Analyzing the Underperformance of Three Bitcoin-related Asset Classes and Selecting the Best One


Still, after being adopted by some big names mostly to boost up their balance sheets as well as offered as part of new funds like the ProShares Bitcoin Strategy ETF (BITO) in October 2021, the cryptocurrency has still managed a one-year gain of 3.64%. However, the volatility which is associated with Bitcoin could result in either a continued downside in case U.S regulators plan some strict moves or a spectacular surge in the event of being adopted by a large institution.

Coming to the orange chart below, BITO, which provides investors with Bitcoin exposure through its futures (futures price increases), instead of owning digital coins themselves, has suffered by 37% in the last three months. This means more underperformance than the digital asset itself. According to the fund’s prospectus, this is explained by the “contango effect” and occurs when the fund sells the expiring contract at a relatively lower price and buys longer-dated contracts at a relatively higher price. Conversely, the fund can also benefit from the “backwardation effect” when it sells an expiring contract at a higher price than what it pays for a new longer dated contract.

Still, according to ETF Trends, despite the latest volatility, inflows into BITO have remained steady in January, signifying that those who have a long-term investment goal are choosing the ETF instead of having to own crypto wallets.

Source: ycharts.com

Next, Marathon Digital Mining (NASDAQ:MARA) as a Bitcoin miner (or producing coins using computing equipment) as shown in the pale blue chart above has suffered from an even higher level of volatility, being up by a whopping 60% in the first week of November, but, currently down by a painful 40%. Looking across the industry, other miners like Riot Blockchain (NASDAQ:RIOT) have also been impacted. One of the reasons for miners’ pain is that in addition to minting digital coins, they also hodl (store Bitcoins) instead of selling them. Consequently, unless you have more of a trading profile, avoid miners.

On the other hand, Coinbase Global (NASDAQ:COIN), with its cryptocurrency exchange app designed to trade crypto has been less impacted, by -17.23% as shown in the green chart above, partly due to a reduction in platform exposure to Bitcoin, from 57% in 2020 to 42% in 2021. Investigating further, the company is diversifying revenues beyond retail crypto trading.

In this respect, non-trading revenues consisting of Subscription & Services which increased from 4% in Q3-2020 to 12% in Q3-2021, look to be on an increasing trend. Additionally, by offering services like blockchain rewards and Earn campaign, as well as planning an NFT (Non-Fungicible Token) platform to take advantage of decentralized finance (DeFi) products, Coinbase is one of the best Bitcoin-related investments one can think of currently.

To further justify my bullish stance, the crypto exchange boasts $6.3 million in its balance sheet, and more importantly, it generates an operating income, not a loss as is the case with most miners.

Source: SEC filings

Finally, with the current inflation outlook and the Fed reducing monetary stimulus, Bitcoin, in the same way as many richly-valued tech stocks, is no longer benefiting from an increase in the money supply. Thus, it is better to avoid exposure to monetary devaluation by investing in asset classes that are directly exposed to Bitcoin’s value like BITO and crypto-miners. Instead, an exchange like Coinbase that benefits from trading-based revenues and is diversifying into value-added services around the crypto ecosystem makes more sense. Thus, the company could surge to the $250 range as soon as it launches Coinbase NFT, a new product experience where users can mint, collect, discover and showcase their NFTs, all in one place.



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