7investing and CryptoEQ: Tesla, Bitcoin, and Coinbase Going Public | 7investing
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7investing and CryptoEQ: Tesla, Bitcoin, and Coinbase Going Public

February 16, 2021 – By Simon Erickson

7investing and CryptoEQ recently announced a partnership, to help investors get a better consolidated view of the opportunities in both equities and in cryptocurrencies. 7investing provides its top seven stock market recommendations every month, while CryptoEQ provides its top-rated cryptocurrencies.

The two companies are now joining forces on a monthly basis, to discuss the most important recent developments taking place and the impact they’ll have on both equities and crypto. This past month, that conversation included a discussion about Tesla’s commitment to buy $1.5 billion worth of Bitcoin for its corporate treasury, as well as Coinbase coming public at a valuation of up to $75 billion.

Going forward, 7investing will publish the full video of these conversations to subscribers as a monthly Advisor Update. CryptoEQ will publish a written recap of the conversation with additional context in their monthly subscriber email newsletter.

We’ve also decided that we’ll be providing this first episode for free! We hope you enjoy the show and our takeaways as a part of our 7investing podcast series. If you’d like to gain access future shows, please consider becoming a subscriber by visiting 7investing.com/subscribe or cryptoeq.io/#memberships

 

Timestamps:

00:00 – Introduction to the 7investing/CryptoEQ partnership

02:50 – Tesla Purchasing $1.5 Billion in Bitcoin

09:05 – Companies Following Tesla’s Crypto Lead

13:45 – MicroStrategy and Bitcoin

22:00 – Coinbase and other Bitcoin Brokerages

44:01 – What to Watch in the Crypto World

 

Transcript

Simon Erickson  0:00

Hello everyone and welcome to this edition of our 7investing podcast…video…whatever we might call this piece of content! I’m 7investing founder and CEO Simon Erickson, joined by my 7investing colleague, lead advisor Steve Symington. Steve, how are you doing this afternoon?

Steve Symington  0:14

I’m fantastic. It’s Friday and I’m only sad that the trading week ends. But I enjoy the weekends, of course.

Simon Erickson  0:24

We’ve got some special guests with us this afternoon. Spence Randall and Michael Thoma are from CryptoEQ, who we’ve just partnered with, with 7investing. We’ve done that because we kept getting a lot of questions about cryptocurrencies, people saying “What is Bitcoin worth? What do you think of Bitcoin? Should I be buying Bitcoin?” And Steve, we found that we didn’t really have great answers to those questions. And so we went out looking for a partner, which we found with CryptoEQ, who really was doing some great objective, thorough research into cryptocurrencies. I’ve really enjoyed reading their CORE reports. And getting much more of an understanding of this space. And so first and foremost, Spencer, and Mike, thanks for joining us in this journey to help investors with 7investing.

Spencer Randall  1:11

And thanks for having us on Simon. We’re excited to be embarking on this partnership with you guys. With 7investing, you’re watching the stock market 24/7, and CryptoEQ, we’re  watching crypto 24/7. So we’ve got these two teams that have been building in parallel and now are coming together to see our two industries really collide in a good way. Right. And there’s there’s this interesting intersection that’s happening between equities and crypto. And so, you know, in our specialization in both industries coming together, I think it’s a really unique value proposition for the audience. And I haven’t seen any content like this out there, and I consume content every day. So I’m excited to do this with you.

Simon Erickson  1:53

Yes. And to clarify a little more what with Spencer’s mentioning there, what we’re going to do going forward is on a monthly basis have calls with both 7investing representing the equity side of recent developments that are taking place out there. And then Spence and Mike representing the cryptocurrency side of the same developments, and kind of pull them together into giving investors a comprehensive look at what this means and what we should do about it. I’m really excited about this, we’re going to be publishing the video of this call to 7investing. And then there’s going to be a written piece, a content piece that’s available for CryptoEQ members, if you are interested in that that’s crypto eq.io is their website, I highly recommend checking out their subscription as well. But to kick this off, let me start with the first story that is a very newsworthy right now, which is that Tesla has just announced that they’re going to be purchasing $1.5 billion worth of Bitcoin and also be accepting it for transactions with Tesla in the future. Steve, I’ll start with you on this one, because Elon Musk has said that he’s doing this to diversify and maximize the returns of Tesla’s cash on the balance sheet. Spence and, Mike, I get to you in a second to get the cryptocurrency perspective on this. But Steve, what’s your take from an equity perspective of what’s going on?

Steve Symington  3:14

This is really interesting, because, you know, you and I have done podcasts a couple times talking about the specific capital allocation decisions, and one of those decisions is the decision to just leave cash in cash and maybe not necessarily put that to work as far as maybe returning capital to shareholders for dividends or reinvesting in the business. But this kind of throws an interesting wrench in the thought that cash can sit there idle. And rather than just leaving it in cash, you know, they’re taking a portion of what they have and putting it in Bitcoin, which is a really just a really interesting decision. I mean, and keeping in mind, you were looking at Tesla’s market cap, just short of 800 billion, you know, so it’s not like Tesla is betting the farm on this. But it is. It was cool to kind of watch it all unfold and similar to what MicroStrategy is done in purchasing Bitcoin for part of their balance sheet. And I think that was kind of birthed out of conversation. Elan, musk and MicroStrategy. co had on Twitter several weeks ago, where he was saying are such large transactions even possible and MicroStrategy CEO responded and said, Yes, we just bought 1.3 billion in Bitcoin over the last several weeks. I’d be happy to share my playbook offline. Sure enough, here we are a few weeks later, and this is what happened. But, you know, maybe we add sort of the sixth capital allocation decision to those primary ways that you can, you can put money to work and build the value of your business and diversify your balance sheet so kind of cool to watch and should be really interesting to watch other companies potentially. pile on later on, but kind of an early doctrine that stage.

