top 10 constituents of the Bitwise Crypto Innovators 30 Index (vertical axis) to the Bitwise 10 Large Cap Crypto Index (horizontal axis). Data from December 1, 2020 to September 30, 2021 for all companies except for Coinbase, for which data is available from April 14, 2021 to September 30, 2021. The chart shows that crypto equities’ betas to cryptoassets range from 0.41 for Coinbase to 1.52 for Argo Blockchain. This range is intuitive considering that the subsectors within crypto equities are exposed to cryptoasset price cycles in different ways. Crypto miners tend to have significant operating leverage to crypto prices and therefore their share prices tend to exacerbate the crypto price cycles. Other industry players, however, have valuation drivers that may not be entirely influenced by crypto prices. Exchanges, for example, derive their revenues from trading volume, which may not always move in tandem with crypto prices (and can even spike during short pullbacks), and from additional services that they can add on top of trading fees such as custody, staking, and lending. Conclusion Cryptasset adoption accelerated in 2021, with the global crypto population more than doubling from 100 million in January to 221 million in June. Through the disruption of existing paradigms, the creation of new opportunities for different segments of society, and shifting of consumer behaviors, crypto is reshaping the world. Hope this was informative for each of you. I’ll be looking to do more analysis like this in the coming weeks. Thanks to the team at Bitwise for being so helpful and putting context around the data as well. Talk to everyone tomorrow. -Pomp THE RUNDOWN:Michael Saylor Says MicroStrategy Will Continue to Keep Adding to Its Trove of Bitcoin: MicroStrategy will continue stockpiling bitcoin for years to come, and while the cryptocurrency's price is volatile, "it's going up forever," CEO Michael Saylor told CNBC on Monday. The bitcoin bull outlined his bullish outlook on the digital asset after a MicroStrategy regulatory filing last week showed the company bought 9,000 bitcoin in the quarter ended Sept. 30. The data analytics company's bitcoin count stood at 114,042, and the stash was worth nearly $7 billion on Monday as bitcoin traded around $61,220.Read more. NFL Star Aaron Rodgers Gives Ringing Endorsement of Bitcoin: NFL superstar Aaron Rodgers offered a resounding endorsement of bitcoin on Monday, tweeting that “I believe in Bitcoin & the future is bright.” The longtime Green Bay Packers quarterback and three-time MVP revealed that he’s working with Square’s Cash app to receive an undisclosed amount of his salary in bitcoin for the first time. New York Giants star running back Saquon Barkley said in July he would be receiving all his future endorsement money in bitcoin, while several other NFL players have also said they would get part of their salaries in cryptocurrency.Read more. Coinbase Revenues Could Hit Nearly $50B by 2025: Coinbase is the best-positioned cryptocurrency-related company to benefit from the industry’s soaring growth, Hayden Capital said on Monday in a memo on the crypto exchange. Coinbase could reach $49.2 billion in revenue exiting 2025 under a bullish outlook of mass crypto adoption, rising interest among institutional investors and the sector growing to $6.8 trillion in total size. Under a more conservative crypto market cap estimate of $3.4 trillion, the firm would more than double revenues to $21.3 billion by 2025.Read more. Biden Administration to Congress: Put Stablecoins Under Federal Supervision – Or We Will: A group of U.S. regulators urged lawmakers to subject stablecoin issuers to the same strict federal oversight as banks, in a highly anticipated report released Monday. Congress should also require custodial wallet providers to be regulated by a federal agency and limit stablecoin issuers’ interactions with non-financial companies such as tech or telecom providers, the President’s Working Group for Financial Markets said. The latter recommendation appeared to be aimed squarely at Diem, formerly Libra, the controversial stablecoin project created by Meta, the social media giant previously known as Facebook.Read more. Pension Funds Wade Into Crypto Investments: The Houston Firefighters’ Relief and Retirement Fund made news recently when it announced it was investing $25 million in bitcoin and ether, marking what was believed to be the first time a U.S. pension fund had put cryptocurrencies directly on its balance sheet. Of course, $25 million is only a drop in the bucket compared to the $5.5 billion in total assets held by the fund – more precisely, it represents just 0.5% of its portfolio. But it still was a notable first step by the historically conservative investment fund. Read more. LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE Rich Antoniello is the Founder & CEO of Complex (now Complex Networks). They recently sold the business for approximately $300 million to BuzzFeed. In this conversation, we discuss media, entrepreneurship, capital markets, bitcoin, NFTs, and some of the CRAZY stories from over the years. LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE Podcast SponsorsThese companies make the podcast possible, so go check them out and thank them for their support!
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