Focus on

① Coinbase has carved out a unique niche in the intricate world of crypto. “Whether it can dominate the U.S. crypto infrastructure” and “whether the crypto economy will become an important part of the real economy” will determine how far Coinbase can go.

② As one of the world’s largest holders of listed Bitcoin companies, MicroStrategy’s core SaaS business limits downside risks, and the use of low-cost funds to continue buying Bitcoin in the long term gives it considerable upside space.

③ As a leading Bitcoin mining company, Marathon’s business is essentially energy arbitrage. Differentiated operational capabilities, hardware upgrades and energy utilization strategies will become the core competitiveness of mining companies to surpass Bitcoin returns and successfully cross the cycle.

All innovation cycles begin with speculation. Speculation often gets ahead of reality, and fundamentals take time to catch up.

Such was the case with the Internet over the past few decades. Although it suffered from the bursting of the bubble in the late 1990s, today it has spawned some of the world’s largest and most profitable companies.

The crypto market may face similar challenges. It would be an obvious lie to suggest that the market’s rapid expansion over the past decade has been driven by pure fundamentals rather than speculation. The question now is, if this market gradually emerges from the late stage of the bubble, what is the real value left behind? What are the representative companies in this industry?

Starting from the present moment, the RockFlow investment research team will introduce to you which of the current US stock companies are expected to survive as long-term participants in the encryption market and grow into real behemoths.

1. COIN: an important player leading infrastructure construction and attracting institutional investors

Coinbase has carved out a unique niche for itself in the intricate world of crypto. Its history dates back to 2012, starting from an early Bitcoin-centric platform that was incubated by Y Combinator. More than a decade later, Coinbase has become the leading exchange for buying and selling crypto assets and has been pursuing compliance.

In the past two years, Coinbase has worked hard to diversify its business beyond exchanges and expand into the entire blockchain technology field, from wallet infrastructure to staking services to on-chain scaling solutions. The previous L2 rollup Base is a typical example.

At the same time, its revenue sources are also significantly diversified: the transaction revenue of individual users continues to decline (the fundamental reason is the sharp decline in the prices of BTC and ETH in recent quarters), while other types of revenue are surging. Especially interest income, which increased rapidly to US$201.4 million in 2023Q2 from US$32.5 million in the previous year. The chart below shows Coinbase’s important financial data over the past five quarters:

In this volatile emerging industry, Coinbase is building a trustworthy reputation that is the product of unwavering commitment, transparent operations and a user-centric approach. This trust is not only reflected in its trading platform, but also in its diversified products - from multi-functional financial products such as savings and rewards to Coinbase debit cards, to its entry into Web3, Coinbase’s ecological strategic picture is slowly unfolding.

Objectively speaking, the future valuation geometry of Coinbase is mainly based on the answers to four propositions:

First, can Coinbase dominate the construction of crypto market infrastructure in the United States?

Second, is Coinbase more than just an exchange?

Third, will the “crypto economy” become an important part of the real economy?

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

These four propositions imply almost the entire narrative of Coinbase.

Can Coinbase Dominate U.S. Crypto Market Infrastructure? Judging from the current situation, Binance and others are still strong opponents in terms of transaction volume and scale. But a key difference in the crypto space is trust – users need to be confident in the security of their assets and the compliance of the exchange. It is too difficult for Binance and others to do business in the United States, and they have entangled “grievances” with the SEC and others; while Coinbase is subject to strict supervision by the CFTC, SEC, British and European financial regulatory agencies. Comparing the two comparisons, Coinbase should be the preferred place for individuals and institutions seeking to safely invest in Bitcoin.

Second, Coinbase is more than just an exchange. In the traditional U.S. financial system, institutions often play different roles in each link. For example, Robinhood, TD Ameritrade and Schwab have retail brokerage businesses, State Street and BNY Mellon have asset custody businesses, PayPal, Visa and Mastercard have payment businesses, and NYSE and Nasdaq have stock trading businesses.

This is obviously not the case with the current crypto-financial system. Coinbase already has retail brokerage operations, custody solutions, exchange operations, and is a leading player in crypto payments. It’s not an exaggeration to say it’s “crypto’s NYSE + Robinhood + State Street + PayPal.”

Third, will the “crypto economy” become an important part of the real economy? The market is divided on this point. All mature real economy markets that have stood the test of time - think agricultural products, oil and gas - they thrive because the entire industry makes money by selling basic commodities to consumers. The oil market is not just people speculating on oil prices - it is a real business for producers upstream and downstream in the energy industry; the corn market is not just people speculating on corn prices - farmers and large institutions are also trading and hedging risks in order to provide consumers with Food with stable prices. And what about the crypto market? How many real business participants are there?