Simon Erickson  5:01

I think that that is really interesting. What MicroStrategy did like you mentioned, Steve, beginning last summer MicroStrategy, at first put $425 million into buying Bitcoin, put on the balance sheet, it went from cash to being a long term investment – increased quite a bit in value over those next eight months versus where it is today. So that that created a lot of value for shareholders, right, and we see MicroStrategy, nine months ago was trading at $118 a share, it’s now over $1,000 a share as people are saying, “hey, what an innovative move what a creative way for somebody get out ahead of this.” Mike, are you and Spence, I’d like to bring this to you next, because this is kind of like Steve said, a big capital allocation decision. What does it mean that corporations are now actually buying Bitcoin to put on their balance sheet?

Spencer Randall  5:50

Yeah, well, first, I need to start off by plugging the value of the content we did a few months ago, you actually asked me to do I think Elon is gonna allocate to Bitcoin. And my like, kind of an almost an exact quote, I think I said something like, well, Saylor and and Elon both really liked Twitter. They were kind of in orbit. Right? He may do it, and then sure enough, here we are. So I think of this new kind of chapter that we’re seeing in Bitcoin adoption is there’s a new ark of persona that’s adopting Bitcoin. And you know, the reason Bitcoin makes sense for Elon and Saylor and many other CEOs is a similar reason to why it made sense for a lot of early adopters like Mike and I. So when you think about why Mike, and I wanted to allocate cash to Bitcoin as a retail investor and trader way back when, right, it’s a similar thought process on a much, much bigger scale. So I think we’re looking at another ark of adoption, as we continue to charge ahead to mass adoption of cryptocurrencies. So that’s kind of my general take on on this trend that we’re seeing as CEOs allocate cash reserves to Bitcoin.

Simon Erickson  6:57

Yeah. Mike, what do you think?

Michael Thoma  7:00

Yeah, so I guess it can’t be understated. You know, like Spence said MicroStrategy seemed to be the first one first major player in the scene, and it was in August of last year, and they didn’t dip their toe in the water. They put almost all of their cash into bitcoin and made waves across all of you know, equities and corporations across America. And, you know, I was a bit skeptical at first it seemed kind of headline grabby. But Michael Saylor really seems to you know, he’s gone on a total media tour since then, and is a diehard Bitcoin-er now, and he’s preaching the gospel, recruiting others and it wasn’t long after that, that Square, Jack Dorsey, they allocated $50 million. And so a much smaller position, much more prudent, some may say. You have the first quote unquote crazy guy, Michael Saylor to go all in. But then as soon as you have another one follow suit, it really kind of gives some credence to this idea. And you’re no longer you know, at the risk is from a reputational standpoint, and we’ve known for a long time that Elon is a crypto, crypto curious. He tweets about Bitcoin, Dogecoin over the years, and you know, it was probably only a matter of time for a lot of us in the crypto community. Especially after a couple of weeks ago. He changed his Twitter profile to just say Bitcoin and Bitcoin only. So this is very on brand I think for Elon and Tesla in general. Like you said, what it equated to about 8-10 percent of their their cash on hand, which some still find pretty big, but it’s not like Tesla needed to do this. Or, you know, in the in the SEC report filing, they said “hey, we’re trying to de risk some of our diversifier assets and derisk a bit, which, you know, is certainly true in a sense. But Tesla is a narrative driven kind of stock at this point, and I’m sure you know, purchasing Bitcoin and getting your name attached to Bitcoin doesn’t hurt either.

Simon Erickson  9:05

I do think I remember since you called it, tha Tesla was going to be buying and now Mike, you know, we’ve seen even other corporations mentioned that they might want to get into bitcoin as well. We’ve seen even Apple say that they would potentially purchase up to $5 billion worth of Bitcoin future. Do you think that we see more follow suit now that like you mentioned, it’s been de risked and Elon is taking the first move?

Michael Thoma  9:26

Right. I certainly think so. I don’t know – Apple would be the next Domino to fall. But it’s been said this is kind of the dam has been broken. And I don’t think Tesla will be the last one at all. So when when Tesla and Elon do something, it catches the attention of others. And it just so happened to piggyback right on the same weekend that Michael Saylor MicroStrategy was hosting a webinar, a virtual event to teach other corporations how to add Bitcoin on their books to be fully compliant and attack and cover all your tax purposes. And so I, it’s a little serendipitous that those lined up together. But you know Apple made a couple of headlines, I’m not sure if that’s what we call like hopium. in the cryptocurrency space. Apple is the mother of all businesses, almost, I think they have something like $200 billion of cash on hand. And so people are just praying that they would put a little bit of money into bitcoin there, there was a headline, it was just an opinion piece from what I saw from somebody, I think, maybe at the Royal Bank of Canada or something like that that said that Apple would do well to maybe drop this, push into cars, electric cars, and just open up a cryptocurrency wallet and get in the exchange business. Everyone’s got an Apple phone or a lot, you know, 50% of people have an Apple phone, and they have the App Store. They could just pretty seamlessly get into that space. And the margins would be great, they would instantly have a, you know, billions upon billions of users. And it might be a quick way, quote, unquote, quick and easy way to drum up some some revenue. But I don’t know if Apple is, you know, I don’t know where their heads that. But by no means do I think Tesla was the last one, I think we’ll have a steady drip of company after company for four months to come that are going to put some kind of position into bitcoin.

