  Weekly insights, news and analysis for the professional investor By Noelle Acheson, Managing Director of Research April 11, 2021 Sponsored by  Prices as of 04/11/21 @ 12 p.m. UTC If you were forwarded this newsletter and would like to receive it, sign up here.
Hi everyone!
In the flood of news and events that define our industry, it’s easy to lose sight of milestones as they blend into the flotsam and jetsam of big developments.
Next week, our industry will see its first major crypto company listing on a major stock exchange: Coinbase goes public on April 14. It’s not the first crypto company to go public by far – there are many. It is the largest to date, however, and could come to be seen as a listed proxy for the overall health of the crypto market, attracting greater mainstream interest as well as providing the industry with a benchmark stock price against which to extrapolate all sorts of valuations.
You can follow our comprehensive coverage here.
I talk a bit about this below and look at comparative multiples as well as what they say about the potential price performance after the starting bell. But I couldn’t resist the temptation to also pull on the macro threads left dangling after Peter Thiel’s pointed comment about China weaponizing bitcoin – it was just too irresistibly complex.
Christine Kim and I are hosting a webinar tomorrow (Monday), April 12 at 11:30 a.m. ET, to dive into some of the bitcoin charts in our latest Quarterly Review which came out last week. Come and join us, and ask questions! You can sign up for free here.
With that, read on...
– Noelle
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THE BRIEFING Playing Go: Peter Thiel Defines Bitcoin’s Accidental Role in Global Politics The battle over bitcoin’s evolving role just became a piece in a complex game of political strategy.
Peter Thiel’s talk earlier this week at a Richard Nixon Foundation event thrust the cryptocurrency even further out onto the geopolitical stage and highlighted two important macro narratives that investors should keep an eye on, not just for their potential impact on crypto returns.
Here’s one extract from his comments:
“I do wonder whether bitcoin should be thought of as a Chinese financial weapon against the U.S. It threatens fiat money, but it especially threatens the U.S. dollar.”
As with most things in life, context is key, and this statement is crying out for it.
On the surface, it seems as if he is asking U.S. regulators to prevent bitcoin from becoming more of a threat to the U.S. dollar. This is the wrong interpretation. The underlying intention is both more meaningful and more supportive of bitcoin and, ultimately, the U.S. than it may at first appear.
Others have pointed out that Thiel is probably playing 4D chess here, and I agree with that. But I believe his underlying message is about more than bitcoin and about more than trying to get the U.S. to sit up and take notice.
Bitcoin as a weapon?
Before we unpack why Thiel might have said what he said, let’s look at what he might have meant.
Why would bitcoin threaten the U.S. dollar?
As early as 2013, Thiel was talking about bitcoin’s potential to “change the world,” and has on other occasions praised bitcoin’s reserve qualities.
Thiel seems to be suggesting that bitcoin’s stable supply and worldwide reach could one day put it in a position to rival the U.S. dollar as the world’s reserve currency. And his statement implies that he believes China is supporting bitcoin, effectively “weaponizing it,” for this reason.
Does he really believe this?
He has access to several of the best minds in the crypto industry through some of the investments made by his funds, and is arguably a very smart individual himself. He has acknowledged that bitcoin is not the best payments system, and surely recognizes that the dollar is a strong reserve currency precisely because it is an efficient payment method. Countries want to hold it because it is essential for global commerce.
And as for China “weaponizing” bitcoin to hurt the dollar, Thiel is no doubt aware of just how long on the dollar China is. Chinese investment of U.S. Treasuries has been increasing since October of last year, and is now at almost $1.1 trillion.
What’s more, on the current macro landscape, bitcoin is probably well below central bank policies on the list of things that could hurt the U.S. currency.
And Thiel probably knows that China has not exactly been “friendly” to bitcoin. On top of the years-old ban on crypto exchanges, authorities moved to shut down bitcoin miners in Inner Mongolia last month. Given the country’s constant battle with capital flight, it’s more likely that it wishes bitcoin would just go away. And if it really wanted to weaken the dollar (which is debatable), it has methods within reach that would not also cause damage to the yuan.
So, Thiel may have said that China was trying to bring down the U.S. dollar by “weaponizing” bitcoin. But I doubt he really believes that. So, why did he say so? What is he hoping to achieve?
The real issue
To dive into these questions, we need even more ladlefuls of context.
The theme of the seminar was technology and national security. The comment flagged above was tucked into an answer to a question about China’s digital currency plans, and a discussion flowed about the potential control that would give the state over its citizens. The conversation also touched on AI, supply chains and much more, all with a sharp tinge of concern about ideological influence. Thiel even referred to the Chinese government as “omni malevolent.” Let that sink in.