Currently, few people actually use Bitcoin as a payment method, and it is almost impossible for current mainstream cryptocurrencies to be used as a daily payment method. Wider use and circulation will also require the final approval of the Bitcoin spot ETF in the United States, at which time it will expand the effective “commercial use” of the crypto market, such as allowing individuals and institutions to hold Bitcoin. The crypto economy is expected to continue to exist as a form of speculation and an emerging asset class, but commercial viability remains difficult.

Fourth, will the prices of Bitcoin and Ethereum continue to rise? Coinbase, which charges fees based on the value of assets customers trade or hold on its platform, also holds a significant amount of Bitcoin on its own balance sheet. Therefore, rising cryptocurrency prices do have a direct boost to their market capitalization. Judging from past events, inflation has always existed, fiscal and monetary stimulus has never stopped, and the two final main choices for safe-haven assets-gold and Bitcoin are becoming a greater consensus.

The crypto industry is challenging, but that also means the remaining players can benefit even more. Coinbase is one of the few exchanges that can actually attract institutional investors into the space, and it’s expected to outperform cryptocurrencies themselves in the long term.

2. MSTR: A better choice than BTC

The U.S. SEC has delayed making formal decisions on multiple Bitcoin spot ETF proposals for a long time, which is disappointing news for the vast majority of investors. However, for investors familiar with MicroStrategy and Bitcoin, this will only enhance the appeal of MSTR, because MSTR is currently the most convenient way to obtain Bitcoin through a US stock account.

MSTR is one of the largest listed holders of Bitcoin in the world, thanks to its August 2020 strategy of using excess cash as well as debt and equity financing to buy Bitcoin long-term and continuously.

According to its 2023Q2 financial report, as of July 31, MSTR held 152,800 Bitcoins at a total cost of US$4.53 billion, or US$29,672 per Bitcoin. Among them, 15,731 were pledged as collateral for the company’s 2028 guaranteed notes, and the remaining 137,069 (about 90% of the total holdings) were not pledged.

Since the launch of the buy-and-hold strategy three years ago, MSTR shares have shown a strong correlation with the price of Bitcoin. As shown below:

For investors looking to profit from rising BTC prices, MSTR is not the only option. The share prices of Bitcoin mining companies such as Marathon Digital and Riot Platforms, as well as crypto exchanges such as Coinbase, have also fluctuated in tandem with the price of Bitcoin. Unlike these stocks, however, MSTR has an underlying core business, which is a strong competitive advantage.

Stable core business limits downside risks

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

MSTR is migrating its enterprise analytics software customers to the cloud, which will shift from generating revenue through product licensing to generating revenue through subscriptions. So far, the subscription model has proven successful, with high renewal rates. The customer renewal rate in the 2023Q2 quarter was 93% and remained above 90% for the sixth consecutive quarter.

In order to comply with technology trends, MSTR’s core enterprise analysis platform is also exploring integration with AI. MSTR is expanding its partnership with Microsoft to integrate its analytics capabilities with Azure OpenAI services and Microsoft 365. MSTR is also pursuing greater innovation through MicroStrategy Lightning, which aims to leverage the Bitcoin network to enable new e-commerce use cases and address cybersecurity challenges.

While these moves are unlikely to lead to explosive revenue growth, they are a solid sign of the health of MSTR’s core business, which means it can continue to provide sufficient cash to cover operating costs. This limits downside risk to its share price.

From a valuation perspective, MSTR’s current stock price is reasonable compared with other software companies; the difference is that MSTR is not an ordinary software company and it also owns more than 137,000 unsecured Bitcoins. This makes its stock price more likely to outperform many tech giants and SaaS peers.

Key advantages of access to low-cost capital

For investors who are bullish on BTC, another major reason to choose MSTR is its ability to raise funds on attractive terms. It is reported that the company’s outstanding debt and convertible notes are US$2.2 billion, with a weighted average interest rate of approximately 1.6%. This represents a reduction in annualized interest expense of more than $15 million compared to the average interest rate of 2.1% at the end of 2022.

Being able to take advantage of low-interest debt to continue purchasing BTC is a smart move, as the crypto market improves in the coming quarters (catalytic events include the US SEC’s approval of a Bitcoin spot ETF, the 2024Q2 Bitcoin halving, and the possibility of lower interest rates during a period of falling inflation sex, etc.), Bitcoin’s capital appreciation will exceed debt and interest costs.

Raising funds by issuing new shares is another financing method for MSTR. Since 2021Q3, MSTR has raised a total of US$1.7 billion through the ATM program, and the average price of additional shares is approximately US$424/share. The main purpose of raising funds is naturally also to buy more Bitcoins.

MSTR’s ATM program is unique in that its increment in outstanding shares is very low compared to other players in the Bitcoin space such as MARA and RIOT who regularly issue new shares to raise funds.