Spencer Randall  11:21

Yeah. Well said, Mike, when you look at Tesla, and you look at MicroStrategy. They’re the biggest allocations of cash. But I also want to highlight that leadership, right, like leadership, every persona, that’s when adopted Quint needs leadership. And so for executives, you know, they’re the playbook is being written and shared by sailor and now Ilan. And so I’d also like to highlight that MicroStrategy hosted an event for 1000s of executives very recently, where they went through very transparently exactly how they allocated all of this capital to Bitcoin. So, you know, they walked through the the CFO side of things, the CEOs, considerations, you know, compliance issue. I mean, they opened up the whole playbook, obviously, you know, it helps MicroStrategy because they, they were the first but it also helps all of these executives that are considering onboarding to the crypto ecosystem. So I, you know, I do think that we’ve got leadership around how to do this now. And I think it is a trend. Now, whether or not certain companies are going to participate, you know, Ubers not right, for the time being Apple May. But I think the trend, you know, thinking about the pattern that we’re seeing, we expect this to persist from our analysis.

Steve Symington  12:43

Do you think that’s – you brought up Uber, and that was just yesterday, they said they wouldn’t buy bitcoin, but they would consider accepting it as payment eventually. So that was interesting. But they sort of said, we’re going to keep our cash safe. We’re not in the speculation business, do you think they’ll eventually kind of end up eating those words? It seems like they they kind of frown upon that, and a lot of people on fintwit especially we’re reviewing that it’s kind of a diss on Tesla, because everyone’s being asked are you gonna put money in Bitcoin? And he was like, Yeah, like, that’s not me.

Spencer Randall  13:16

There’s been so many public figures that have come out, you know, and said something negative about Bitcoin? And then, you know, retracted that statement later. You know, Steve, you asked the question, I thought about a lot of the statements that banks made in 17 about Bitcoin, and then how they came back and retracted those statements years later. So yeah, I think time time this will play out and, you know, even Uber, for example, may revise their position down the road.

Simon Erickson  13:45

Steve, to bring this back to the capital allocation piece, I mean, what Spence just mentioned about leadership is a good point that this is now something a lot of people are unfamiliar with. But you’ve got the Michael Saylor’s and Elon’s that are willing to do this. It’s not simple. You have to get approval from the Board of Directors to invest this money into an alternative asset class, you know, take money off the balance sheet, and do something that a lot of people were considering very risky. Maybe it’s a tad less risky today. But you know, at the end of the day, Steve MicroStrategy, even with this great allocation move is still as a business. Its revenue has declined every single year for the past six years. Right. Does this move change your opinion about MicroStrategy? Or on top of that, do you see this from an equity investment perspective, as a net positive when companies are allocating to cryptocurrencies, like MicroStrategy?

Steve Symington  14:36

I think, you know, it doesn’t really change my opinion about MicroStrategy specifically, I think you need to have a promising business kind of underlying that. That you know, and it’s it’s better to have a thriving business that is, you know, deciding to say like Tesla, allocate more money and diversify its balance sheet in a case like this. But it’s also one of those things were these are some of the people who are calling these shots like MicroStrategy CEO and, and Elon Musk are kind of viewed as these brash, bold personalities. And I think maybe what happens is the decision to is what we see, when we see more conservative leaders start to make this move, I think that’s when when we it starts to become more widely acceptable, because right now, nobody was terribly surprised, you know, that Ilan might be bold enough to take this step. But at the same time, you know, we need in order for this to be more broadly accepted, and maybe not so much viewed as speculation but an astute capital allocation decision, we need to see people who are more widely viewed as relatively conservative allocators of capital, make this move, but that’s going to take time. And like you said, you know, a couple of years ago, Spencer, and the banks were all arguing Bitcoin is sort of this, you know, they’re not going to touch it with a 10 foot pole, because it was probably terrifying back then. And it seemed, would seem like an irresponsible decision, it needs to, we need to have a couple of those more, more conservative leaders take take the helm as far as buying Bitcoin on their balance sheet.

Simon Erickson  16:23

So on that note, Spence, let me let me give you or Mike the last word on this topic, you are assessing a fair value for Bitcoin and several other cryptocurrencies all the time? Does this move of corporations buying Bitcoin change your thinking, to set a floor on the price of bitcoin now that you’ve got corporate treasuries interested?