Thiel’s remarks on bitcoin were most likely, as many have pointed out, an attempt to get the U.S. regulators to start taking bitcoin more seriously. But they were also about the broader threat to U.S. dominance that he sees coming from China.
The first point may seem risky – many are concerned that the U.S. might decide to ban bitcoin if it starts to see it as a threat. But, as I’ve written elsewhere, this is unlikely to happen as authorities have been watching the social unrest triggered by attempts to curtail cryptocurrency activity in countries such as Nigeria. Plus, a U.S. attempt to ban bitcoin would be the best advertisement that something like bitcoin is needed, and the domestic fallout could shore up China’s soft power play.
It is more likely that greater attention to bitcoin regulation would support investment in crypto infrastructure, which would have extended effects throughout the industry. This includes putting institutional investors’ minds more at ease with the concept, and possibly even removing the last barriers to approval of a bitcoin ETF by the SEC.
The arc of history
Now let’s turn to the broader context. As a declared Republican who donated generously to Trump’s first presidential campaign, Thiel was closer to the last administration than this one. He, and others, are concerned that the new administration will take a more relaxed stance on relations with what many see as the greatest threat to U.S. power since the Cold War: China.
This almost nationalistic tone can also be heard in Kevin O’Leary’s insistence on CDTV last month that investors aren’t going to want “China coin.”
What’s more, the 2021 National People’s Congress held in February ratified the next five-year plan which focuses on, among other things, shoring up China’s position on the global stage. The previous five-year plan described how a peaceful multilateral world would benefit China. This one highlights the danger of “hegemonism,” and describes a strong economic growth based on a vibrant domestic economy that is less dependent on others.
The crescendo in anti-American rhetoric and diplomatic actions point to escalating competition for not only trade but also hearts and minds on the international stage. The soft-power battle is being backed by loans and investment far beyond China’s borders in what appears to be a long game of influence.
I heard an interesting metaphor the other day: The U.S. favors chess, which is about capturing the opponent’s pieces in order to kill its king. The Chinese prefer Go, which is about a slow and stealthy occupation of territory.
Thiel seems to be saying that the Chinese are playing Go with bitcoin, as well as with blockchain, AI and other new technologies. He is effectively asking the U.S. to watch out for the territorial creep its inaction is facilitating.
Thiel’s talk is likely to have repercussions, slow and subtle, but real and meaningful. Hopefully, U.S. regulators will recognize the real opportunity in supporting the use of bitcoin and the development of its infrastructure. Hopefully, they will see that bitcoin is more representative of the American values of freedom and choice than many of the other new technologies making their mark on societal structures today. And hopefully they will understand that bitcoin will thrive no matter what they do, so they might as well start figuring out how to harness its innovation.
For those of us who love irony, there is much to appreciate in this emerging picture. Bitcoin is being thrust into a tussle between two world powers, when it was created to live outside national boundaries. It is being associated with political intent, when its inbuilt ideology is supposed to flourish outside party lines. It is being used as a tool in a shift away from globalization and towards nationalism, when its design is based on decentralization.
Here’s the thing: Bitcoin doesn’t care. It can be what anyone wants it to be. It’s going to continue functioning the way it does, regardless of how people see it. I’m pretty sure Peter Thiel knows that, and so if he wants to use Bitcoin to make larger points that he believes are necessary for prosperity and freedom, then I say we leave him to it.
Coinbase Makes History
Excitement is building for April 14, when crypto exchange Coinbase lists on NASDAQ under the symbol COIN. Why is this a big deal?
Speaking of which, earlier this week Coinbase released its estimated Q1 earnings (pending review by the accountants), which showed some impressive progress since the S1 filing.
Yes, these growth figures are dizzying. Will they be enough to justify the expected $100 billion valuation upon listing?
Applying a typical market infrastructure multiple (using CME and Nasdaq as examples) of 35x, and assuming Q1 earnings decline 10% over the rest of the year (the company’s mid-range scenario for average MTU increase shows a decline of 10%), gives a back-of-the-envelope total value of $95 billion - $104 billion. However, Coinbase has higher growth potential than traditional exchanges, given the relative immaturity of the assets it trades. Could it be considered a growth stock?