MSTR’s total outstanding shares increased from 11.3 million shares in 2021 to 14.1 million shares in the most recent quarter. In comparison, MARA’s shares outstanding jumped from 102.7 million shares in 2021 to 174.2 million shares in the most recent quarter, while RIOT’s shares increased from 117.3 million shares in 2021 to 185.3 million shares in the most recent quarter.

The slow growth in the number of shares means that MSTR has more room to issue more new shares to obtain financing in the future. In addition, MSTR sold a total of 403,362 shares on September 24, with net proceeds of US$147.3 million, used to purchase Bitcoin.

risk factors

It is necessary to point out that there are two potential risks of MSTR. First, any future disposition of some or all of its Bitcoins for whatever reason could lead to an excessive negative reaction from investors. Therefore, the company must continue to take on debt and issue additional shares to maintain its Bitcoin strategy. But it’s also hard to guarantee that it will be able to raise capital on attractive terms in the long term, especially if Bitcoin prices continue to trade sideways (or worse, fall significantly). You know, during the last crypto bear market in 2022, many crypto companies went bankrupt due to excessive leverage.

The second potential risk lies in company valuation. Although investors can use the price-to-earnings ratio to understand its value as a software company, under GAAP accounting requirements, MSTR’s Bitcoin holdings are required to recognize impairments quarterly when fair value changes, so impairments may occur frequently in the company’s financial reports. Worth the cost . As Bitcoin prices fluctuate too much in the short term (for example, impairment charges in 2023Q2 were US$24 million, compared with US$918 million in 2022Q2), the already difficult company valuation has become more complicated.

3. MARA: Is mining a good business?

Marathon is a Bitcoin mining company that provides investors with an indirect Bitcoin investment solution. There is a strong positive correlation between mining company stock prices and Bitcoin prices, and mining companies in general are effectively leveraged plays on cryptocurrencies.

Judging from historical data, when the price of Bitcoin rises, the share prices of mining companies will rise more because investors are extremely excited and they think there is a multiplier effect; and when the price of Bitcoin falls, miners will be hit harder. .

The essence of the mining business is arbitrage. Rather than saying that mining companies need to study the technical details of Bitcoin, it is better to say that they need to learn “mining farm” experience and operate energy arbitrage business as efficiently as possible. The leading mining companies are often excited about new cooling methods, new architectural methods, new transformers or new energy arbitrage strategies.

Arbitrage is key and is one of the differentiating factors that sets mining companies apart from their competitors. The best mining companies need to have the best equipment assets and the lowest production costs. More importantly, they needed someone who understood energy arbitrage, a great CFO.

They sometimes shut down machines because greater profits can be made through energy recovery programs. The importance of an experienced CFO is that he can guide mining companies through Bitcoin’s cyclical bear markets and “crypto winters.”

Marathon’s 2023Q2 financial report released on August 8 revealed its business development status: revenue for the quarter increased by 228.5% year-on-year, with a net loss of US$21.3 million (an increase of nearly 200% from Q1’s US$7.2 million). This means that Bitcoin production costs are high, market prices are less than ideal, and other operating expenses such as energy costs are too heavy.

Although it fell short of expectations, MARA’s results still showed significant growth compared to the previous year. Bitcoin production increased by 314% year-on-year, with an average of 32 per day, but the average price of Bitcoin fell by 14%, affecting revenue.

The reason for the increase in output is that MARA’s operating computing power increased by 54% in the second quarter compared with the first quarter, reaching 17.7 EH/s, a record high. After the second quarter, operating computing power continued to rise, reaching approximately 19 EH/s in July.

The road to profitability for mining companies is more difficult than that for exchanges and asset management companies. In addition to the usual regulatory headwinds in the crypto space, since Bitcoin is a major source of revenue, fluctuations in its price often severely impact the profits and cash flow of mining companies.

In addition, the next Bitcoin halving is expected to occur in April 2024. As the Bitcoin block reward is halved, the income of mining companies may decrease. The Bitcoin halving will also increase the difficulty of mining, forcing mining companies to purchase more powerful hardware. More powerful hardware will in turn lead to higher energy costs, which in turn generates more operating expenses. These are difficult problems for mining companies to avoid.

Therefore, mining is a riskier crypto investment than exchange and asset management businesses.

4. Write at the end

The crypto industry itself has gone through multiple hype cycles, each driven by speculation about what triggers innovation. These cycles bring more attention, users, and capital to the crypto ecosystem, and expand the possibilities of crypto technology based on the progress made by previous generations.

It’s possible that the industry has now reached the point where there are enough pieces of the puzzle – that can be rematched in different ways to meet a wider range of needs and real-world use cases – to take the industry to new horizons.

In this process, even if you are not in the encryption industry, you can also support the companies you are optimistic about through investment. The following are the top crypto companies and crypto strategy ETFs selected by the RockFlow investment research team:

Disclaimer：

1. This article is reprinted from [RockFlow Universe]. All copyrights belong to the original author [RockFlow]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.