Spencer Randall  16:43

There’s two points I’d like to make. One, with Bitcoin and corporate treasuries and allocating it, there’s only one cryptocurrency that’s being talked about, right? It’s Bitcoin. So I just from the crypto side of things, I just want everyone to realize that they’re only talking about Bitcoin. I would think that Ethereum would be the only other potential asset to enter the conversation, you know, over the next year, as far as allocating because we know that Bitcoin and Ethereum are not securities as deemed by the SEC. So I want to make that point very clear. And then the second point is, you know, the fair value of Bitcoin, you know, our take, we do deeply route ourselves in the stock to flow model that we discussed in the previous episode, Simon. And so I do think that we’ve overshot the fair value of Bitcoin today. Right. So I think we’re a little ahead of schedule. So these fundamental changes in news headlines, they’ve been a part of every single cycle, and they do push us into more exuberant areas, and we do overshoot our stock to flow model, but we always come back to it. So I don’t change, you know, the statements about the the floor for Bitcoin that I’ve made previously, you know, 10, and 20. k makes a lot of sense to me, you know, 20 being realistic 10 being very surprising. So I stand a stand by what we put together last month on price action in Bitcoin. That, might you you want to add to, to that in any way?

Michael Thoma  18:11

Yeah, I’ll say, you know, the fair value of anything, that’s a tough one, right? Especially something like Bitcoin that moves in the cyclical waves. So with the, you know, with the corporations and businesses coming on and buying now, it certainly brings in a new dynamic, right? What what a lot of the conversations that we’re having now is, so these aren’t your retailers that are coming in, maybe to make a quick buck, maybe some of them are looking to come in just for the speculation and heist and earn a quick dollar. But typically, these decisions are not not made. rationally, right. So you have a whole bunch of buy in from a large corporation that’s looking to take a position to de risk off of some of their dollar exposure, or maybe something else that other consideration they’re having, but these are long term decisions, they’re not going to sell their position at the next 10% drop. So we have new, large, large buyers who are buying in the billions now rather than the 1000s, like your average person would, and they’re looking to hold for the long term. So does that help smooth out some of the volatility? Does it help buy up, you know, scoop up when, when the price dips, these guys come in and help support the price? Yeah, I think we’ve seen a lot of that over the last several months. I would, again think I would, it would continue, especially as more of these corporations Come on. So it’s a it’s a new way, we just have a new customer for Bitcoin. And, you know, we’ve had three, maybe four cycles now in Bitcoin. And in each one, you get a new sort of narrative and a new customer involved and this time, it’s major high net worth individuals and its corporations whereas before it was retail Joe’s crypto anarchists or libertarians or in the early days, drug dealers are people looking at work. surfing the dark web. So it’s a it’s just a whole new frontier. And I think where Bitcoin goes and what its quote unquote fair value is is what the price determines. So we know that there’s a fixed supply. So the only relief valve is the price. So as more people get more exuberant about this asset, the price is going to overshoot, and then correct, just like we’ve seen before. But, you know, the same can be said, with a lot of the equities going on these days, too, right. So tough to, for anything to trade on, quote unquote fair value or its fundamentals at the moment.

Simon Erickson  20:38

Yeah, and it’s definitely true that the adjectives we use to describe the buyer base of Bitcoin has certainly changed over the last several years as well. Now, that brings us to I think the second topic that we want to talk about, which is that Bitcoin is much more readily available to a larger user base today. You don’t have to be an artist that’s figured out how to get ahold of Bitcoin, you can actually buy it through exchanges and brokerages. And one of those the largest brokerage Coinbase, is actually announced that it’s now going to be going public through a direct listing. A direct listing is different than an initial public offering, which is what we’ve gotten used to with stocks, which means that insiders are going to be transferring their positions in the company and making them publicly available. And in essence, insiders will be cashing out, and there’s not money that’s going to be put directly onto the balance sheet. That also gets rid of a lot of the inefficiencies of underwriters that we’ve seen with the traditional IPO. But just to put some context behind this, in 2018, it’s series e round Coinbase was valued at $8 billion. That was a private investing round. And there’s already speculation at the upcoming direct listing, which many believe is going to happen in either late February, early March could have a target valuation of a market cap of $50 billion. So that’s spicy for a brokerage. But my first question I think is for Mike, either you or Spence is can you tell us a little bit about Coinbase? And how that compares to other brokerages or other ways that people can get a hold of Bitcoin?

Spencer Randall  22:08

Yeah. So when we spend a lot of time talking to people about crypto, and every time I meet a newcomer, they generally already made a coin base account. So I think that’s very interesting data for your audience, right? virtually every us customer that we talked to, started their crypto journey with a Coinbase account. So the network effects around onboarding, the newest people to crypto are very strong with Coinbase. Now, conversely, another trend that we see, especially within our community is people that have used Coinbase before, used Coinbase for a while and have developed a lot of expertise in crypto, generally get frustrated with the retail offering of their product. Then they churn and they go to other competitors. So that’s another trend that we’ve seen with people using Coinbase as products and services from a retail side. I’d also add that when you hear about allocations to crypto from corporations, like Saylor and MicroStrategy, or Elon and Tesla, a lot of times Coinbase is the company facilitating these institutional grade microtransactions to acquire Bitcoin. So it seems like Coinbase is a market leader, not only in US retail investors and traders, but the institutional buying of Bitcoin for these corporations – though, it seems like they’ve, they’re building network effects there too. So that’s my quick take on Coinbase from from a crypto user perspective. But Mike, what are your thoughts?