Let’s assume the Coinbase share price ends up being highly correlated with the bitcoin (BTC) price. As you can see from the below chart, 90-day correlations between BTC and both high-growth stocks (represented by Amazon and Tesla) and exchange stocks (represented by CME and Nasdaq) have been all over the place for the past year, implying no correlation trend.  So, given that Coinbase is an exchange, and given the growth potential of the technologies and mainstream awareness of the assets it trades, let’s apply a simple average of the multiples of CME (31x) and Nasdaq (NDAQ, 24x), and growth companies represented by Tesla (TSLA, 158x) and Amazon (AMZN, 68x). This gives Coinbase a potential market valuation of $189 billion - $207 billion, propelling it into the top 50 of global market capitalization.
And with crypto assets, the number of users does not confer a linear growth outlook – it confers an exponential growth outlook as network effects kick in. So, the more than 30% increase in verified users in Q1 vs the end of the previous quarter implies a significant growth in potential value.
Obviously, none of these musings are investment advice, as the initial price could be seen as too high and there could be a Deliveroo-like debacle. This is unlikely, however. The shares are coming to market via a direct listing rather than an IPO, so we don’t have teams of investment bankers pressured to price ambitiously – direct listing advisors usually charge a flat fee, vs. the percentage-of-total-raised remuneration for IPO advisors.
There are risk factors on the horizon, however, such as:
Whatever happens to the COIN price upon listing, April 14 will be a significant day for the industry, one that will probably end up enshrined in the memes of crypto history.
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Bitcoin may have hit recent all time highs, but it’s not too late to be early.
CHAIN LINKS Bloomberg analysts have extrapolated BTC’s behavior in the 2013 and 2017 bull runs and come to the conclusion that the cryptocurrency’s price could reach $400,000 this year. TAKEAWAY: Does history repeat itself? Many technical analysts will tell you yes. I recognize that psychology plays an important role in trading decisions, but I have a conceptual difficulty in betting on chart regressions. What does make sense to me is the four-year cyclical nature of bitcoin runs, given the fundamental impact of the bitcoin reward halving every four years. That we are in a bull market, as we were four and eight years ago, feels obvious at this stage. Will it continue up into six digits? It’s certainly possible, but so many other factors are in play in crypto markets today that I am personally skeptical of simple extrapolation.
The U.S. Securities and Exchange Commission (SEC) has started its review of WisdomTree’s bitcoin ETF application. TAKEAWAY: This now makes two bitcoin ETF proposals in front of the regulator. The other is VanEck’s, and a ruling on that is expected some time next month.
Grayscale Investments (a subsidiary of DCG, also parent of CoinDesk) issued a statement saying that it is “100% committed” to converting its flagship Grayscale Bitcoin Trust (GBTC) into an ETF when that becomes possible. TAKEAWAY: Expectations that the U.S. Securities and Exchange Commission will finally approve a bitcoin-based ETF are building, after years of SEC rejections, given 1) the improvement of crypto market infrastructure and surveillance, and 2) the pressure from the success of Canadian-listed bitcoin ETFs. This statement from Grayscale seems aimed at addressing the persistent discount to underlying value at which the trust’s shares have been trading since the beginning of March. If trust shares can be converted into an ETF with redemptions, there is an arbitrage play to be had: investors can effectively buy future ETF shares at a discount, which will disappear when redemptions become possible. The risk is in the uncertain timing.
NYDIG raised $100 million in a “growth capital round” from Liberty Mutual, Starr Insurance and other unnamed property and casualty coverage firms. TAKEAWAY: Given that last month NYDIG raised $200 million from MassMutual, New York Life and others, we can reasonably expect some significant crypto-related announcements from large insurance incumbents over the next few months. Given the sheer size of the insurance industry, even if the products end up being niche, we could be looking at a sizeable new market.
Online brokerage app Robinhood revealed that 9.5 million customers traded cryptocurrencies in Q1, up from 1.7 million in Q4. TAKEAWAY: Combine this with the jump in monthly transacting users that Coinbase shared in its estimated Q1 earnings release (see THE BRIEFING above) – 6.1 million, vs. 2.8 million – and you get a sense of 1) the astonishing increase in retail investor activity in Q1, and how it is starting to drive the market even more than growth in interest from institutional investors. (For more on this, see our latest Quarterly Review.)
Bitcoin miners are holding on to their earned bitcoin more than they are selling them, according to a chart by Glassnode. TAKEAWAY: This is a bullish signal as: 1) it hints that miners are generally feeling optimistic about the price, and 2) it means that fewer new bitcoins are hitting the market, removing some selling pressure.  Source: Glassnode
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Podcast episodes worth listening to: 
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