Bitcoin Bets: Coinbase, MicroStrategy and Riot Blockchain

It goes without saying: Bitcoin is volatile. Just this year, it has risen from the $20,000s to above $60,000, fallen back near $30,000 -- and then jumped back above $40,000 before pulling back to the high $30,000s range. For those comfortable with this high volatility, three leading growth experts and contributors to MoneyShow.com highlight a trio of companies involved in various aspects of the cryptocurrency market. Simon Erickson, 7investing Coinbase took the early lead as America's largest crypto exchange by initially appealing to the early adopters of cryptocurrencies, observes Simon Erickson, founder and CEO of 7investing. I personally found myself in this boat. I used Coinbase to buy my first Bitcoin ( ) in February 2015. It cost me $247.93, which even included $5 worth of BTC as a promotional credit. There was no fee for this upfront purchase. I added a bit more along the way and then sold half of my Bitcoin stake 2½ years later in December 2017 at a price of $17,308. It funded my lifelong dream of buying a hot tub. In that sale, Coinbase charged me $128.94 -- a 1.5% commission of the total selling transaction value. While I'd love to claim to be a genius or clairvoyant, stumbling upon these Bitcoin gains came more from luck than from skill. My initial purchase was highly speculative, and it was heavily influenced by seeing auditoriums of people packing in to learn about Bitcoin at the SXSW conferences I'd attended. With only a cursory understanding of how it worked -- and certainly without any in-depth knowledge of distributed ledgers or consensus mechanisms -- I decided the potential return was worth the risk. It was. And that hot tub has been amazing. The Bigger Picture I'm sharing this personal story to demonstrate how that same speculative trading dynamic is making its way to the mass market with cryptocurrencies today. Several speculative traders who have become disillusioned with meme stocks and Robinhood are turning to cryptocurrencies. The appeal of Bitcoin doubling in price between January and February is strong for those who need to scratch the short-term trading itch. Coinbase's fees have also gone up pretty significantly during these past three years. The platform now charges an average of 2% on the purchase and then also 2% on the sale of any cryptocurrencies on its platform. With the prices of Bitcoin and Ethereum soaring, those 2% trading fees are adding up very quickly. Coinbase's $335 billion of trading volume in the first quarter was eleven times what it was a year ago, and its revenue of $1.8 billion was nine times last year's. There's a flood of interest in cryptocurrencies, but those financials could also still just be getting started. Coinbase CEO Brian Armstrong recently mentioned his company would soon list every [crypto]asset where it is legal to do so. That means next time around, Coinbase won't miss out on tens of millions of trading fees when Elon Musk mentions his fascination with Dogecoin. The Long-Term Appeal But let's step back from the short-term trading angle of this. There are also a few things about buying and selling cryptocurrencies on Coinbase's exchange that are fundamentally different than buying on selling stocks on a brokerage like Schwab . Once a user buys Bitcoin, Ethereum, or any of the 108 crypto assets that Coinbase supports, they have optionality on how to monetize them even further. Staking allows users with Ethereum to validate other transactions and earn more Ethereum as rewards. Coinbase will pay you 4% interest for holding stablecoins on its platform, or will loan you money for 8% APR with no credit check if you post your Bitcoin as collateral. That makes Coinbase and cryptocurrencies an intriguing alternative to parking your cash in a bank account, or in using it as a longer-term investment opportunity. Coinbase's average account today has around $4,000 worth of cryptoassets. Contrast that with the $221,000 average account size on Schwab. Many of Schwab's assets under management are in retirement accounts, which are also beginning to embrace cryptocurrencies. ForUsAll is now allowing its plan participants to contribute up to 5% of their retirement assets to crypto. And the rest of the world has taken an interest in crypto for commercial transactions. El Salvador recently declared Bitcoin as legal tender, meaning businesses will now be required to accept it for payments. Other countries will follow suit, leading many to believe that Bitcoin could eventually become an unofficial cross-border currency of Latin America. Even if you're personally not buying or using Bitcoin, keep an eye on how many people are. Coinbase already has 134,000 merchant partners who accept payments from its digital wallets today. That number will be significantly higher five years from now. Welcome to the cryptoeconomy. Frank Curzio, Crypto Intelligence Riot Blockchain might be the luckiest company in the world right now. Back in April, it announced it would acquire Whinstone, the largest Bitcoin mining facility in North America, for around $650 million in cash and stock. Whinstone is a 100-acre property located in Rockdale, Texas. Put simply, Riot became the biggest Bitcoin miner in North America... just before China destroyed more than half the global competition in Bitcoin mining. Riot plans to grow the Whinstone facility from around 300 megawatts (MW) of electrical capacity to 750 MW over the next year or so. And keep in mind, the China crackdown sent equipment prices plunging. So Riot will be able to build out its operations at a great price. Even before the acquisition, Riot had a decent-sized mining operation at the Coinmint data center in Massena, New York. This operation includes over 16,000 