Michael Thoma  23:41

Yeah, so our impression, or my impression, of coin base is that so it is US centric. It is the trusted brand name in crypto onboarding. It’s got a long tenure. I think it’s sort of around maybe 2016 and Y Combinator project kind of came right after or a bit after the whole Mt. Gox debacle, which if your customers aren’t familiar with was a very popular exchange in the early days of Bitcoin that totally imploded and a lot of people lost a lot of money. A lot of controversy around it, but it really set Bitcoin back in and led to the tarnished kind of image it had for a while in the early days. But so then comes along a super reputable, US centric, uber compliant exchange that only listed a few assets and had a great user experience and just made it super easy. And so it was kind of the front door to crypto for a lot of people which were when I got in was the first place I went and it’s been said we’re now you know, six years later or something like that, and it’s still a lot of people’s first introduction into the market. We recommend it on our site. It just makes it super easy. And they again, they’re very compliant. They work closely with US regulators, so there’s nothing shady going on behind closed doors. They’ve never been hacked. So when you’re looking for is security and a trusted name, when you don’t really know where else to go – if you’re a new applicant, or a new person to crypto, so that’s kind of the niche they’ve carved out for themselves. It’s worked very well, right, we just talked about in 2018, the market was down a little bit, but Coinbase’s valuation at that time was $8 billion. Now we’re in a bull market prices are much higher, their users are flooding in, much like we saw in 2017, and it’s doing wonders for that valuation. So I think they might be going public at the right time, and certainly will capitalize that scene. So we mentioned the $50 billion number, but also, I’ve seen trading as high as that would equate to $70-75 billion. So we’re talking astronomical numbers. And basically, everything that goes public, you know, right now is, is gold. So why would Coinbase be any different?

Simon Erickson  25:57

Yeah, great point, like, we don’t know. We have a target price that we think it is at $50 billion. But it could be much higher than that in direct listing, because this is not the same rules as an IPO. Steve, before I hand it to you, I’d like to ask one more question to Spence, which is double clicking on one of the points that you made that a lot of sophisticated traders in cryptocurrencies have walked away from the Coinbase platform. I know that you said they have a retail presence. So they’ve got commissions that they’re charging for placing the trades. But any more context on why sophisticated traders aren’t happy with Bitcoin, or are not happy with Coinbase out there?

Spencer Randall  26:33

Yeah, the the pattern that I’ve heard and feedback is that Coinbase will have outages at key times for retail traders and investors. So when the market is either at a peak in terms of price or too low, and you know, like to capitalize on that buy or sell, the exchange goes offline temporarily for retail investors and traders. Now, there’s a lot of reasons why that could be happening. But the important part is to note that it’s happening again and again and again. And so those opportune times to buy or sell aren’t available for a lot of customers that are using Coinbase. And I think that frustration is causing folks to switch. That’s the the pattern that I’ve seen as a reason why people are wanting to switch, and it’s something that they have not seemed to figure out just yet. So this is something that’s been going on for a long time and it’s well documented.

Michael Thoma  27:29

One more point, sorry Simon, is fees is also another a big one, right? So Coinbase makes it easy for everybody, but they charge a premium on that. And so they have a higher fee structure than alternatives. So once a user comes on, they learn the ropes, and they decide, okay, well, now I know what I’m doing, I’m a little bit more comfortable, why am I paying so much? And also Coinbase doesn’t list a lot of the longtail assets or maybe alt coins that people may want. And they also don’t provide the availability that advanced traders would be looking for – like leverage or option trading, in order to kind of do some more sophisticated hedging and trading strategies. So it’s just you kind of graduate past Coinbase, sometimes when you’re looking for a deeper all coin market or more sophisticated trading strategies.

Simon Erickson  28:17

Yeah. And I wanted to ask you guys, is it still a percentage of the total of the total assets being traded? I used Coinbase, a couple of years ago, I think it was charging one and a half percent, which if you’re only getting in and out with a, you know, a couple $1,000, maybe that’s not a huge deal. But if you’re a sophisticated trader that’s trading the kind of money even like, you know, Elon’s trading, there’s no way that one and a half percent is going to be allowed for something. Is it still a percentage of the total trade? Or have they changed the way that they’re making money on the commission’s these days?

Spencer Randall  28:45

It was with the big US exchanges, the pattern is you’ve got a super user friendly product with a high commission. You know, that’s what Mike just touched on. And that’s what you experience something. And they typically have a more professional interface that they’ll offer the user, you know, Gemini does this, Coinbase does this, kind of like a pro version or an active trader version, where you can trade with less fees. But even the pro version when you look at the fee structure, there’s there’s going to be an opportunity to switch and save on your commissions. And so that’s, you know, that’s to touch on Mike point, that’s what people are doing here. They’re moving into more competitive fee structures.

Simon Erickson  29:27

Let’s put an equity spin on this to Steve because in our markets, we’ve seen this playing out for years, we’ve seen all the large brokerages that are consolidating to try to get as low of fees as possible. In fact, most of them are now offering zero commissions for trading and we’ve seen you know, the large get bigger, Schwab has been very acquisitive and buying up brokerages and Schwab is now $100 billion company, right when we’re talking about Coinbase you know, the first publicly traded crypto exchange going going public at 50 million dollars $75 billion. Maybe Mike. I mean, this is putting it in the league with the big boys of equity trading. Steve, what do you think about the valuation for Coinbase. And this is interesting to you as an equity investor.

Steve Symington  30:11

It’s steep, but it’s not surprising. 50 billion, I won’t be surprised if it surges up to 75 or even 100, as people, you know, really pile in, because they’re excited. And we’re still at an early stage and the market is very much a forward looking machine that way. And, you know, they’ve got some impressive numbers kind of backing them. Yeah, I think they last I checked, it was a little over 90 billion in assets on the platform and 43 million active verified users. So I mean, impressive to that end. But it’s also, we shouldn’t fail to appreciate the scale the relative scale of brokerages like Schwab, I think last time I looked, yeah, their market cap was around 108 billion. And I think they had 4.1 trillion in assets on their platform. And but the interesting thing is, when you look at it, you know, a business like Schwab, they also only had 14 point 1 million brokerage accounts active last time I checked. So I mean, the average size of those brokerage accounts is obviously significantly larger. But it is interesting that Coinbase has more than twice, almost three times as many users as Schwab has brokerage accounts, but the assets on their platform is astronomically larger on Schwab. And I think that will change you know, as cryptocurrency enjoys some validation in the coming years. But you know, when you’re looking at only 90 billion in assets on the platform right now, this is something we saw kind of unfold with Robin Hood and people talking about their potential IPO in the coming year, or a direct listing or SPAC or however, they decide to choose, you know, to do this, but Robin Hood, you know, endured, some they have growing pains, often they have downtime for retail traders, that frustrates people. And then they have situations like with the GameStop, I don’t know what the we described as a debacle (team chatter) where they, you know, the cost of fulfilling trades was so incredibly high because of what their clearing houses were requesting, for assets to back it, that, you know, you have Mark Cuban coming on to explain to the whole Reddit slash GameStop crowd. Hey, the reason, you know that Robin Hood wasn’t able to really enable what you want it to do. And the reason they went down and restricted trading is because they had to go raise another $3 billion. And that’s, you know, pennies. It’s a penance, you know, compared to what Schwab could you know, with 4.1 trillion in assets or whatever they have on their balance sheet or assets on the platform. It’s, it’s such a small amount for a really large trader. And I think, because we look at these names, we often don’t appreciate the true scale that companies like Charles Schwab have, and they are so enormous, and I think Coinbase can get there, and 50 billion is a decent starting point. But it’s going to look, you know, like, you’re you’re you’re looking at these really, really richly valued SaaS stocks, for example. And you say, you know, what’s their revenue right now? You know, the recurring revenue. And and yeah, they’re growing really fast, but they’re small. And I think growth rates are going to be a crucial to determining what kind of premium valuation we can continue to put on Coinbase once it’s public.

Simon Erickson  33:38

Yeah, I think that’s similar to my key point as well, Steve, which is, you mentioned Robin Hood, which is coming under a lot of fire lately, because of payment for order flow. And the way that that company makes its money, it’s not charging your commissions, but it is getting it behind the scenes when it’s routing those orders to high frequency traders. And then taking a portion of the spread, you’re not aware that you’re paying when you’re actually placing those trades. Yeah. But if you’re a larger, consolidated brokerage in equities, that’s not as big of a deal, because if you’re Charles Schwab, and you need to cut your commissions, you’ve still got advisory services, right. And if your fidelity, you know, you don’t mind about cutting commissions because you still got target date funds that you’re charging a percentage of a you have assets under management for now, this is really interesting that Spence and Mike have mentioned that Coinbase also has those ancillary services, which are more of kind of consulting and guiding and taking a portion of fees for that rather than just the trading itself. I think that there’s a lot of people that need that kind of guidance and cryptocurrency right now and as we start seeing these platforms mature, more volume picking up because it’s going to the mass market, that would be something as an as a potential investor in Coinbase. I would be really interested to see outside of the Commission’s where they’re making their money and see that’s taken decades for the brokerages to do right. I mean, you know, 401k plans came into play and then you had Roth IRA plans and, um, this is kind of the result of regulatory changes. And I would be very interested to see how that plays out, Mike and Spence and any other thoughts on this topic.

Spencer Randall  35:10

And I’d like to think out loud with y’all for a second. So when we talk about Coinbase, an important thing to think about is that you can physically pull your crypto off of the exchange and custodiet. So they’re an actual cryptocurrency marketplace in exchange for physical crypto, right? It’s a digital asset, but you can physically pull it off the exchange. Whereas like Robin Hood, and other places where you can pay for trade crypto, you never actually get control of your cryptocurrency. So I guess I’m curious from the equity side of things, what we might see happen is more traditional brokerages offering, you know, a paper trading crypto equivalent, or maybe even venturing into allowing you to physically pull your cryptocurrency out of the brokerage. And I just if we fast forward this thing like Well, how do we think that’s going to affect the market? Right? Is the question thinking out loud? Or is Coinbase and other cryptocurrency exchanges built enough moat around digital assets? where they’ve got that specialization in a five year six year headstart? Or could we see you know, these more traditional brokerages, venturing out into the quote unquote, crypto land, and trying to, you know, develop those services in house and develop that expertise in house and actually allow people to use Schwab to, for example, to physically acquire crypto? Yeah.