specialized computers mining Bitcoin 24/7. The Whinstone deal turns Riot into a completely different company. In terms of electrical capacity, Riot's Coinmint operations are a little over 50 MW. Whinstone adds 300 MW of existing capacity to its operations... plus another 350 MW of growth potential. In short, Riot just increased its mining operations by 7x... just before more than half of its competition disappeared. For the month of May, the company produced 227 bitcoins, up 220% vs. a year ago... and a 10% increase vs. the previous month. The Whinstone deal was completed at the end of May. Now, Riot can focus on expanding the facility and taking advantage of the reduced competition. Looking at the numbers, Riot is about to see its revenues explode higher. Total revenue for 2020 was just over $12 million. But the Whinstone acquisition puts the company on track to generate around $220 million in revenue for 2021. And next year, that number is expected to nearly double, topping $416 million. Keep in mind, Bitcoin mining is extremely profitable, as long as you keep your operations efficient. Riot's mining margin was 67.5% last quarter, which resulted in a modest $7.5 million net income (after factoring all expenses). As the company expands its operations, its mining margins could approach 80%... sending net income soaring over $170 million next year. Currently, analysts expect Riot to make about $0.90 in earnings per share (EPS) this year. Next year, they expect EPS to grow to $1.53. I think that number is too conservative. And if the price of Bitcoin continues to recover, Riot's earnings could skyrocket now that it owns the biggest mining operation in North America. We're going to start with a small position in Riot, which gives us room to take advantage of any volatility we'll see over the next few months. Jon Markman, Strategic Advantage Institutions are rushing into Bitcoin. The German government announced it will allow institutional funds that currently control $2.1 trillion to invest up 20% of their assets in Bitcoin. This mainstreaming of crypto is a big development. It means prices are likely to surge. Investors should consider buying MicroStrategy . The bearish argument against crypto is that digital coins do not represent a store of value and therefore there is no demand from so-called real investors. However, institutional investors are as real as it gets. The rule change in Germany is likely the result of intense lobbying by professional investors clamoring for the opportunity to add bitcoin, even for their most conservative accounts. Institutional demand for Bitcoin is significant. Last year Paul Tudor Jones, and Stanley Druckenmiller, two titans of the hedge fund world, began allocating funds to cryptocurrency. A portfolio manager at Soros Fund Management told Bloomberg in March that institutional investors see Bitcoin as a hedge against shrinking fiat currencies. Global central banks are creating new currency at an unprecedented rate. The Federal Reserve is currently buying $120 billion worth of Treasury and mortgage-backed securities every month. The dollars used to fund these purchases are being digitally created out of thin air. Although the economy is improved and many would argue inflationary pressures are building, there is no sign this strategy to flood the system with liquidity will change anytime soon. Bitcoin is capped at 22 million units. It is decentralized and cryptographically secure. Nobody has direct control. And blockchain, its public digital ledger cannot be altered for any reason. It is a permanent record of every transaction. Scarcity and protection against fiat currency devaluation is the argument for Bitcoin. It is why professionals want in. The German strategy shift impacts Speziafonds, fixed asset investments that are only accessible by pension companies and insurance funds, according to a report at Bloomberg. The further mainstreaming of Bitcoin follows a decision in February at Bank of New York Mellon , the nation's oldest bank. The Wall Street Journal reported the giant custody bank will begin to hold, transfer and issue cryptocurrencies on behalf of its asset manager clientele. MicroStrategy is the mullet of tech businesses. Upfront it is all business. The company is a profitable buttoned-down enterprise software company. In back, the firm is pure party. It is a leveraged Bitcoin investment. The Tysons, VA.-based company now holds 105,000 bitcoins. Michael Saylor, chief executive officer decided in 2020 that owning Bitcoin would create more shareholder value than holding cash. Then Saylor started selling debt to buy even more Bitcoin. He has issued convertible stock to buy Bitcoin. And most recently the firm completed a Dutch auction to potentially buy more again. The average cost of Bitcoin acquired by MicroStrategy is $26,080. The strategy might seem reckless yet shares zoomed from about $120 in 2020 to a peak of $1,305 in February 2021. It helps that the software business generated $83.8 million in free cashflow during the past 12 months. That's ample to run the business and service debt. The outcome is a leveraged Bitcoin investment with capable managers. In theory, the leverage should give MicroStrategy shares a premium to a simple Bitcoin investment. This assumes the price of the digital coin continues to rise. The German news and the arrival of more institutional investors strongly suggests that will be the case. A lot of new money is headed into Bitcoin. Investors looking for a leveraged Bitcoin play should consider MicroStrategy.

Bitcoin Bets: Coinbase, MicroStrategy and Riot Blockchain

Bit by bit, leading growth experts highlight a trio of companies involved in the cryptocurrency market.

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