Steve Symington  36:30

I think that’s really that’s an interesting point. Because you know, you do have I think Schwab allows people to trade Bitcoin futures, for example. And a lot of them do have sort of platforms to allow people to do that. But I also think, you know, coin base, the Head Start and as a kind of a pure play on this niche. They’re going to view any sort of efforts by these larger brokerages to sort of muscle into their their niche as a validating effort. And they say, you know, this only helps us in that sense, and that’s how they’ll argue it. But it’s also a risk that I think we really need to appreciate. as investors, as you know, as we consider buying shares of Coinbase is that, you know, there there is going to be some risk from larger brokerages coming in because they have all this infrastructure established. And it won’t be I don’t want to say it won’t be difficult for them to get into it. But Coinbase does have an advantage in that it’s it’s got the name. And if people are saying, Well, I’m not really sure, I think there’s gonna be a lot of people. You know, like you said on on their traditional brokerage accounts, you say, Well, I’m not really sure if I can do this with my current brokerage account. So they’re going to go open a separate Coinbase account as well. And they may, you know, realize later on once they kind of learn the ropes that they can go back and do that again. But I think it’s it’s gonna just pour gas on the fire for Coinbase is more large brokerages sort of validate what they’re doing.

Simon Erickson  38:04

I also think that a lot of the behind the scenes piping, even though it’s pretty boring when you talk about the infrastructure is actually very important. Steve talked about the clearinghouses earlier. I mean, intercontinentalexchange owns the New York Stock Exchange, they have their own embedded Clearinghouse, Robin Hood does not. And so what did Robin Hood have to do when the Clearing House said you can’t place these trades anymore? Unless you’re going to pay us this much money to transfer the title between the buyer and the seller? They said, Okay, we’re not allowing any more selling at gamestop. I mean, that was somebody behind the scenes running the infrastructure saying you can’t do that mentioned the options exchange. I mean, those are mostly taking place options today, on CME or CBOE. I mean, there’s still exchanges that are built out that are that institutions are tapping into I mean, that’s something I think it’s going to be really interesting for crypto is who’s going to build it themselves. And how much influence do they have? I can see other people that want to get access to it’s not simple, holding digital, digital tokens and currencies, right, right.

Michael Thoma  39:04

Yeah, not at all. Oh, Allah, chime in there just for a bit. That’s one of the biggest obstacles and hurdles for these institutions and why we’ve, you know, in the crypto land we’ve been talking about institutions are coming, they’re coming since probably 2016 2017. And really, we’ve kind of started to see that proliferation, starting back half of last year. And the issue was, they just weren’t able to when they couldn’t hardly understand that right. It took some understanding to get over the learning curve. But once they were comfortable with it, they couldn’t they couldn’t custody it. The legacy infrastructure is not built for this digital bearer asset that you take control of yourself. So these, these institutions needed to learn, okay, well, if I’m going to buy $100 million worth of Bitcoin, I can’t leave it on an exchange that doesn’t that hasn’t been thoroughly audited or has a closed book system that I don’t trust or are they going to keep it on a hardware wallet and who’s going to know the code key phrase to that. And so there was a lot that needs to be built down. And luckily, the space is only getting more mature only getting better. We’re getting custody solutions where corporations can now have multi signature wallets where you have, you can split the keys, so no one person can control it all. But it’s getting there is what I’m saying. And so it’s it’s really all coming together. And that’s why we’re starting to see this flood of interest, especially from large players. You know, one thing where my head went when Spencer, you know, brought his question, we talked about the competition to coin base from the traditional brokerages, but kind of where my head goes being in the crypto land is that they have a different competitor coming up. And that’s called decentralized exchanges. dexus for short, and so what this is, is another exchange or an order book. And rather than having a company in the middle that settles the buys and sells it’s just lines of code that execute automatically there’s so it’s very compatible with the cryptocurrency ethos that you remove the intermediaries, you remove the middleman, and 2020 was a breakout year for these, the technology finally got there, the interest was there, we have probably a half dozen that do over a billion a day in volume. And the largest one is called Yoona swap, which has been a breakout star this year. And in fact, this just simple project that was coated up two years ago, did more daily volume on a day in December then Coinbase did. So that was a big watershed moment, a big breakthrough that, hey, these things do work. The fees right now are quite high. So and there is a learning curve for it’s more for the crypto native people, but it’s only getting better. So I mean, a year ago, they didn’t they made up 0% of the trading volume in the cryptocurrency space, and now they’re chipping away at 1% of the total volume throughout 2020. And that number will certainly grow next year. So that’s why I think I mentioned earlier I think Coinbase might be going public at just the right time with Bitcoin prices going. And if they wait any longer, these these decentralized alternatives may start to catch on and then it it becomes curious as to how much market share do they eat from Coinbase going forward?

Spencer Randall  42:23

It’s a great point, like, you know, when we talked earlier about the problem of a centralized exchange, and it’s shutting down over and over again, in a pattern, right? decentralized exchanges can help solve that problem. Like you said they’re distributed. So, you know, the world’s thinking about Coinbase is direct listing. And you know, in the crypto land, Mike brought up, we’re already thinking about decentralized exchanges. Right. So that fast forward, right, we might be talking about dex is in a few years is a common thing. But like Mike highlighted with uniswap. At that peak day in December, that probably was one of the days that Coinbase went down, right and then swap Yoona swap at that volume. I wouldn’t be surprised at that coincide.

Simon Erickson  43:05

Yeah. And we’re bring it full circle. Steve, I’m actually going to retract my reckless prediction from 2021. A couple of months ago, we said what was something crazy that you could see happening this year, my reckless prediction was that Schwab was going to make an attempt and actually succeeded buying Coinbase because it wanted access to this new market. But now that we’re talking in terms of 50,000,000,070 $5 billion valuation for Coinbase, right out of the gate, right, that’s out of touch that’s out of touch for for Schwab, who is at $100 billion, even if it has gone out

Steve Symington  43:35

and bought a lot of brokerage. I actually, I have to express my admiration for Schwab’s power move. When was it in 2019 Robin Hood, basically they saw the writing on the wall. Schwab did when it came to no commission trading and they said everyone’s going here. Let’s drop this x. And they said Schwab is moving to zero commission trading and all the other brokerages plunged because I think it only Schwab was only collected maybe five or 7% of its revenue from actual commissions on stock trades, whereas like companies like TD Ameritrade were like 15 or 25%. So their stocks crashed Schwab’s like just a little bit. And then Schwab a couple weeks later says, Hey, we’re acquiring TD Ameritrade like it was amazing move just this power play. And I think they closed on it. Yeah, not too much later, but holy cow. So you kind of wonder if if Schwab could could make a similar move going forward, if they see some area to undercut a competitor, and then buy them on their weakness? They’re there. They’re sharp that way, so we can’t rule it out completely. But right now, it makes it a lot less likely. I’ll agree.

Simon Erickson  44:48

We’ve maybe got maybe one one or two more minutes here. Spence and Mike, anything else that I guess is really on your radar right now where you’re we’ll be having these conversations every month, but just a spot up perhaps the next one that we’ll be talking about today. there anything else in crypto world that we should be paying attention to?

Spencer Randall  45:03

I’d like to highlight the the patterns that we’ve talked about and summarize them. So to kind of encapsulate one of my points, these are one way trades that these corporations are making, right? They’re not buying Bitcoin to speculate they’re buying Bitcoin because they want to hold it on their balance sheet for an extended period of time. And then these may not be one time transactions either, right? So when you look at MicroStrategy, they have a treasury reserve policy, where they allocate to Bitcoin on a regular basis. And then with Tesla, we don’t know if this is their only allocation to Bitcoin in 2021, they may buy more. So I just want to make those two points that even if we’re limited to talk about these two organizations at this time, these may not be what these are not the only only times that they’re allocating to Bitcoin, and we expect more and more companies to follow their leadership, as we charge ahead into 2021. Mike, what’s on your mind, like giving you any additional points of decks is was agreed?

Michael Thoma  45:59

Yeah. Right. And I mean, there’s so much to look forward to, obviously, in the crypto space, that’s why I spent and I love it so much is that there’s never a dull moment. So it’s hard to pinpoint one. I mean, obviously, we’ll continue to monitor the the inflow of corporations to buying Bitcoin. I guess one thing maybe we’ll catch ourselves talking about later in the year is, are they just buying Bitcoin does I think and Tesla’s sec sec filing, they kind of left a little wiggle room, they said they were they had the ability to buy digital assets. So they could purchase something else, like a theory a more stable coin, potentially, it’d be curious to see. Beyond that, you know, we talked a lot about Coinbase. And their IPO, I think it’s important to note again, we said this is the biggest exchange in the US. Really, if you look on a global markets, Coinbase only is 10 15%, maybe of the spot market. So there’s much bigger players out there with by Nance being the world’s biggest exchange. So there are much, much potentially bigger companies out there, but I think Coinbase is well positioned, they’re going to do incredibly well with their IPO. Because being kind of the first name brand to go public. A lot of people are going to use them as an avenue to get exposure to crypto in general, if you don’t want to just outright buy bitcoin, then you can do go the picks and shovels route and buy something like Coinbase. So I think they’ll, they’ll be doing great. And the whole space. I’m very bullish on 2021. A lot of good stuff coming down the pipeline. And so these conversations, I welcome them, we’re gonna have a lot to talk about.

Simon Erickson  47:30

Sounds good. Mike. Steve, any final thoughts from you?

Steve Symington  47:33

I think I’m good.

Simon Erickson  47:35

Yep. And I think this is a I really enjoy these conversations. You know, we kind of are finding the middle ground between equities and cryptocurrencies and what this means as a whole for investors. One thing I’d like to split us up for next month to talk about, as we talked about the big corporations on this call, let’s talk about some retail investors on the next call. We’ve seen quite a bit with GameStop this last month, how is that going to impact cryptocurrency markets as well? So spotting that up for a conversation coming up in March a huge thanks to huge thanks to the guests on this call Spence and Mike, as well as Steve, my colleague at 7investing. We really appreciate you tuning in. We’re really looking forward to more of these in the future. And thanks for tuning in. We’ll see you next time.

 

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